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 February 29, 2000
-----------------
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
-------
REXALL SUNDOWN, INC.
--------------------
(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
--------------
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 April 12, 2000, the number of shares outstanding of the Registrant's
Common Stock was 63,965,319.
REXALL SUNDOWN, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
February 29, 2000 and August 31, 1999................................. 3
Consolidated Statements of Operations for the
Three and Six Months Ended February 29, 2000 and
February 28, 1999..................................................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended February 29, 2000 and February 28, 1999.............. 5
Consolidated Statement of Shareholders' Equity and
Comprehensive Income for the
Six Months Ended February 29, 2000.................................... 6
Notes to Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 12
Part II. Other Information..................................................... 19
Signatures.............................................................................. 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share data)
(Unaudited)
February 29, August 31,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................................................... $ -- $ 2,124
Trade accounts receivable, net ...................................................... 84,988 71,332
Inventory ........................................................................... 129,853 114,861
Prepaid expenses and other current assets ........................................... 21,531 19,393
Net current assets of discontinued operations ....................................... 4,076 4,076
-------- --------
Total current assets ....................................................... 240,448 211,786
Property, plant and equipment, net .................................................. 69,592 69,274
Goodwill, net ....................................................................... 100,480 --
Other assets ........................................................................ 17,061 14,291
-------- --------
Total assets ............................................................... $427,581 $295,351
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................................... $ 44,205 $ 24,381
Accrued expenses and other current liabilities ...................................... 36,893 24,280
Short-term debt ..................................................................... 2,898 15,000
-------- --------
Total current liabilities .................................................. 83,996 63,661
Long-term debt ...................................................................... 90,842 --
Other liabilities ................................................................... 384 722
-------- --------
Total liabilities .......................................................... 175,222 64,383
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000 shares,
no shares outstanding ........................................................... -- --
Common stock, $.01 par value; authorized 200,000 shares,
shares issued and outstanding: 63,814 and
64,450, respectively ............................................................ 638 644
Capital in excess of par value ...................................................... 138,237 137,702
Retained earnings ................................................................... 113,396 92,537
Accumulated other comprehensive income .............................................. 88 85
-------- --------
Total shareholders' equity ................................................. 252,359 230,968
-------- --------
Total liabilities and shareholders' equity ................................. $427,581 $295,351
======== ========
See accompanying notes
3
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---- ---- ---- ----
Net sales ...................................................... $ 176,329 $ 138,990 $ 318,427 $ 261,054
Cost of sales .................................................. 82,287 63,549 144,752 116,717
--------- --------- --------- ---------
Gross profit .......................................... 94,042 75,441 173,675 144,337
Selling, general and administrative expenses ................... 65,424 50,416 126,807 101,866
--------- --------- --------- ---------
Operating income ...................................... 28,618 25,025 46,868 42,471
Other (expense) income:
Interest expense .......................................... (1,063) (1) (1,138) (10)
Interest income ........................................... 153 836 271 2,123
Other (expense) income .................................... (117) (6) 328 (13)
--------- --------- --------- ---------
Income before income tax provision ............................. 27,591 25,854 46,329 44,571
Income tax provision ........................................... 10,622 9,642 17,667 16,605
--------- --------- --------- ---------
Net income ..................................................... $ 16,969 $ 16,212 $ 28,662 $ 27,966
========= ========= ========= =========
Net income per common share:
Basic...................................................... $ 0.26 $ 0.24 $ 0.45 $ 0.40
========= ========= ========= =========
Diluted.................................................... $ 0.26 $ 0.23 $ 0.44 $ 0.39
========= ========= ========= =========
Weighted average common shares outstanding:
Basic ..................................................... 64,062 68,377 64,248 69,857
========= ========= ========= =========
Diluted ................................................... 65,010 69,578 65,068 71,092
========= ========= ========= =========
See accompanying notes
4
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
--------------------------
February 29, February 28,
2000 1999
---- ----
Cash flows provided by (used in) operating activities:
Net income .......................................................................... $ 28,662 $ 27,966
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ........................................................................ 5,742 4,135
Amortization ........................................................................ 3,132 1,175
Loss on sale of property and equipment .............................................. 1 9
Deferred income taxes ............................................................... (312) (177)
Stock options issued to Rexall Showcase distributors ................................ 914 870
Changes in assets and liabilities, net of effects of acquisition:
Trade accounts receivable ......................................................... (999) (13,144)
