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 May 31, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number 0-21884
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REXALL SUNDOWN, INC.
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(Exact Name of Registrant as Specified in its Charter)
Florida 59-1688986
- ------------------------------- -------------------
(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
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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. Yes [X] No [ ]
As of July 12, 1999, the number of shares outstanding of the Registrant's Common
Stock was 64,396,048.
<PAGE>
REXALL SUNDOWN, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
May 31, 1999 and August 31, 1998............................... 3
Consolidated Statements of Operations for the
Three and Nine Months Ended May 31, 1999 and 1998.............. 4
Consolidated Statements of Cash Flows for the
Nine Months Ended May 31, 1999 and 1998........................ 5
Consolidated Statement of Shareholders' Equity for the
Nine Months Ended May 31, 1999................................. 6
Notes to Consolidated Financial Statements..................... 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations............... 11
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................. 17
Part II. Other Information.............................................. 18
Signatures................................................................. 19
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<PAGE>
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)
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
--------- ----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................... $ 6,669 $ 87,349
Marketable securities ....................................... -- 32,045
Trade accounts receivable, net .............................. 82,166 60,805
Inventory ................................................... 117,118 77,727
Prepaid expenses and other current assets ................... 11,425 7,554
Net current assets of discontinued operations ............... 4,076 4,076
--------- ---------
Total current assets ............................... 221,454 269,556
Property, plant and equipment, net .......................... 68,263 56,697
Other assets ................................................ 15,271 13,105
--------- ---------
Total assets ....................................... $ 304,988 $ 339,358
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 44,080 $ 21,653
Accrued expenses and other current liabilities .............. 29,297 27,260
Short-term debt ............................................. 15,000 --
--------- ---------
Total current liabilities .......................... 88,377 48,913
Other liabilities ........................................... 240 384
--------- ---------
Total liabilities .................................. 88,617 49,297
--------- ---------
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 and outstanding: 64,345,166 and
72,139,459, respectively ................................ 643 721
Capital in excess of par value .............................. 136,737 149,405
Retained earnings ........................................... 79,079 140,185
Accumulated other comprehensive income ...................... (88) (250)
--------- ---------
Total shareholders' equity ......................... 216,371 290,061
--------- ---------
Total liabilities and shareholders' equity ......... $ 304,988 $ 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 Nine Months Ended
May 31, May 31,
------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales ............................................. $ 171,211 $ 150,979 $ 436,656 $ 377,188
Cost of sales ......................................... 72,421 65,197 189,138 157,551
------------ ------------ ------------ ------------
Gross profit ................................. 98,790 85,782 247,518 219,637
Selling, general and administrative expenses .......... 69,549 55,920 175,806 145,488
------------ ------------ ------------ ------------
Operating income ............................. 29,241 29,862 71,712 74,149
Other income (expense):
Interest income .................................. 339 1,141 2,462 3,411
Other expense .................................... (64) (29) (77) (7)
Interest expense ................................. (38) (3) (48) (219)
------------ ------------ ------------ ------------
Income before income tax provision .................... 29,478 30,971 74,049 77,334
Income tax provision .................................. 10,984 11,591 27,589 27,781
------------ ------------ ------------ ------------
Net income ............................................ $ 18,494 $ 19,380 $ 46,460 $ 49,553
============ ============ ============ ============
Pro forma net income .................................. $ 18,494 $ 19,380 $ 46,460 $ 48,611
============ ============ ============ ============
Net income per common share:
Basic............................................. $ 0.29 $ 0.27 $ 0.68 $ 0.70
============ ============ ============ ============
Diluted........................................... $ 0.28 $ 0.26 $ 0.67 $ 0.67
============ ============ ============ ============
Pro forma net income per common share:
Basic............................................. $ 0.29 $ 0.27 $ 0.68 $ 0.69
============ ============ ============ ============
Diluted........................................... $ 0.28 $ 0.26 $ 0.67 $ 0.66
============ ============ ============ ============
Weighted average common shares outstanding:
Basic ............................................ 64,812,779 71,372,034 68,157,408 70,949,502
