UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-21884
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REXALL SUNDOWN, INC.
--------------------
(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-1688986
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6111 Broken Sound Parkway, NW, Boca Raton, Florida 33487
--------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (561) 241-9400
--------------
Indicate by check mark whether Registrant has (1) filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
--- ---
As of January 12, 1999, the number of shares outstanding of the Registrant's
Common Stock was 68,575,896.
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REXALL SUNDOWN, INC.
TABLE OF CONTENTS
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
November 30, 1998 and August 31, 1998................................. 3
Consolidated Statements of Operations for the
Three Months Ended November 30, 1998 and 1997......................... 4
Consolidated Statements of Cash Flows for the
Three Months Ended November 30, 1998 and 1997......................... 5
Consolidated Statement of Shareholders' Equity for the
Three Months Ended November 30, 1998.................................. 6
Notes to Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................... 14
Part II. Other Information..................................................... 15
Signatures.............................................................................. 16
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
(Unaudited)
November 30, August 31,
1998 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 64,942 $ 87,349
Marketable securities........................................... 11,357 32,045
Trade accounts receivable, net.................................. 51,030 60,805
Inventory....................................................... 85,836 77,727
Prepaid expenses and other current assets....................... 8,441 7,554
Net current assets of discontinued operations................... 4,076 4,076
------------- -------------
Total current assets................................... 225,682 269,556
Property, plant and equipment, net.............................. 60,064 56,697
Other assets.................................................... 15,405 13,105
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Total assets........................................... $ 301,151 $ 339,358
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 16,991 $ 21,653
Accrued expenses and other current liabilities.................. 32,809 27,260
------------- -------------
Total current liabilities.............................. 49,800 48,913
Other liabilities............................................... 384 384
------------- -------------
Total liabilities...................................... 50,184 49,297
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Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000 shares,
no shares outstanding......................................... -- --
Common stock, $.01 par value; authorized 200,000,000 shares,
shares issued: 68,687,259 and 72,139,459, respectively........ 687 721
Capital in excess of par value.................................. 142,791 149,405
Retained earnings............................................... 107,525 140,185
Accumulated other comprehensive income.......................... (36) (250)
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Total shareholders' equity............................. 250,967 290,061
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Total liabilities and shareholders' equity............. $ 301,151 $ 339,358
============= =============
</TABLE>
See accompanying notes
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<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
--------------------------
1998 1997
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<S> <C> <C>
Net sales.................................................................. $ 123,550 $ 110,720
Cost of sales.............................................................. 53,168 44,195
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Gross profit...................................................... 70,382 66,525
Selling, general and administrative expenses............................... 52,936 44,629
------------ -----------
Operating income...................................................... 17,446 21,896
Other income (expense):
Interest income....................................................... 1,287 1,214
Other (expense) income................................................ (7) 33
Interest expense...................................................... (9) (132)
------------ -----------
Income before income tax provision......................................... 18,717 23,011
Income tax provision....................................................... 6,963 7,806
------------ -----------
Net income................................................................. $ 11,754 $ 15,205
============ ===========
Pro forma net income....................................................... $ 11,754 $ 14,543
============ ===========
Net income per common share:
Basic................................................................. $ 0.16 $ 0.22
============ ===========
Diluted............................................................... $ 0.16 $ 0.21
============ ===========
Pro forma net income per common share:
Basic................................................................. $ 0.16 $ 0.21
============ ===========
Diluted............................................................... $ 0.16 $ 0.20
============ ===========
Weighted average common shares outstanding:
Basic................................................................. 71,321,264 70,430,375
============ ===========
Diluted............................................................... 72,591,169 72,795,651
============ ===========
</TABLE>
See accompanying notes
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<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