Inventory ......................................................................... (2,837) 5,023
Prepaid expenses and other current assets ......................................... (1,285) (2,010)
Other assets ...................................................................... (3,429) 123
Accounts payable .................................................................. 7,178 (4,565)
Accrued expenses and other current liabilities .................................... 6,891 12,732
Other liabilities ................................................................. (58) (55)
--------- ---------
Net cash provided by operating activities .................................. 43,600 32,082
--------- ---------
Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment ........................................ (6,158) (11,686)
Acquisition of computer software .................................................... (1,258) (2,532)
Business acquired in a purchase transaction, net of cash acquired ................... (108,590) --
Purchase of marketable securities ................................................... -- (13,428)
Proceeds from sale of marketable securities ......................................... -- 45,473
Proceeds from sale of fixed assets .................................................. -- 37
--------- ---------
Net cash (used in) provided by investing activities ........................ (116,006) 17,864
--------- ---------
Cash flows provided by (used in) financing activities:
Purchase of common stock ............................................................ (9,513) (99,999)
Net payments on short-term line of credit ........................................... (15,000) --
Borrowing on long-term debt ......................................................... 102,516 --
Payments on long-term debt .......................................................... (8,500) --
Exercise of options to purchase common stock ........................................ 1,088 977
--------- ---------
Net cash provided by (used in) financing activities ........................ 70,591 (99,022)
--------- ---------
Effect of exchange rate changes on cash and cash equivalents ........................ (309) (13)
--------- ---------
Net decrease in cash and cash equivalents ........................................... (2,124) (49,089)
Cash and cash equivalents at beginning of period .................................... 2,124 87,349
--------- ---------
Cash and cash equivalents at end of period.................................. $ -- $ 38,260
========= =========
See accompanying notes
5
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
(Amounts in thousands, except share data)
(Unaudited)
Accumulated
Capital in Other
Number Common Excess of Retained Comprehensive Comprehensive
of Shares Stock Par Value Earnings Income Income
--------- ----- --------- -------- ------ ------
Balance at August 31, 1999 ................. 64,450,445 $ 644 $ 137,702 $ 92,537 $ 85
Net income .............................. -- -- -- 28,662 -- $ 28,662
Exercise of stock options ............... 233,430 2 1,253 -- -- --
Tax benefit from exercise of options .... -- -- 237 -- -- --
Stock options issued to Rexall
Showcase distributors ................. -- -- 914 -- -- --
Repurchase and retirement of common
stock ................................. (870,201) (8) (1,869) (7,803) -- --
Cumulative translation
adjustment ............................ -- -- -- -- 3 3
----------- ----------- ----------- ----------- ----------- -----------
Balance at February 29, 2000 ............... 63,813,674 $ 638 $ 138,237 $ 113,396 $ 88 $ 28,665
=========== =========== =========== =========== =========== ===========
See accompanying notes
6
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 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, 1999, 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. Certain amounts in the unaudited
consolidated financial statements for prior periods have been
reclassified to conform to the current period's basis of presentation.
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 February 29, 2000, options to purchase
approximately 3,956,000 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
For the second quarter and first six months of fiscal 2000 and
1999, the only component of other comprehensive income that affected
the Company was the foreign currency translation adjustment. Total
comprehensive income for the three months ended February 29, 2000 and
February 28, 1999 was $16,914 and $16,064, respectively. Total
comprehensive income for the six months ended February 29, 2000 and
February 28, 1999 was $28,665 and $28,032, respectively.
4. Inventory
The components of inventory at February 29, 2000 and August
31, 1999 were as follows:
February 29, 2000 August 31, 1999
----------------- ---------------
Raw materials, bulk tablets
and capsules......................... $ 61,006 $ 61,842
Work in process......................... 5,168 4,938
Finished products....................... 63,679 48,081
---------- ----------
$129,853 $114,861
========== ==========
7
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued (Amounts in thousands, except share and
per share data)
(Unaudited)
5. Debt
In April 1999, the Company entered into a $50,000 line of
credit with a financial institution, which was repaid in full in
November 1999 and canceled in January 2000. In connection with the
acquisition of MET-Rx Nutrition, Inc. ("MET-Rx") discussed in note 9
herein, the Company entered into a new $175,000 unsecured senior credit
facility. The senior credit facility, which is guaranteed by the
Company's domestic subsidiaries and is subject to compliance with
certain financial covenants and ratios, is comprised of a $145,000
three-year revolving credit facility and a $30,000 364-day facility.
The credit facility currently bears interest at LIBOR plus 1.125%,
which will adjust quarterly based on calculations of the Company's debt
to earnings before interest, taxes, depreciation and amortization
(EBITDA) ratio.
6. Sales to a Major Customer and Major Products
The Company had sales to a national retailer that represented
approximately 27% and 26% of net sales for the three months ended
February 29, 2000 and February 28, 1999, respectively, and
approximately 30% and 28% of net sales for the six months ended
February 29, 2000 and February 28, 1999, respectively. Additionally,
the Company had sales to an affiliate of such national retailer that
represented approximately 8% and 4% of net sales for the three months
ended February 29, 2000 and February 28, 1999, respectively, and
approximately 6% and 4% of net sales for the six months ended February
29, 2000 and February 28, 1999, respectively.