============ ============ ============ ============
Diluted .......................................... 66,708,990 74,180,111 69,612,833 73,621,291
============ ============ ============ ============
</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>
Nine Months Ended
May 31,
----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income ................................................. $ 46,460 $ 49,553
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ............................................... 6,859 4,105
Amortization ............................................... 2,143 1,193
(Gain)/loss on sale of property and equipment .............. (32) 56
Deferred income taxes ...................................... (216) (402)
Foreign exchange translation adjustment .................... 162 185
Compensatory options issued to non-employees ............... 1,397 1,069
Adjustment to conform fiscal year of pooled entity ......... -- (2,479)
Changes in assets and liabilities:
Trade accounts receivable ................................ (21,361) (17,054)
Inventory ................................................ (39,391) (32,184)
Prepaid expenses and other current assets ................ (3,871) (1,426)
Other assets ............................................. (4,093) (348)
Accounts payable ......................................... 22,427 (4,302)
Accrued expenses and other current liabilities ........... 2,841 15,585
Other liabilities ........................................ (144) 105
--------- ---------
Net cash provided by operating activities ......... 13,181 13,656
--------- ---------
Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment ............... (18,531) (23,308)
Purchase of marketable securities .......................... (13,428) (48,528)
Proceeds from sale of marketable securities ................ 45,473 40,295
Proceeds from sale of fixed assets ......................... 138 266
--------- ---------
Net cash provided by (used in) investing activities 13,652 (31,275)
--------- ---------
Cash flows provided by (used in) financing activities:
Purchase of common stock ................................... (124,788) --
Net borrowings on line of credit ........................... 15,000 --
Principal payments on long-term debt ....................... -- (3,476)
Exercise of options to purchase common stock ............... 2,275 5,681
--------- ---------
Net cash (used in) provided by financing activities (107,513) 2,205
--------- ---------
Net decrease in cash and cash equivalents .................. (80,680) (15,414)
Cash and cash equivalents at beginning of period ........... 87,349 81,943
--------- ---------
Cash and cash equivalents at end of period ........ $ 6,669 $ 66,529
========= =========
</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)
(Unaudited)
<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...................................... -- -- -- 46,460 --
Exercise of stock options....................... 424,907 4 2,271 -- --
Tax benefit from exercise of options............ -- -- 804 -- --
Compensatory options issued to non-employees.... -- -- 1,397 -- --
Repurchase and retirement of common stock....... (8,219,200) (82) (17,140) (107,566) --
Cumulative translation adjustment............... -- -- -- -- 162
---------- ---- -------- --------- ------
Balance at May 31, 1999............................ 64,345,166 $643 $136,737 $ 79,079 $ (88)
========== ==== ======== ========= ======
</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 interim consolidated financial statements
of Rexall Sundown, Inc. (the "Company") do not include all disclosures
provided in the annual consolidated financial statements of the Company.
These unaudited interim 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 interim
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
May 31, 1999, options to purchase approximately 1,787,000 shares of the
Company's common stock, $.01 par value (the "Common Stock"), were excluded
from the diluted earnings per share calculation as the exercise prices of
these options 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 does impact financial statement disclosures. SFAS
No. 130 requires that enterprises separately disclose items of other
comprehensive income by their nature. For the third quarter and first nine
months of fiscal 1999 and 1998, the only component of other comprehensive
income that affected the Company was the foreign currency translation
adjustment. Total comprehensive income for the three and nine months ended
May 31, 1999 and 1998 was 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>
Three Months Ended Nine Months Ended
May 31, May 31,
---------------------- ---------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income..................... $18,494 $19,380 $46,460 $49,553
Foreign currency translation
adjustment................ 96 273 162 185
------- ------- ------- -------
Total comprehensive
income.................... $18,590 $19,653 $46,622 $49,738
======= ======= ======= =======
</TABLE>
4. Inventory
The components of inventory at May 31, 1999 and August 31, 1998 were
as follows:
May 31, 1999 August 31, 1998
------------ ---------------
Raw materials, bulk tablets
and capsules......................... $ 55,301 $36,011
Work in process......................... 6,987 4,436
Finished products....................... 54,830 37,280
-------- -------
$117,118 $77,727
======== =======
5. Short-term Debt
In April 1999, the Company entered into a $50,000 line of credit with
a financial institution. At May 31, 1999, the Company had $15,000
outstanding under this line of credit bearing interest at 5.65% and
maturing on June 25, 1999. Such maturity date was extended into the fourth
quarter.