November 30,
---------------------------------
1998 1997
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<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income...................................................... $ 11,754 $ 15,205
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.................................................... 1,977 948
Amortization.................................................... 563 320
Loss on sale of property and equipment.......................... 9 --
Deferred income taxes........................................... (44) (422)
Foreign exchange translation adjustment......................... 214 (281)
Compensatory options issued to non-employees.................... 465 238
Adjustment to conform fiscal year of pooled entity.............. -- (2,479)
Changes in assets and liabilities:
Trade accounts receivable..................................... 9,775 (17,212)
Inventory..................................................... (8,109) (6,015)
Prepaid expenses and other current assets..................... (887) (1,079)
Other assets.................................................. (2,819) (505)
Accounts payable.............................................. (4,662) 5,301
Accrued expenses and other current liabilities................ 5,628 9,782
Other liabilities............................................. -- 63
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Net cash provided by operating activities.............. 13,864 3,864
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Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment.................... (5,389) (13,078)
Purchase of marketable securities............................... (7,871) (15,595)
Proceeds from sale of marketable securities..................... 28,559 20,439
Proceeds from sale of fixed assets.............................. 36 --
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Net cash provided by (used in) investing activities.... 15,335 (8,234)
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Cash flows (used in) provided by financing activities:
Purchase of Common Stock........................................ (51,662) --
Principal payments on long-term debt............................ -- (1,447)
S Corporation contribution by members of
Richardson Labs, Inc........................................ -- 292
Exercise of options to purchase Common Stock.................... 56 2,571
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Net cash (used in) provided by financing activities.... (51,606) 1,416
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Net decrease in cash and cash equivalents....................... (22,407) (2,954)
Cash and cash equivalents at beginning of period................ 87,349 81,943
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Cash and cash equivalents at end of period............. $ 64,942 $ 78,989
============= =============
</TABLE>
See accompanying notes
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<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated
Capital in Other
Number Common Excess of Retained Comprehensive
of Shares Stock Par Value Earnings Income
--------- ----- --------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1998......................... 72,139,459 $721 $149,405 $140,185 $(250)
Net income...................................... --- --- --- 11,754 ---
Exercise of stock options....................... 17,800 --- 56 --- ---
Tax benefit from exercise of options............ --- --- 79 --- ---
Compensatory options issued to non-employees.... --- --- 465 --- ---
Repurchase and retirement of Common Stock....... (3,470,000) (34) (7,214) (44,414) ---
Cumulative translation adjustment............... --- --- --- --- 214
------------ ------ -------- -------- -----
Balance at November 30, 1998....................... 68,687,259 $687 $142,791 $107,525 $(36)
============ ====== ======== ======== =====
</TABLE>
See accompanying notes
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<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
(Unaudited)
1. Basis of Presentation and Other Matters
---------------------------------------
The accompanying unaudited consolidated financial statements,
which are for interim periods, do not include all disclosures provided
in the annual consolidated financial statements of Rexall Sundown, Inc.
(the "Company"). These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the Company's Annual
Report on Form 10-K for the year ended August 31, 1998, as filed with
the Securities and Exchange Commission.
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (which are of
a normal recurring nature) necessary for a fair presentation of the
financial statements. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the
full year.
On January 29, 1998, the Company consummated a business
combination with Richardson Labs, Inc. ("Richardson"), which was
accounted for as a pooling of interests. Prior to this transaction,
Richardson was an S corporation for Federal income tax purposes and,
accordingly, did not pay U.S. Federal income taxes. For periods prior
to the transaction with Richardson, pro forma net income on the
Consolidated Statements of Operations reflects a pro forma tax
provision for Richardson, as if it were subject to corporate income
taxes.
2. Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing
net income by the weighted average number of common shares outstanding.
Diluted net income per common share is calculated by dividing net
income by the weighted average number of common shares and potentially
dilutive common shares outstanding during the period. The Company's
potentially dilutive common shares consist of common stock options. For
the three months ended November 30, 1998, options to purchase
approximately 2,016,000 shares of common stock (the "Common Stock"),
$.01 par value, of the Company were excluded from the diluted earnings
per share calculation as the options' exercise prices were greater than
the average market price of the Common Stock.