For each of the three months ended February 29, 2000 and
February 28, 1999, net sales of the Osteo Bi-Flex(R) line of
nutritional supplements were approximately 17% of the Company's net
sales. For the six months ended February 29, 2000 and February 28,
1999, Osteo Bi-Flex net sales were approximately 15% and 17% of the
Company's net sales, respectively. During the latter part of the fourth
quarter of fiscal 1999, the Company introduced Metab-O-Lite, a diet and
energy supplement. For the three and six months ended February 29,
2000, net sales of the Metab-O-Lite line of products were approximately
13% and 14% of the Company's net sales, respectively.
During the latter part of the second quarter of fiscal 1999,
the Company introduced Cellasene(TM), a dietary supplement formulated
for women to help eliminate cellulite, which became one of the
best-selling supplements introduced in the vitamin, mineral and
supplement industry during 1999. Despite the early success of
Cellasene, consumer demand for this product has declined significantly
from previous levels. As of February 29, 2000, the Company had
approximately $20,000 of Cellasene included in inventory. The Company
is currently finalizing its marketing plans for Cellasene, which will
include a strategy for the disposition of the Cellasene inventory
maintained by the Company.
8
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued (Amounts in thousands, except share and
per share data)
(Unaudited)
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 such legal proceedings that are
expected, individually or in the aggregate, to have a material adverse
effect on the Company.
In fiscal 1999, several class action complaints alleging
violations of the Federal securities laws were filed against the
Company and certain of its officers and directors. The Company and the
named officers and directors filed a Motion to Dismiss all claims and
on March 29, 2000, the United States District Court for the Southern
District of Florida granted the Company's Motion to Dismiss the
consolidated class action complaint against the Company and certain of
its officers and directors. By entering its final order of dismissal,
which the plaintiffs can appeal, the court ruled that the plaintiffs
had failed to state a claim. On April 12, 2000, the plaintiffs filed a
Motion to Alter and/or Amend the Judgment.
In January 2000, the Office of the Florida Attorney General
commenced an administrative investigation into the practices of Rexall
Showcase International, Inc. ("Rexall Showcase") under the authority of
the Florida Deceptive and Unfair Trade Practices Act. Rexall Showcase
is cooperating with the Attorney General and has provided
non-confidential documents requested by the Attorney General. Rexall
Showcase filed a petition with the Palm Beach County Circuit Court on
March 23, 2000 to modify the subpoena to prevent disclosure of Rexall
Showcase's confidential trade secrets and other private information to
third parties. The Company believes that Rexall Showcase has conducted
its business in compliance with all applicable Florida laws.
8. Segment Reporting
The Company develops, manufactures, markets and sells
vitamins, nutritional supplements and consumer health products. The
Company distributes its products through three channels of
distribution: sales to retailers, direct sales through independent
distributors, and mail order (see note 10 regarding the Company's sale
of the mail order division). Each distribution channel is managed
separately and requires a unique marketing strategy directed at the
end-user. As a result, the Company's reportable segments are aligned
with these channels of distribution. The sales to retailers segment
markets and sells vitamins and nutritional supplements, using a
multi-brand strategy to access different retail channels, including
mass merchandisers, drug stores, supermarkets, club stores, dollar
stores, convenience stores, fitness centers and health food stores.
Rexall Showcase, through its independent business owners, markets and
sells unique health and wellness products, which include weight
management products, homeopathic remedies, personal care products,
dietary and sports nutrition supplements and water filtration systems.
The Company's mail order division marketed and sold vitamins and
nutritional supplements directly to consumers through catalogs and
direct mailings. Intersegment sales, which are eliminated in
consolidation, were not significant. The table below presents financial
information related to the Company's reportable segments for the three
and six months ended February 29, 2000 and February 28, 1999.