6. Sales to a Major Customer and Major Products
The Company had sales to a national retailer that represented
approximately 24% and 31% of net sales for the three months ended May 31,
1999 and 1998, respectively, and 26% and 30% of net sales for the nine
months ended May 31, 1999 and 1998, respectively. Additionally, the Company
had sales to an affiliate of such national retailer that represented
approximately 4% and 2% of net sales for the three months ended May 31,
1999 and 1998, respectively, and 4% and 1% of net sales for the nine months
ended May 31, 1999 and 1998, respectively.
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<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
For the three months ended May 31, 1999 and 1998, net sales of the
Company's Osteo Bi-Flex(R) brand of nutritional supplements containing the
two dietary ingredients, glucosamine and chondroitin, which help promote
cartilage regeneration and healthy joints, were approximately 11% and 17%
of the Company's net sales, respectively. For the nine months ended May 31,
1999 and 1998, net sales of these products were approximately 16% and 13%
of the Company's net sales, respectively. The percentage of net sales for
the three and nine month periods include sales to the national retailer
discussed above.
At the end of the second quarter of fiscal 1999, the Company
introduced Cellasene(TM) in the United States pursuant to an exclusive
distributorship agreement. Cellasene is a dietary supplement formulated for
women to help eliminate cellulite. For the three and nine months ended May
31, 1999, net sales of this product were approximately 21% and 9% of the
Company's net sales, respectively, which includes sales to the national
retailer discussed above.
7. Contingencies
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.
During 1999, several class action complaints alleging violations of
the federal securities laws were filed against the Company and certain of
its officers and directors. These complaints were consolidated into one
action in the United States District Court for the Southern District of
Florida under the caption In re Rexall Sundown, Inc. Securities Litigation
(98-8798). The plaintiffs filed an amended complaint in February 1999 and
in April 1999, the Company and the individuals named in the action filed a
motion to dismiss the complaint on numerous grounds, including the failure
to allege actionable claims. The suit purports to be on behalf of all
persons who were damaged by the purchase of the Company's Common Stock
between March 19, 1998 and November 5, 1998. After a review of the amended
complaint, the Company believes that the allegations are without merit.
While the Company will vigorously defend against the lawsuit, there can be
no assurance that the Company will ultimately prevail in its defense.
8. 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 $562 and $233 for the three months ended May
31, 1999 and 1998, respectively, and $804 and $7,686 for the nine months
ended May 31, 1999 and 1998, respectively.
-9-
<PAGE>
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
9. Share Repurchase Program
On September 29, 1998, the Company's Board of Directors authorized a
share repurchase program to buy back up to $100,000 of its Common Stock. As
of February 28, 1999, the Company had completed this repurchase program by
repurchasing and retiring 6,865,700 shares of Common Stock. On March 16,
1999, the Company's Board of Directors authorized a new share repurchase
program to buy back up to an additional $100,000 of its Common Stock. As
with the initial share repurchase program, the new share repurchase program
has no expiration date and allows the Company to buy shares of its Common
Stock from time to time in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of May
31, 1999, the Company had repurchased and retired 1,353,500 shares pursuant
to the new program.
10. 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 approximates the net book value of
such assets at May 31, 1999. 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.
11. Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments
and hedging activities. SFAS No. 133 requires all derivatives to be
measured at fair value and recognized as either assets or liabilities on
the balance sheet. Furthermore, the accounting for changes in the fair
value of a derivative (i.e., gains and losses) depends on the intended use
of the derivative. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company believes that the
adoption of SFAS No. 133 will not have a material effect on its
consolidated financial statements.
-10-
<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.
The Company sells products to customers throughout the world. The sales to
retailers and mail order divisions of the Company operate predominantly within
the United States, while Rexall Showcase International, Inc. ("Rexall
Showcase"), the Company's direct sales subsidiary, has operations in the United
States, Japan, Hong Kong, Taiwan, South Korea and Mexico. Rexall Showcase
intends to continue expanding operations to other selected countries in the
future. Currently, net sales and operating income derived from the Asia Pacific
region of the world are not material when compared to the Company's total net
sales. Notwithstanding this fact, net sales and operating income could be
adversely affected by fluctuations in Asian currencies and the weakening of
Asian economies. The Company will continue to monitor the economic situation
within this region.
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 entering into 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 Rexall Showcase increase as a percentage of the Company's
net sales because such products command a higher gross margin. In a related
manner, selling, general and administrative ("SG&A") 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 SG&A
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 Company 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.