3. Comprehensive Income
--------------------
During the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income and its
components. The adoption of SFAS No. 130 does not affect the Company's
results of operations or financial position, but will impact financial
statement disclosures. SFAS No. 130 requires that enterprises
separately disclose items of other comprehensive income by their
nature. For the first quarter of fiscal 1999 and 1998, the only
component of other comprehensive income affecting the Company has been
foreign currency translation adjustment. Total comprehensive income for
the three months ended November 30, 1998 and 1997 is as follows:
-7-
<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
November 30, 1998 November 30, 1997
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<S> <C> <C>
Net income.............................. $11,754 $15,205
Foreign currency translation
adjustment............................ 214 (281)
---------- ----------
Total comprehensive income.............. $11,968 $14,924
========== ==========
</TABLE>
4. Inventory
---------
The components of inventory at November 30, 1998 and August
31, 1998 are as follows:
<TABLE>
<CAPTION>
November 30, 1998 August 31, 1998
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<S> <C> <C>
Raw materials, bulk tablets
and capsules.......................... $45,031 $36,011
Work in process......................... 4,505 4,436
Finished products....................... 36,300 37,280
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$85,836 $77,727
======== ========
</TABLE>
5. Sales to a Major Customer and Major Products
--------------------------------------------
The Company had sales to a national retailer that represented
approximately 29% of net sales for each of the three months ended
November 30, 1998 and 1997. Additionally, the Company had sales to an
affiliate of such national retailer that represented approximately 4%
of net sales for the three months ended November 30, 1998.
In the fourth quarter of fiscal 1997, the Company introduced
an exclusively licensed, patented product. For the three months ended
November 30, 1998 and November 30, 1997, net sales of this product were
approximately 18% and 11% of the Company's net sales, respectively,
which includes sales to the national retailer discussed above.
6. Contingencies
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The Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The
Company is not currently engaged in any legal proceedings that are
expected, individually or in the aggregate, to have a material adverse
effect on the Company.
-8-
<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
In the first quarter of fiscal 1999, several class action
complaints alleging violations of the federal securities laws were
filed against the Company and certain officers and directors of the
Company. These suits purport to be on behalf of all persons who
purchased the Company's Common Stock between March 19, 1998 and
November 5, 1998. Following initial review of the complaints which have
been served, the Company believes that the allegations are completely
without merit, the lawsuits are groundless, and the Company will
vigorously defend against them, although no assurance can be given that
the Company will ultimately prevail in its defense.
7. Supplemental Disclosure of Non-Cash Financing Activities
--------------------------------------------------------
The Company recognized a reduction of income taxes payable and
a corresponding increase in additional paid-in-capital related to the
exercise of stock options of $79 and $3,467 for the three months ended
November 30, 1998 and 1997, respectively.
8. Share Repurchase Program
------------------------
On September 29, 1998, the Company's Board of Directors
authorized a share repurchase program, which allows the Company to buy
back up to $100,000 of its Common Stock. Under the terms of the
program, which has no expiration date, the Company may buy shares from
time to time in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of
November 30, 1998, the Company had repurchased and retired 3,470,000
shares pursuant to the program.
9. Discontinued Operations
-----------------------
On December 21, 1998, the purchaser of the assets of Pennex
Laboratories, Inc. ("Pennex") was in default under the collateralized
note and the terms of the most recent forbearance agreement with
respect to payments due to the Company. As such, the Company has taken
back possession of the property and is in the process of selling the
assets of Pennex. Based on Company investigations, the Company believes
that the current fair market value of the net assets of Pennex exceeds
the net book value of such assets at November 30, 1998. In addition, as
the Company was recording interest under the collateralized note only
when it was paid to the Company, no write-off of accrued interest is
necessary.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Rexall Sundown, Inc. (the "Company") develops, manufactures, markets
and sells vitamins, herbals, nutritional supplements and consumer health
products. The Company distributes its products using three channels of
distribution: sales to retailers; direct sales through independent distributors;
and mail order. The Company offers a broad product line including vitamins in
both multivitamin and single-entity formulas, minerals, herbals, homeopathic
remedies, weight management products and personal care products.
Revenue from the sale of the Company's products is recognized at the
time products are shipped. Net sales are recorded net of all discounts,
allowances, returns and credits. Initial costs associated with acquiring sales
agreements with certain retail customers are amortized over the expected term of
the relevant agreement and the amortization of such costs is recorded as a
reduction in net sales. Cost of goods sold includes the cost of raw materials
and all labor and overhead associated with the manufacturing and packaging of
the products.
Gross margins are impacted by changes in the relative sales mix among
the Company's channels of distribution. In particular, gross margins are
positively impacted if sales of the Company's direct sales subsidiary, Rexall
Showcase International, Inc. ("Rexall Showcase"), increase as a percentage of
net sales because such products command a higher gross margin. In a related
manner, selling, general and administrative expenses as a percentage of net
sales are typically higher if sales of Rexall Showcase increase as a percentage
of net sales because of the commissions paid to Rexall Showcase's independent
distributors. Conversely, if Rexall Showcase's sales as a percentage of net
sales decrease, gross margins will be negatively impacted and selling, general
and administrative expenses will decrease as a percentage of net sales.