9
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued (Amounts in thousands, except share and
per share data)
(Unaudited)
8. Segment Reporting, continued
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---- ---- ---- ----
Net sales
Sales to retailers ......................... $134,519 $ 93,995 $232,525 $170,373
Direct sales ............................... 38,554 41,145 79,402 83,000
Mail order ................................. 3,256 3,850 6,500 7,681
-------- -------- -------- --------
Total ................................... $176,329 $138,990 $318,427 $261,054
======== ======== ======== ========
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---- ---- ---- ----
Operating income
Sales to retailers ........................... $ 29,851 $ 19,071 $ 48,765 $ 30,394
Direct sales ................................. (1,320) 5,465 (2,366) 11,325
Mail order ................................... 87 489 469 752
-------- -------- -------- --------
Total ..................................... $ 28,618 $ 25,025 $ 46,868 $ 42,471
======== ======== ======== ========
Total assets by reportable segment at February 29, 2000 and
August 31, 1999 were as follows:
February 29, August 31,
2000 1999
------------- --------
Total assets
Sales to retailers................................. $ 378,405 $ 249,714
Direct sales....................................... 43,788 41,710
Mail order......................................... 5,388 3,927
--------- ---------
Total......................................... $ 427,581 $ 295,351
========= =========
The reconciliation of operating profit to consolidated income
before income tax provision is as follows:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
---- ---- ---- ----
Operating income ....................................... $ 28,618 $ 25,025 $ 46,868 $ 42,471
Interest income (1) .................................... 153 836 271 2,123
Interest expense (1) ................................... (1,063) (1) (1,138) (10)
Other (expense) income ................................. (117) (6) 328 (13)
-------- -------- -------- --------
Income before income tax provision ............... $ 27,591 $ 25,854 $ 46,329 $ 44,571
======== ======== ======== ========
(1) Corporate interest income and interest expense are not included at
the segment level as significant financing decisions are
centralized at the corporate level.
10
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
Continued (Amounts in thousands, except share and
per share data)
(Unaudited)
9. MET-Rx Acquisition
On January 7, 2000, the Company completed the purchase of
MET-Rx, a leader in the sports nutrition category, for total
consideration of $111,000, inclusive of transaction fees. The
acquisition of MET-Rx was accounted for as a purchase and was financed,
in part, by the Company's $175,000 senior credit facility, as discussed
in note 5. The pro forma net sales, net income and diluted earnings per
share for the six months ended February 29, 2000 and February 28, 1999,
presented below, were prepared as if the acquisition had occurred on
September 1, 1998.
Six Months Ended Six Months Ended
February 29, 2000 February 28, 1999
------------------ -----------------
Net sales.................................... $ 348,968 $ 304,175
Net income................................... 23,194 24,028
Diluted earnings per share................... $0.36 $0.34
10. Subsequent Events
On March 17, 2000, the Company entered into a receivable
securitization program to sell without recourse, through its wholly
owned non-consolidated special purpose corporation, certain trade
accounts receivable, up to a maximum of $30,000. The proceeds from the
program will be used to reduce borrowings under the Company's senior
credit facility. The Company, as agent for the purchaser of the
receivables, retains collection and administrative responsibilities for
the purchased receivables.
On March 23, 2000, the Company completed the purchase of
Worldwide Sport Nutritional Supplements Inc. ("Worldwide"), a leader in
the sports nutrition category, for total consideration of $71,500,
exclusive of transaction fees. The transaction, which will be accounted
for as a purchase, was financed by the Company's senior credit
facility, discussed in note 5.
On April 13, 2000, the Company completed the sale of SDV, the
Company's catalog and mail order division.
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion and analysis should be read in conjunction
with the Consolidated Financial Statements and the notes thereto contained in
this Quarterly Report.
The Company develops, manufactures, markets and sells vitamins,
nutritional supplements and consumer health products. The Company distributes
its products through three channels of distribution: sales to retailers, direct
sales through independent distributors, and mail order (as noted in note 10
above, the Company recently completed the sale of the mail order division). The
sales to retailers segment markets and sells vitamins and nutritional
supplements using a multi-brand strategy to access different retail channels
including mass merchandisers, drug stores, supermarkets, club stores,
convenience stores, fitness centers and health food stores. Rexall Showcase, the
Company's direct sales subsidiary, through its independent business owners,
markets and sells unique health and wellness products, which include weight
management products, homeopathic remedies, personal care products, dietary and
sports nutrition supplements and water filtration systems. The Company's mail
order division marketed and sold vitamins and nutritional supplements directly
to consumers through catalogs and direct mailings.
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 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. Net sales and operating income could be adversely affected by
fluctuations in foreign currencies and the weakening of foreign economies.
Revenue from the sale of the Company's products is recognized at the
time products are shipped. Net sales are net of all estimated 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. The majority of the Company's products are in tablet, softgel or
two-piece capsule forms, and with the completion of the MET-Rx and Worldwide
acquisitions, products are now available in powder, liquid and bar forms.
Gross margins are impacted by changes in the relative sales mix among
the Company's channels of distribution. In particular, gross margins are
negatively impacted if sales of the Company's direct sales subsidiary, Rexall
Showcase, decrease 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 lower if sales of Rexall
Showcase decrease as a percentage of net sales. Conversely, if Rexall Showcase's
sales as a percentage of net sales increase, gross margins will be positively
impacted and selling, general and administrative expenses will increase 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. As a result of the MET-Rx and Worldwide acquisitions, whose net sales
are classified in the sales to retailers segment, as well as a continual
softening in the domestic direct selling industry, Rexall Showcase's net sales
as a percentage of total net sales for fiscal 2000 will be less than that
achieved in fiscal 1999.