-11-
<PAGE>
Results of Operations
Three Months Ended May 31, 1999 Compared to Three Months Ended May 31, 1998
Net sales for the three months ended May 31, 1999 were $171.2 million,
an increase of $20.2 million or 13.4% over the comparable period in fiscal 1998.
Of the $20.2 million increase, sales to retailers accounted for $20.1 million,
an increase of 19.7% over the comparable period in fiscal 1998. The increase in
sales to retailers was primarily attributable to net sales of Cellasene, which
totaled approximately $35.0 million and represented the Company's initial
distribution of this product to its customers. Additionally, net sales increased
primarily due to the Company's expanded distribution to its existing customers,
as the introduction of newer products, such as Cellasene and the Twist 'N
Learn(TM) line of herbal supplements, have allowed the Company to gain
additional distribution. These increases, however, were partially offset by a
decline in net sales of herbal supplements and Osteo-Bi-Flex. The decline in net
sales of herbal supplements from the third quarter of fiscal 1998 was primarily
caused by these products receiving less media attention in the fiscal 1999
period. The decline in net sales of Osteo-Bi-Flex was primarily attributable to
the timing of promotions for the Osteo-Bi-Flex brand in fiscal 1998. The
increase in net sales to retailers for the third quarter of fiscal 1999 was
primarily associated with product mix resulting from new product introductions,
as pricing remained essentially unchanged. Net sales of Rexall Showcase
increased 1.1% in the third quarter of fiscal 1999 as compared to the third
quarter of fiscal 1998. The increase in net sales was primarily due to the
commencement of Rexall Showcase operations in Japan in late May 1999 and the
commencement of operations in Taiwan in November 1998. Net sales of the
Company's mail order division, SDV(R), decreased by $0.4 million to $3.3 million
or an 11.1% decline over the comparable period in fiscal 1998. In recent years,
the Company has not allocated significant resources to this division.
Gross profit for the three months ended May 31, 1999 was $98.8 million, an
increase of $13.0 million or 15.2% over the comparable period in fiscal 1998. As
a percentage of net sales, gross profit increased from 56.8% for the three
months ended May 31, 1998 to 57.7% for the three months ended May 31, 1999. The
increase in gross profit was primarily due to lower product royalty expenses in
the third quarter of fiscal 1999 as compared to the third quarter of fiscal
1998. This increase, however, was partially offset by increased infrastructure
costs associated with the expansion of the Company's manufacturing and packaging
capacity and by product mix, as the Company had a higher percentage of sales to
retailers in the third quarter versus the same period in fiscal 1998.
SG&A expenses for the three months ended May 31, 1999 were $69.5 million,
an increase of $13.6 million or 24.4% over the comparable period in fiscal 1998.
As a percentage of net sales, SG&A increased from 37.0% for the three months
ended May 31, 1998 to 40.6% for the three months ended May 31, 1999. This
increase was primarily the result of increased advertising expense, as the
Company continues its strategy to support its nationally branded products, and
costs incurred by the Company in strengthening its infrastructure. For the third
quarter of fiscal 1999, the Company spent approximately $18.3 million in
consumer advertising as compared to $4.3 million for the third quarter of fiscal
1998. These increases in SG&A, however, were partially offset by the reversal of
bonus expenses accrued through the first half of the year of approximately $5.0
million and with product mix, as Rexall Showcase sales comprised a smaller
percentage of net sales for the three months ended May 31, 1999 as compared to
the three months ended May 31, 1998.
-12-
<PAGE>
Other income, net, decreased from $1.1 million in the third quarter of
fiscal 1998 to $0.2 million in the third quarter of fiscal 1999. Other income,
net, is predominantly comprised of interest income ($0.3 million for the three
months ended May 31, 1999 and $1.1 million for the three months ended May 31,
1998) which is derived from the investment of the Company's available cash
balances. The Company's cash balances were lower in the third quarter of fiscal
1999 as compared to the third quarter of fiscal 1998 due to the repurchase of
8,219,200 shares of the Company's Common Stock for a total cost of approximately
$124.8 million.