Historically, operating margins from sales to retailers and mail order have been
higher than operating margins from the Rexall Showcase division. The Company
expects that Rexall Showcase's net sales, as a percentage of total net sales,
will remain relatively consistent in fiscal 1999 with the percentage achieved in
fiscal 1998, although no assurances can be given in this regard.
Results of Operations
Three Months Ended November 30, 1998 Compared to Three Months Ended
- -------------------------------------------------------------------
November 30, 1997
- -----------------
Net sales for the three months ended November 30, 1998 were $123.6
million, an increase of $12.8 million or 11.6% over the comparable period in
fiscal 1998. Of the $12.8 million increase, sales to retailers accounted for
$7.8 million, an increase of 11.1% over the comparable period in fiscal 1998.
The increase in sales to retailers was primarily attributable to the increase in
sales of Osteo-Bi-Flex(R) and increased sales and distribution to the Company's
existing customer base business, as well as new account distribution. Net sales
of Rexall Showcase increased by $5.4 million, an increase of 14.8% over the
comparable period in fiscal 1998. The $5.4 million increase was primarily due to
the expansion of Rexall Showcase's independent distributor base, the
introduction of new products and the inclusion of a full quarter of activity for
the Hong Kong operations, which commenced operations in
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<PAGE>
late October 1997, and the commencement of operations in Taiwan in November
1998. Rexall Showcase currently has operations in Hong Kong, Taiwan and South
Korea in Asia and anticipates commencing operations in Japan in fiscal 1999.
Currently, net sales within this region of the world are not material when
compared to the Company's total net sales. The Company will continue to monitor
the economic situation within this region. Rexall Showcase also has operations
in Mexico. The increase in net sales to retailers and for Rexall Showcase was
associated with increased unit sales, as pricing has remained essentially flat.
Net sales of the Company's mail order division, SDV(R), decreased by $0.4
million or 8.9% over the comparable period in fiscal 1998. Historically, the
Company has not allocated significant resources to this division.
Gross profit for the three months ended November 30, 1998 was $70.4
million, an increase of $3.9 million or 5.8% over the comparable period in
fiscal 1998. As a percentage of net sales, gross profit decreased from 60.1% for
the three months ended November 30, 1997 to 57.0% for the three months ended
November 30, 1998. The decrease in gross profit was primarily due to increased
overhead expenses associated with tripling the Company's manufacturing and
packaging capacity, which was built to support an anticipated higher level of
sales. Additionally, a shift in product mix in the sales to retailers division,
to products that generate lower gross profit, contributed to the decrease in
gross profit as a percentage of net sales.
Selling, general and administrative expenses for the three months ended
November 30, 1998 were $52.9 million, an increase of $8.3 million or 18.6% over
the comparable period in fiscal 1998. Of the increase, $1.7 million related to
the increase in sales commissions paid to Rexall Showcase's independent
distributors due to higher sales volumes, with the remaining increase primarily
due to the costs incurred by the Company in strengthening its infrastructure
including sales and marketing personnel, product development, increased costs
associated with our new administrative facilities and other personnel, to
support anticipated higher levels of sales in the future. These additional costs
were partially offset by an approximately $2.0 million reduction, in the first
quarter of fiscal 1999 as compared to the comparable period in the prior year,
in consumer advertising which resulted from the timing of new product releases.
As a percentage of net sales, selling, general and administrative expenses
increased from 40.3% for the three months ended November 30, 1997 to 42.8% for
the three months ended November 30, 1998, reflecting the lower than anticipated
sales volume.
Other income, net, increased from $1.1 million in the first quarter of
fiscal 1998 to $1.3 million in the first quarter of fiscal 1999. Other income,
net, is predominantly comprised of interest income ($1.3 million for the three
months ended November 30, 1998 and $1.2 million for the three months ended
November 30, 1997) which is derived from the investment of the Company's
available cash balances.