12
MET-Rx Acquisition
On January 7, 2000, the Company completed the purchase of MET-Rx, a
leader in the sports nutrition category, for total consideration of
$111.0 million inclusive of transaction fees. The acquisition of MET-Rx was
accounted for as a purchase and was financed, in part, by the Company's $175.0
million senior credit facility. The senior credit facility, which is guaranteed
by the Company's domestic subsidiaries and is subject to compliance with certain
financial covenants and ratios, is comprised of a $145.0 million three-year
revolving credit facility and a $30.0 million 364-day facility. The credit
facility currently bears interest at LIBOR plus 1.125%, which will adjust
quarterly based on calculations of the Company's debt to earnings before
interest, taxes, depreciation and amortization (EBITDA) ratio.
Worldwide Acquisition
On March 23, 2000, the Company completed the purchase of Worldwide
Sport Nutritional Supplements Inc., a leader in the sports nutrition category,
for total consideration of $71.5 million, exclusive of transaction fees. The
transaction, which will be accounted for as a purchase, was financed by the
Company's senior credit facility.
SDV Divestiture
On April 13, 2000, the Company completed the sale of SDV, the Company's
catalog and mail order division. As a result of the divestment of SDV, the
Company expects to record a gain on the transaction in the third quarter of
fiscal 2000.
Results of Continuing Operations
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2000 1999 2000 1999
----------- ----------- ------------ --------
Net sales........................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales.................................... 46.7 45.7 45.5 44.7
------ ------ ------ ------
Gross profit............................... 53.3 54.3 54.5 55.3
Selling, general and administrative
expenses..................................... 37.1 36.3 39.8 39.0
------ ------ ------ ------
Operating income........................... 16.2 18.0 14.7 16.3
Other (expense) income, net...................... (0.6) 0.6 (0.2) 0.8
------ ------ ------ ------
Income before income tax provision......... 15.6 18.6 14.5 17.1
Income tax provision....................... 6.0 6.9 5.5 6.4
------ ------ ------ ------
Net income................................. 9.6% 11.7% 9.0% 10.7%
====== ===== ====== =====
13
Three Months Ended February 29, 2000 Compared to
Three Months Ended February 28, 1999
------------------------------------
Net sales for the three months ended February 29, 2000 were $176.3
million, an increase of $37.3 million or 26.9% over the comparable period in
fiscal 1999. The increase was due to the increase in net sales to retailers from
$94.0 million for the second quarter of fiscal 1999 to $134.5 million for the
second quarter of fiscal 2000, an increase of $40.5 million or 43.1%. Of this
increase, $17.9 million related to net sales contributed by MET-Rx, which was
acquired on January 7, 2000, as discussed above. The remaining increase in sales
to retailers was primarily attributable to $23.4 million in net sales of the
Metab-O-Lite line of products, a diet and energy supplement which the Company
introduced late in the fourth quarter of fiscal 1999, the continued success of
the Company's Osteo Bi-Flex brands and the introduction, in the latter part of
the second quarter, of a complete line of Pokemon(TM) children's vitamins.
Additionally, net sales increased as a result of expanded distribution to the
Company's existing retail customers. Partially offsetting these increases was a
decrease in sales of Cellasene, which was introduced late in the second quarter
of fiscal 1999. Net sales of Rexall Showcase for the three months ended February
29, 2000 decreased $2.6 million or 6.3% as compared to the second quarter of
fiscal 1999, which resulted primarily from a decline in the United States
business, partially offset by an increase in international net sales principally
due to operations in Japan, which commenced in May 1999. The Company believes
that the decline in Rexall Showcase's United States business was primarily due
to a continued overall softening in the domestic direct selling industry, which
has impacted the recruitment of new independent business owners for Rexall
Showcase. Net sales of the Company's mail order segment, decreased by $0.6
million to $3.3 million or a 15.4% decline over the comparable period in fiscal
1999.
Gross profit for the three months ended February 29, 2000 was $94.0
million, an increase of $18.6 million or 24.7% over the comparable period in
fiscal 1999. As a percentage of net sales, gross profit decreased from 54.3% for
the three months ended February 28, 1999 to 53.3% for the three months ended
February 29, 2000. The percentage decrease in gross profit was primarily due to
net sales to retailers constituting a higher percentage of the Company's total
net sales (76.3% of total Company net sales for the second quarter of fiscal
2000 compared to 67.6% for the second quarter of fiscal 1999). As noted above,
Rexall Showcase products have a higher gross margin than products sold to
retailers and, as such, the Company's gross margins decline as Rexall Showcase's
net sales decrease as a percentage of total net sales. This decrease, however,
was partially offset by lower product royalty expenses in the second quarter of
fiscal 2000 as compared to the second quarter of fiscal 1999.