Income before income tax provision was $29.5 million for the three months
ended May 31, 1999, a decrease of $1.5 million or 4.8% as compared to the same
period in fiscal 1998. As a percentage of net sales, income before income tax
provision decreased from 20.5% for the three months ended May 31, 1998 to 17.2%
for the three months ended May 31, 1999. Pro forma net income was $18.5 million
for the third quarter of fiscal 1999, a decrease of $0.9 million or 4.6% 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 reasons discussed
above.
Nine Months Ended May 31, 1999 Compared to Nine Months Ended May 31, 1998
Net sales for the nine months ended May 31, 1999 were $436.7 million, an
increase of $59.5 million or 15.8% over the comparable period in fiscal 1998.
Sales to retailers accounted for $48.9 million of the sales growth, an increase
of 19.7% over the comparable period in fiscal 1998. The increase in sales to
retailers was primarily attributable to the launch of Cellasene, which began at
the end of the second fiscal quarter of 1999, an increase in net sales of
Osteo-Bi-Flex, expanded distribution to the Company's existing customers as well
as new account distribution. These increases were partially offset by a decline
in net sales of herbal supplements from the first nine months of fiscal 1998
which was primarily caused by these supplements receiving less media attention
in the fiscal 1999 period. The increase in net sales to retailers for the nine
months ended May 31, 1999 was primarily associated with product mix resulting
from new product introductions, as pricing remained essentially unchanged. Net
sales of Rexall Showcase increased by $12.9 million, an increase of 11.2% over
the comparable period in fiscal 1998. The increase was primarily due to the
commencement of operations in Japan in May 1999, the commencement of operations
in Taiwan in November 1998 and the inclusion of a full nine months of activity
for the Hong Kong operations in fiscal 1999 (which commenced operations in late
October 1997). The increase in net sales for Rexall Showcase was primarily
associated with increased unit sales, as pricing remained essentially unchanged.
Net sales of the Company's mail order division decreased by $2.3 million or
17.7% over the comparable period in fiscal 1998 primarily due to non-recurring
promotions held in the fiscal 1998 period. In addition, in recent years, the
Company has not allocated significant resources to this division.
Gross profit for the nine months ended May 31, 1999 was $247.5 million, an
increase of $27.9 million or 12.7% over the comparable period in fiscal 1998. As
a percentage of net sales, gross profit decreased from 58.2% for the nine months
ended May 31, 1998 to 56.7% for the nine months ended May 31, 1999. The decrease
in gross profit was primarily due to increased infrastructure costs associated
with the expansion of the Company's manufacturing and packaging capacity,
partially offset by lower product royalty expenses.
-13-
<PAGE>
SG&A expenses for the nine months ended May 31, 1999 were $175.8 million,
an increase of $30.3 million or 20.8% over the comparable period in fiscal 1998.
Excluding approximately $2.5 million of pooling expenses incurred in the second
quarter of fiscal 1998 related to the business combination with Richardson, for
which there was no corresponding expenses in the same period this year, SG&A
expenses increased approximately $32.8 million. The increase in SG&A expenses
was primarily attributable to increased consumer advertising in the fiscal 1999
period and increased costs incurred by the Company in strengthening its
infrastructure. Consumer advertising expense for the nine months ended May 31,
1999 was $23.4 million compared to $10.5 million for the corresponding fiscal
1998 period. Additionally, $4.5 million of the increase in SG&A expense related
to increased sales commissions paid to Rexall Showcase's independent
distributors resulting from higher sales volumes. These additional SG&A costs,
however, were partially offset by the reduction in bonus expense, as the Company
had no bonus expense for the first nine months of fiscal 1999 as compared to
$2.8 million of bonus expense for the first nine months of fiscal 1998.
Excluding the non-recurring pooling expenses described above, as a percentage of
net sales, SG&A expenses increased from 37.9% for the nine months ended May 31,
1998 to 40.3% for the nine months ended May 31, 1999.
Other income, net, was $2.3 million in the first nine months of fiscal
1999, a $0.9 million decrease as compared to the $3.2 million recorded in the
first nine months of fiscal 1998. Other income, net, is predominantly comprised
of interest income ($2.5 million for the nine months ended May 31, 1999 and $3.4
million for the nine months ended May 31, 1998) which is derived from the
investment of the Company's available cash balances. The Company's cash balances
were lower during the first nine months of fiscal 1999 as compared to the first
nine months of fiscal 1998 due to the repurchase of 8,219,200 shares of the
Company's Common Stock for a total cost of approximately $124.8 million.