Income before income tax provision was $18.7 million for the three
months ended November 30, 1998, a decrease of $4.3 million or 18.7% as compared
to the same period in fiscal 1998. As a percentage of net sales, income before
income tax provision decreased from 20.8% for the three months ended November
30, 1997 to 15.1% for the three months ended November 30, 1998. Pro forma net
income was $11.8 million for the first quarter of fiscal 1999, a decrease of
$2.8 million or 19.2% from the prior year's comparable quarter. The decrease in
income before income tax provision and pro forma net income was primarily due to
the increased cost of the Company's infrastructure, including selling, general
and administrative expenses, which was not fully absorbed at the current level
of sales.
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<PAGE>
Seasonality
The Company believes that its business is not subject to significant
seasonality based on historical trends, with the exception of Rexall Showcase,
which typically experiences lower revenues in the second and fourth fiscal
quarters due to winter and summer holiday seasons, respectively.
Liquidity and Capital Resources
The Company had working capital of $175.9 million as of November 30,
1998, compared to $220.6 million as of August 31, 1998. This decrease was
principally due to the implementation of the Company's stock repurchase program.
As of November 30, 1998, the Company had repurchased and retired 3,470,000
shares at a cost of $51.7 million, pursuant to this program. Trade accounts
receivable, net, at November 30, 1998, decreased $9.8 million as compared to
fiscal 1998 year-end, while inventory increased $8.1 million during the same
period. The reduction in trade accounts receivable can be primarily attributed
to lower sales to retailers in the first quarter of fiscal 1999 as compared to
the fourth quarter of fiscal 1998. The increase in inventory resulted primarily
from lower than expected sales volume, coupled with increased levels of new
product inventory.
Net cash provided by operating activities for the three months ended
November 30, 1998 was $13.9 million compared to $3.9 million for the comparable
period in fiscal 1998. Net cash provided by operating activities, as compared to
the first quarter of fiscal 1998, increased primarily due to a decrease in
accounts receivable (as discussed above), partially offset by an increase in
inventory, as well as a decrease in accounts payable and accrued expenses and
other current liabilities. Net cash provided by investing activities was $15.3
million for the three months ended November 30, 1998 compared to $8.2 million of
cash used in investing activities for the comparable period in fiscal 1998.
During the first quarter of 1999, the sale of marketable securities provided
$20.7 million of net proceeds necessary to fund the Company's share repurchase
program. Offsetting these proceeds, the Company made capital expenditures of
$5.6 million in the three months ended November 30, 1998, primarily related to
investments in equipment and facility enhancements. Net cash used in financing
activities was $51.6 million for the three months ended November 30, 1998
compared to net cash provided of $1.4 million for the comparable period in
fiscal 1998, with the first quarter of fiscal 1999 reflecting $51.7 million used
for the Company's share repurchase program.
The Company believes that its existing cash balances, internally
generated funds from operations and its available bank line of credit will
provide the liquidity necessary to satisfy the Company's working capital needs,
including the purchase and maintenance of inventory, the financing of the
Company's accounts receivable and anticipated capital expenditures, as well as
any future repurchase of shares under the Company's share repurchase program.
Inflation
Inflation has not had a significant impact on the Company in the past
three years nor is it expected to have a significant impact in the foreseeable
future.
-12-
<PAGE>
Potential Year 2000 Issues
The Year 2000 issue generally refers to the inability of computer
hardware and software to properly recognize a year that begins with "20" instead
of "19." This issue arose as a result of computer systems and programs being
designed to accept a calendar year reference as two-digits as opposed to
four-digits. If the Year 2000 issue is not corrected, computer applications may
stop processing date-related computations or process them incorrectly. The
Company has recognized the severity of the Year 2000 issue and has designated it
as a priority, allocating appropriate resources in order to minimize the impact
of Year 2000 date-related problems on its business. The Company has assembled an
internal task force which is headed by its information technology vice president
to review and evaluate the Year 2000 issue as it relates to its internal
computer based and non-computer based systems as well as third party computer
systems including those of its vendors and customers. The scope of the Company's
Year 2000 analysis encompasses the Company's traditional enterprise-wide
software, its mid-range and personal computing systems, and its embedded
microprocessor systems.
For the Company's internal computer and non-computer-based systems, the
task force will identify the scope of any Year 2000 problems, prepare test
scripts in order to determine whether these systems will be Year 2000 compliant
and implement the test scripts by conducting appropriate testing in order to
confirm actual compliance. The Company expects to complete test scripts for all
of its internal computer-based systems by the end of the first quarter of 1999.