Selling, general and administrative ("SG&A") expenses for the three
months ended February 29, 2000 were $65.4 million, an increase of $15.0 million
or 29.8% over the comparable period in fiscal 1999. As a percentage of net
sales, SG&A expenses increased from 36.3% for the three months ended February
28, 1999 to 37.1% for the three months ended February 29, 2000. Included in SG&A
expenses for the three months ended February 29, 2000 were $6.0 million of SG&A
expenses related to MET-Rx, including $1.5 million of consumer advertising and
$0.6 million of goodwill amortization. Excluding the MET-Rx costs, SG&A expenses
were $59.4 million for the second quarter of fiscal 2000, an increase of $9.0
million or 17.8% over the second quarter of fiscal 1999. This increase was
partially the result of increased advertising expenses, as the Company continued
its strategy to support its nationally branded products. For the second quarter
of fiscal 2000, the Company, excluding MET-Rx, spent approximately $4.7 million
in consumer advertising as compared to $3.2 million for the second quarter of
fiscal 1999. Also contributing to the increase in SG&A expenses were $6.4
million of costs incurred by Rexall Showcase, an increase of $4.5 million as
compared to the second quarter of fiscal 1999, as a result of the development of
its international infrastructure, primarily in Japan and Taiwan.
14
Interest expense for the second quarter of fiscal 2000 was $1.1 million
relating to the initial borrowings under the Company's senior credit facility
that were required to fund the MET-Rx acquisition, as compared to no interest
expense in fiscal 1999. The increase resulted from interest income for the
second quarter of fiscal 2000 was $0.2 million, a decrease of $0.6 million as
compared to the second quarter of fiscal 1999. The decrease in interest income
was primarily attributable to lower cash balances during the second quarter of
fiscal 2000 as compared to the second quarter of fiscal 1999.
Income before income tax provision was $27.6 million for the three
months ended February 29, 2000, an increase of $1.7 million from the $25.9
million recorded in the same period in fiscal 1999. As a percentage of net
sales, income before income tax provision decreased from 18.6% for the three
months ended February 28, 1999 to 15.6% for the three months ended February 29,
2000. Net income was $17.0 million for the second quarter of fiscal 2000, an
increase of $0.8 million or 4.7% from the prior year's comparable quarter due to
the reasons discussed above.
Six Months Ended February 29, 2000 Compared to
Six Months Ended February 28, 1999
----------------------------------
Net sales for the six months ended February 29, 2000 were $318.4
million, an increase of $57.3 million or 22.0% as compared to net sales of
$261.1 million for the six months ended February 28, 1999. Net sales to
retailers for the first half of fiscal 2000 were $232.5 million compared to
$170.4 million for the first half of fiscal 1999, representing an increase of
$62.1 million or 36.5%. The increase in sales to retailers was primarily
attributable to $43.4 million in net sales of the Metab-O-Lite line of products,
which was introduced late in the fourth quarter of fiscal 1999, and $17.9
million in net sales of MET-Rx products, which the Company acquired in January
2000. Also contributing to the increase in net sales of the sales to retailers
segment was the increase in net sales of the Company's Osteo Bi-Flex brands and
the introduction, in the latter part of the second quarter of fiscal 2000, of a
complete line of Pokemon children's vitamins. Partially offsetting these
increases was a decrease in net sales of Cellasene, which was introduced late in
the second quarter of fiscal 1999. Net sales for the six months ended February
29, 2000 for Rexall Showcase were $79.4 million, a decrease of $3.6 million or
4.3%, compared to net sales of $83.0 million for the six months ended February
28, 1999. The decrease in Rexall Showcase net sales was primarily due to a
decline in the United States business, partially offset by an increase in
international net sales, which resulted principally from the commencement of
operations in Japan in May 1999. The Company believes that the decline in Rexall
Showcase's U.S. business in the first half of fiscal 2000 was primarily due to
an overall softening in the domestic direct selling industry, which has impacted
the recruitment of new independent business owners for Rexall Showcase. Net
sales for the Company's mail order segment were $6.5 million for the first half
of fiscal 2000, compared to $7.7 million for the first half of fiscal 1999.
15
Gross margins for the six months ended February 29, 2000 were $173.7
million, an increase of $29.3 million or 20.3% over the comparable period in
fiscal 1999. As a percentage of net sales, gross margins declined from 55.3% for
the six months ended February 28, 1999 to 54.5% for the six months ended
February 29, 2000. The percentage decrease in gross profit was primarily due to
net sales to retailers constituting a higher percentage of the Company's total
net sales (73.0% of total Company net sales for the first half of fiscal 2000
compared to 65.3% for the first half of fiscal 1999). As noted above, Rexall
Showcase products have a higher gross margin than products sold to retailers
and, as such, the Company's gross margins decline as Rexall Showcase's net sales
decrease as a percentage of total net sales. Partially offsetting this decrease
in gross margins was lower product royalty expenses in the first half of fiscal
2000 as compared to the first half of fiscal 1999.