Income before income tax provision was $74.0 million for the nine months
ended May 31, 1999, a decrease of $3.3 million or 4.2% as compared to the same
period in fiscal 1998. As a percentage of net sales, income before income tax
provision decreased from 20.5% for the nine months ended May 31, 1998 to 17.0%
for the nine months ended May 31, 1999. Pro forma net income was $46.5 million
for the first nine months of fiscal 1999, a decrease of $2.2 million or 4.4%
from the prior year's comparable period. The decrease in income before income
tax provision and pro forma net income was primarily due to the reasons
discussed above.
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.
-14-
<PAGE>
Liquidity and Capital Resources
The Company had working capital of $133.1 million as of May 31, 1999,
compared to $220.6 million as of August 31, 1998. This decrease was principally
due to the implementation and completion of the Company's initial stock
repurchase program and the implementation of the Company's new stock repurchase
program. As of May 31, 1999, the Company had repurchased and retired 8,219,200
shares of Common Stock at a cost of approximately $124.8 million pursuant to
these programs. Additionally, trade accounts receivable, net, at May 31, 1999,
increased $21.4 million as compared to the fiscal 1998 year-end, while inventory
increased $39.4 million during the same period. The increase in trade accounts
receivable can be primarily attributed to Cellasene shipments to retailers
during the latter part of the third quarter of fiscal 1999 due to the timing of
receipt of Cellasene inventory. The increase in inventory resulted primarily
from inventory for Cellasene, inventory necessary to support the opening of
Rexall Showcase Japan and increases in the Company's overall target inventory to
satisfy customer needs. Accounts payable at May 31, 1999 increased $22.4 million
as compared to fiscal 1998 year-end, primarily reflecting the timing of
payments.
Net cash provided by operating activities for the nine months ended May 31,
1999 was $13.2 million compared to $13.7 million for the comparable period in
fiscal 1998. Net cash provided by investing activities was $13.7 million for the
nine months ended May 31, 1999 compared to $31.3 million of cash used in
investing activities for the comparable period in fiscal 1998. During the first
nine months of 1999, net proceeds from the sale of marketable securities
provided $32.0 million of cash necessary to fund the Company's initial share
repurchase program. Offsetting these proceeds, the Company made capital
expenditures of $18.5 million for the nine months ended May 31, 1999, primarily
related to investments in the Company's new softgel facility, computer systems
to support the global operations of Rexall Showcase, expanded lab facilities and
facility enhancements. Net cash used in financing activities was $107.5 million
for the nine months ended May 31, 1999 compared to net cash provided of $2.2
million for the comparable period in fiscal 1998. The first nine months of
fiscal 1999 reflected $124.8 million used for the Company's share repurchase
programs, partially offset by $15.0 million provided by net borrowings on a line
of credit necessary to fund a portion of the repurchase of the Company's Common
Stock and increased working capital requirements.
The Company believes that its existing cash balances, internally generated
funds from operations and the Company's credit line 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 new 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.
-15-
<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 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 has identified the scope of any Year 2000 problems, prepared test
scripts in order to determine whether these systems are Year 2000 compliant and
implemented the test scripts by conducting appropriate testing in order to
confirm actual compliance. The Company has substantially completed testing its
internal computer-based systems and expects to complete test scripts and testing
for the remainder of its less crucial internal computer-based systems by the end
of August 1999. The task force has identified and tested 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
August 1999. The Company has also begun to schedule site visits with its key
vendors and customers in order to confirm Year 2000 compliance. 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, travel 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 new enterprise-wide
computer systems which is utilized for the Company's manufacturing,
distribution, finance and sales functions for all of its distribution channels,
substantially reduces the likelihood that the costs incurred by the Company in
becoming Year 2000 compliant will be material. These enterprise-wide systems are
warranted to be Year 2000 compliant by their manufacturers and are in the
process of being tested by the Company to
-16-
<PAGE>
confirm their compliance. 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.
Recent Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133 requires all derivatives to be measured at fair
value and recognized as either assets or liabilities on the balance sheet.
Furthermore, the accounting for changes in the fair value of a derivative (i.e.,
gains and losses) depends on the intended use of the derivative. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company believes that the adoption of SFAS No. 133 will not have a material
effect on the consolidated financial statements.
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.
-17-
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Not applicable.
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.