The task force is currently in the process of identifying the applicable
internal non-computer systems which potentially may be affected by Year 2000.
In order to determine the state of readiness of third parties,
including the Company's significant vendors and customers, to handle Year 2000
issues and whether it will impact the Company's business, the Company has sent
letters of inquiry to substantially all of the third parties with whom it does
business. The Company's vendors and customers are at various stages in analyzing
this issue and the Company is in the process of receiving and analyzing their
responses to the Company's letter. The Company expects to have identified any
potential Year 2000 problems with its key vendors and customers by the end of
March 1999. The Company has not yet established any contingency plans but will
develop such plans as needed once it identifies the scope and magnitude of any
compliance issues with third parties. There can be no assurance that the systems
of other companies on which the Company's systems rely or interface will be
timely converted, which failure by a key vendor or customer could prevent the
Company's products from being distributed in a timely manner.
The Company has incurred and will continue to incur internal staff
costs as well as consulting and other expenses related to Year 2000 issues. The
Company does not separately track internal costs incurred for the Year 2000
project, the majority of which are payroll related for the Company's information
technology professionals. If any of the Company's internal systems or equipment
are found to be non-compliant with Year 2000, they will need to be upgraded or
replaced. To date, none of these costs have been material. The recent growth of
the Company which prompted it, in October 1997, to install a new enterprise-wide
computer system which is utilized for the Company's manufacturing, distribution,
finance and sales functions, substantially reduces the likelihood that the costs
incurred by the Company in becoming Year 2000 compliant will be material. This
enterprise-wide system is warranted to be Year 2000 compliant by the
manufacturer and the Company will confirm its compliance by subjecting this
system to the same tests as the Company's other internal computer-based systems.
The Company does not expect that the total costs involved in becoming Year 2000
compliant will be material to the Company's financial position, results of
operations or cash flows.
-13-
<PAGE>
Forward-Looking Statements
This report contains certain "forward-looking statements" as such term
is defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, which
represents the Company's interpretation or beliefs. These forward-looking
statements, by their nature, involve substantial risks and uncertainties,
certain of which may be beyond the Company's control and actual results may
differ materially depending on a variety of important factors including
uncertainties related to acquisitions, government regulation, managing and
maintaining growth, the effect of adverse publicity, litigation, reliance on
independent distributors of Rexall Showcase, competition and other factors
described in the Company's filings with the Securities and Exchange Commission.
For this purpose, any statements contained in this Report that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the generality of the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "could," "estimate," or "continue"
or the negative or other variations thereof or comparable terminology are
intended to identify forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
-14-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Information with respect to this Item for the period covered
by this Form 10-Q has been previously reported in Item 3,
entitled "Legal Proceedings" of the Form 10-K for the fiscal
year ended August 31, 1998 heretofore filed by the Registrant
with the Commission.
Item 2. Changes in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
-15-
<PAGE>
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.
REXALL SUNDOWN, INC.
Date: January 14, 1999 By: /s/ Carl DeSantis
---------------------------------------
Carl DeSantis, Chairman of the Board
Date: January 14, 1999 By: /s/ Geary Cotton
---------------------------------------
Geary Cotton, Chief Financial Officer,
Treasurer and Chief Accounting Officer
-16-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety by reference to such financial statements).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Aug-31-1999
<PERIOD-END> Nov-30-1998
<CASH> 64,942,243
<SECURITIES> 11,356,571
<RECEIVABLES> 51,029,547<F1>
<ALLOWANCES> 0
<INVENTORY> 85,836,120
<CURRENT-ASSETS> 225,681,905
<PP&E> 60,063,618<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 301,151,158
<CURRENT-LIABILITIES> 49,800,203
<BONDS> 0
0
0
<COMMON> 686,873
<OTHER-SE> 250,279,969
<TOTAL-LIABILITY-AND-EQUITY> 301,151,158
<SALES> 123,549,961
<TOTAL-REVENUES> 123,549,961
<CGS> 53,168,436
<TOTAL-COSTS> 53,168,436
<OTHER-EXPENSES> 52,935,816
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,888
<INCOME-PRETAX> 18,716,748
<INCOME-TAX> 6,962,740
<INCOME-CONTINUING> 11,754,008
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,754,008
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
<FN>
F1 - Net of allowance.
F2 - Net of accumulated depreciation.
</FN>
</TABLE>