SG&A expenses for the six months ended February 29, 2000 were $126.8
million compared to $101.9 million, an increase of $24.9 million or 24.5% over
the comparable period in fiscal 1999. As a percentage of net sales, SG&A
expenses increased from 39.0% for the first half of fiscal 1999 to 39.8% for the
first half of fiscal 2000. Included in SG&A expenses for the six months ended
February 29, 2000 were $6.0 million of SG&A expenses related to MET-Rx,
including $1.5 million of consumer advertising and $0.6 million of goodwill
amortization. Excluding the MET-Rx costs, SG&A expenses were $120.8 million for
the first half of fiscal 2000, an increase of $18.9 million or 18.6% over the
first half of fiscal 1999. For the first half of fiscal 2000, the Company,
excluding MET-Rx, incurred advertising expense of $11.1 million as compared to
$5.1 million for the first half of fiscal 1999. This increase in advertising
expense is consistent with the Company's strategy to support its nationally
branded products. Also contributing to the increase in SG&A expenses was an
increase of $9.2 million of costs incurred by Rexall Showcase related to the
development of its international infrastructure, primarily focused on Japan and
Taiwan, which began operations in May 1999 and November 1998, respectively.
Interest expense for the first half of fiscal 2000 increased
approximately $1.1 million relating to the initial borrowings under the
Company's senior credit facility that were required to fund the MET-Rx
acquisition, as compared to the first half of fiscal 1999. Interest income for
the six months ended February 29, 2000 decreased approximately $1.8 million as
compared to the six months ended February 28, 1999, primarily due to a reduction
in the Company's cash balances available for investment.
Income before income tax provision for the six months ended February
29, 2000 was $46.3 million compared to $44.6 million for the six months ended
February 28, 1999, an increase of $1.7 million or 3.9%. As a percentage of net
sales, income before income tax provision decreased from 17.1% for the first
half of fiscal 1999 to 14.5% for the first half of fiscal 2000. Net income was
$28.7 million for the six months ended February 29, 2000, an increase of $0.7
million or 2.5% from the comparable period in fiscal 1999 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.
16
Liquidity and Capital Resources
The Company had working capital of $156.5 million at February 29, 2000,
compared to $148.1 million at August 31, 1999, an increase of $8.4 million.
Approximately $7.0 million of this increase was due to increased working capital
as a result of the MET-Rx acquisition.
Net cash provided by operating activities for the six months ended
February 29, 2000 was $43.6 million compared to $32.1 million for the comparable
period in fiscal 1999. The increase in cash provided by operating activities was
primarily due to an increase in income before depreciation and amortization
expenses, as well as an increase in cash provided by working capital. Net cash
used by investing activities for the first half of fiscal 2000 was $116.0
million, compared to net cash provided of $17.9 million for the first half of
fiscal 1999. The acquisition of MET-Rx accounted for $108.6 million of the cash
used for investing activities, with the remainder used for capital expenditures.
For the six months ended February 29, 2000, the Company used $7.4 million for
property, plant and equipment and computer software capital expenditures,
primarily relating to the retrofit of the Company's manufacturing facility as
well as additions to Rexall Showcase's global information infrastructure. Net
cash provided by financing activities was $70.6 million for the six months ended
February 29, 2000, compared to net cash used of $99.0 million for the six months
ended February 28, 1999. Net cash provided for the first half of fiscal 2000 was
primarily the result of the initial borrowings under the Company's senior credit
facility that were required to fund the MET-Rx acquisition, partially offset by
the continued implementation of the Company's share repurchase program. For the
six months ended February 29, 2000, the Company has repurchased and retired
854,400 shares at a cost of $9.5 million. Since September 29, 1998, the
inception of the Company's share repurchase programs, through February 29, 2000,
the Company has repurchased and retired 9,073,600 shares of the Company's common
stock for a total cost of $134.3 million.
The Company believes that its existing cash balances, internally
generated funds from operations and the Company's credit facilities 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 or
acquisitions.
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.
Year 2000 Issues
Prior to January 1, 2000, the Company identified the scope of any Year
2000 problems with regard to internal computer based systems, prepared test
scripts in order to determine whether these systems were Year 2000 compliant and
implemented the test scripts by conducting appropriate testing in order to
confirm actual compliance. The Company also identified and completed testing the
applicable internal non-computer systems, which could have been affected by Year
2000. As a result of these tests and preparation, and the passage of time into
the year 2000 through the date of this report, the Company has not experienced
any business disruption or other problems in relation to the Year 2000 issue.
Although the Company believes that both its computer and non-computer-based
systems are Year 2000 compliant, the Company will continue to monitor its
internal computer and non-computer-based systems, as all potential Year 2000
problems may have yet to be experienced.
17
Forward-Looking Statements
This report may contain 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 represent the Company's expectations or beliefs, including, but not
limited to, statements concerning industry performance, the Company's
operations, economic performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. 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. These statements by their nature, involve
substantial risks and uncertainties, certain of which are beyond the Company's
control, and actual results may differ materially depending on a variety of
important factors, including uncertainty related to acquisitions, government
regulation, managing and maintaining growth, the effect of adverse publicity,
litigation, reliance on independent distributors of Rexall Showcase, the
centralized location of the Company's manufacturing operations, availability of
raw materials, risks associated with international operations, competition,
product liability claims, volatility of stock price and those factors described
in the Company's filings with the Securities and Exchange Commission.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In fiscal 1999, several class action complaints alleging
violations of the Federal securities laws were filed against
the Company and certain of its officers and directors. The
Company and the named officers and directors filed a Motion to
Dismiss all claims and on March 29, 2000, the United States
District Court for the Southern District of Florida granted
the Company's Motion to Dismiss the consolidated class action
complaint against the Company and certain of its officers and
directors. By entering its final order of dismissal, which the
plaintiffs can appeal, the court ruled that the plaintiffs had
failed to state a claim. On April 12, 2000, the plaintiffs
filed a Motion to Alter and/or Amend the Judgment.
In January 2000, the Office of the Florida Attorney General
commenced an administrative investigation into the practices
of Rexall Showcase under the authority of the Florida
Deceptive and Unfair Trade Practices Act. Rexall Showcase is
cooperating with the Attorney General and has provided
non-confidential documents requested by the Attorney General.
Rexall Showcase filed a petition with the Palm Beach County
Circuit Court on March 23, 2000 to modify the subpoena to
prevent disclosure of Rexall Showcase's confidential trade
secrets and other private information to third parties. The
Company believes that Rexall Showcase has conducted its
business in compliance with all applicable Florida laws.
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.
The Company's Annual Meeting of Shareholders was held on
February 23, 2000. The holders of 64,199,567 shares of Common
Stock were entitled to vote at the Annual Meeting and there
were present, in person or by proxy, holders of 61,174,010
shares of Common Stock (95.3% of the shares entitled to vote).
The following individuals were elected as Directors of the
Company to serve until the 2001 Annual Meeting by the
following votes (the numbers in parenthesis represent the
percent of the shares of Common Stock voted at the Annual
Meeting):
FOR WITHHELD AUTHORITY
------------------------------- --------------------------
Carl DeSantis 60,580,455 (99.0%) 593,555 (1.0%)
Christian Nast 60,582,712 (99.0%) 591,298 (1.0%)
Damon DeSantis 60,487,170 (98.9%) 686,840 (1.1%)
Nickolas Palin 60,585,030 (99.0%) 588,980 (1.0%)
Dean DeSantis 60,571,966 (99.0%) 602,044 (1.0%)
Stanley Leedy 60,585,191 (99.0%) 588,819 (1.0%)
Melvin T. Stith 60,586,891 (99.0%) 587,199 (1.0%)
19
The proposal to amend the Company's Amended and Restated 1993
Stock Incentive Plan was approved as follows: 38,169,407
(85.2%) shares were cast for the proposal; 6,385,141 (14.3%)
shares were cast against the proposal; and 256,601 (.5%)
shares abstained.
The proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent
certified public accountants for the fiscal year ending August
31, 2000 was approved as follows: 60,873,881 (99.5%) shares
were cast for the proposal; 174,986 (.3%) shares were cast
against the proposal; and 125,143 (.2%) shares abstained.
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.
Form 8-K filed on December 16, 1999 regarding the signing of a
definitive agreement to purchase privately-held MET-Rx
Nutrition, Inc.
Form 8-K filed on January 7, 2000 regarding the completion of
the MET-Rx Nutrition, Inc. acquisition.
Form 8-K filed on February 25, 2000 regarding the signing of a
definitive agreement to purchase privately-held Worldwide
Sport Nutritional Supplements Inc.
From 8-K/A filed on March 21, 2000 regarding financial
statements and pro forma financial statements of MET-Rx
Nutrition, Inc. and Rexall Sundown, Inc.
Form 8-K filed on March 24, 2000 regarding the signing of a
definitive agreement to sell SDV, the Company's catalog and
mail order division.
Form 8-K filed on March 24, 2000 regarding the completion of
the Worldwide Sport Nutritional Supplements, Inc. acquisition.
20
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: April 14, 2000 By: /s/ Damon DeSantis
------------------------------------
Damon DeSantis, President and
Chief Executive Officer
Date: April 14, 2000 By: /s/ Geary Cotton
-------------------------------------
Geary Cotton, Chief Financial Officer,
Treasurer and Chief Accounting Officer
21