10.1 Master Promissory Note dated April 22, 1999 by Rexall
Sundown, Inc. for the benefit of NationsBank, N.A.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
-18-
<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: July 14, 1999 By: /s/ Damon DeSantis
-----------------------------------
Damon DeSantis, President and Chief
Executive Officer
Date: July 14, 1999 By: /s/ Geary Cotton
--------------------------------------
Geary Cotton, Chief Financial Officer,
Treasurer and Chief Accounting Officer
-19-
MASTER PROMISSORY NOTE
$50,000,000 April 22, 1999
FOR VALUE RECEIVED, the undersigned Rexall Sundown, Inc., a Florida
corporation ("Borrower"), hereby promises to pay to the order of NationsBank,
N.A. ("Lender"), at its office at Charlotte, North Carolina (or at such other
place as Lender may designate from time to time), in lawful money of the United
States of America and in immediately available funds, the principal amount of
Fifty Million Dollars ($50,000,000) or such lesser amount as shall equal the
aggregate unpaid principal amount of the advances (the "Advances") made by
Lender to Borrower under this Master Promissory Note (this "Note"), and to pay
interest on the unpaid principal amount of each such Advance at the rates per
annum and on the dates specified below.
Each Advance hereunder shall be at the sole discretion of Lender. Each
Advance shall have a maturity date and shall bear interest at the rate per annum
quoted to Borrower by Lender and accepted by Borrower prior to the making of
such Advance (which acceptance shall in any event be deemed to occur upon
receipt by Borrower of the proceeds of any Advance). Each Advance, and accrued
and unpaid interest thereon, shall be due and payable ,on the earlier of (a) the
maturity date of such Advance, or (b) April 19, 2000. No Advance shall have a
maturity of more than 30 days. Lender may, if and to the extent any payment is
not made when due hereunder, charge from time to time against any or all of
Borrower's accounts with Lender any amount so due.
The date, amount, interest rate, and maturity date of each Advance, and
each payment of principal and interest hereon, shall be recorded by Lender on
its books, which recordations shall, in the absence of manifest error, be
conclusive as to such matters; provided, that the failure of Lender to make any
such recordation or any error therein shall not limit or otherwise affect the
obligations of Borrower hereunder.
Borrower may, upon at least one business days' notice to Lender, prepay any
Advance in whole or in part; provided, however, that Borrower shall at the time
of prepayment compensate Lender for any loss, cost, or expense that Lender
incurs as a result of such prepayment.
Interest shall be computed on the basis of a year of 360 days and the
actual days elapsed (including the first day but excluding the last day).
Overdue principal and, to the extent permitted by applicable law, interest shall
bear interest, payable upon demand, for each day from and including the due date
to but excluding the date of actual payment at a rate per annum equal to the sum
of 2% plus the rate of interest publicly announced by Lender from time to time
as its prime rate. The Lender's prime rate is a rate set by Lender based upon
various factors including Lender's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate. Whenever any
payment under this Note is due on a day that is not a day Lender is open to
conduct substantially all of its business (each a "business day"), such payment
shall be made on the next succeeding day on which Lender is open to conduct
substantially all of its business, and such extension of time shall in such case
be included in the computation of the payment of interest.
Each of the following shall constitute an Event of Default hereunder: (a)
Borrower shall fail to pay when due any principal of or interest on any Advance,
(b) a default or event of default shall occur under the terms of any other
material indebtedness for which Borrower or any of its subsidiaries is liable,
whether as principal obligor, guarantor, or otherwise, (c) any representation,
warranty, certification, or statement made by Borrower to Lender shall prove to
have been incorrect or misleading in any material respect, (d) Borrower shall
dissolve, liquidate, or terminate its legal existence or shall convey, transfer,
lease, or dispose of (whether in one transaction or a series of transactions)
all or substantially all of its assets to any person or entity, or (e) a
petition shall be filed by or against Borrower or any of its subsidiaries under
any law relating to bankruptcy, reorganization, or insolvency, or (f) Borrower
or any of its subsidiaries shall make an assignment for the benefit of creditors
or fail generally to pay its debts as they become due, or a receiver, trustee,
or similar official shall be appointed over Borrower or any of its subsidiaries
or a substantial portion of any of their respective assets. If an Event of
Default shall have occurred and be continuing, Lender may declare the
outstanding principal of and accrued and unpaid interest on this Note to be
immediately due and payable without presentment, protest, demand, or other
notice of any kind, all of which are hereby waived by Borrower; provided,
however, that upon the occurrence of any event specified in (e) above, the
outstanding principal and accrued and unpaid interest on this Note shall become
immediately due and payable without presentment, protest, demand, or other
notice of any kind, all of which are hereby waived by Borrower.
<PAGE>
The request of Borrower for any Advance and the receipt by Borrower of the
proceeds thereof shall be deemed a representation by Borrower as of each such
date that no Event of Default has occurred and that Borrower is duly authorized
to incur such indebtedness hereunder.
No failure or delay by Lender in exercising, and no course of dealing with
respect to, any right, power, or privilege hereunder shall operate as a waiver
thereof nor shall any single or partial exercise of any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The rights and remedies of
Lender provided herein shall be cumulative and not exclusive of any other rights
or remedies provided by law. If any provision of this Note shall be held invalid
or unenforceable in whole or in part, such invalidity or unenforceability shall
not affect the remaining provisions hereof. No provision of this Note may be
modified or waived except by a written instrument signed by Lender and Borrower.
Lender shall incur no liability to Borrower in acting upon any telephone,
telex, or other communication that Lender in good faith believes has been given
by an authorized representative of Borrower.
Lender may assign to one or more banks or other entities all or any part
of, or may grant participations to one or more banks or other entities in or to
all or any part of, this Note or any Advance or Advances hereunder.
Borrower shall pay on demand all costs and expenses (including reasonable
attorneys' fees and the allocated costs of internal counsel) incurred by Lender
in connection with any Event of Default or the enforcement or attempted
enforcement of this Note.
Notwithstanding anything to the contrary contained herein, the interest
paid or agreed to be paid hereunder shall not exceed the maximum rate of
non-usurious interest permitted by applicable law (the "Maximum Rate"). If
Lender shall receive interest in an amount that exceeds the Maximum Rate, the
excessive interest shall be applied to the principal of this Note or, if it
exceeds the unpaid principal, refunded to Borrower. In determining whether the
interest contracted for, charged, or received by Lender exceeds the Maximum
Rate, Lender may, to the extent permitted by applicable law, (a) characterize
any payment that is not principal as an expense, fee, or premium rather than
interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
amortize, prorate, allocate, and spread in equal or unequal parts the total
amount of interest throughout the stated term of this Note.
This Note shall be governed by and construed in accordance with the laws of
the State of Florida. Borrower hereby submits to the nonexclusive jurisdiction
of the Federal and State courts in the City of Miami, Florida for the purposes
of all legal proceedings arising out of or relating to this Note. Borrower
irrevocably waives, to the fullest extent permitted by law, any objection that
it may now or hereafter have to the laying of venue of any such proceeding
brought in such a court and any claim that any such proceeding brought in such a
court has been brought in an inconvenient forum. Borrower and Lender by
acceptance of this Note hereby irrevocably waive any and all right to trial by
jury in any legal proceeding arising out of or relating to this Note.
THIS NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
REXALL SUNDOWN, INC.
By: /s/ Richard Werber
------------------------------------
Name: Richard Werber
Title: Vice President,
General Counsel and Secretary
<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> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-END> MAY-31-1999
<CASH> 6,669,092
<SECURITIES> 0
<RECEIVABLES> 82,165,588<F1>
<ALLOWANCES> 0
<INVENTORY> 117,118,459
<CURRENT-ASSETS> 221,453,516
<PP&E> 68,262,832<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 304,987,584
<CURRENT-LIABILITIES> 88,376,670
<BONDS> 0
0
0
<COMMON> 643,452
<OTHER-SE> 215,727,349
<TOTAL-LIABILITY-AND-EQUITY> 304,987,584
<SALES> 436,656,256
<TOTAL-REVENUES> 436,656,256
<CGS> 189,138,694
<TOTAL-COSTS> 189,138,694
<OTHER-EXPENSES> 175,806,143
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,293
<INCOME-PRETAX> 74,049,285
<INCOME-TAX> 27,589,716
<INCOME-CONTINUING> 46,459,569
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 46,459,569
<EPS-BASIC> 0.68
<EPS-DILUTED> 0.67
<FN>
(1) Net of allowance.
(2) Net of accumulated depreciation.
</FN>
</TABLE>
