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 28, 1999
-----------------
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. [X] Yes __ No
As of April 8, 1999, the number of shares outstanding of the Registrant's Common
Stock was 65,063,324.
REXALL SUNDOWN, INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of
February 28, 1999 and August 31, 1998................................. 3
Consolidated Statements of Operations for the
Three and Six Months Ended February 28, 1999 and 1998................. 4
Consolidated Statements of Cash Flows for the
Six Months Ended February 28, 1999 and 1998........................... 5
Consolidated Statement of Shareholders' Equity for the
Six Months Ended February 28, 1999.................................... 6
Notes to Consolidated Financial Statements............................ 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...................... 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................... 15
Part II. Other Information..................................................... 16
Signatures.............................................................................. 18
-2-
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)
February 28, August 31,
1999 1998
---- ----
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 38,260 $ 87,349
Marketable securities........................................... -- 32,045
Trade accounts receivable, net.................................. 73,949 60,805
Inventory....................................................... 72,878 77,727
Prepaid expenses and other current assets....................... 9,571 7,554
Net current assets of discontinued operations................... 4,076 4,076
------------- -------------
Total current assets................................... 198,734 269,556
Property, plant and equipment, net.............................. 64,156 56,697
Other assets.................................................... 14,572 13,105
------------- -------------
Total assets........................................... $ 277,462 $ 339,358
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 17,119 $ 21,653
Accrued expenses and other current liabilities.................. 39,820 27,260
------------- -------------
Total current liabilities.............................. 56,939 48,913
Other liabilities............................................... 340 384
------------- -------------
Total liabilities...................................... 57,279 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: 65,476,289 and
72,139,459, respectively.................................... 655 721
Capital in excess of par value.................................. 137,188 149,405
Retained earnings............................................... 82,524 140,185
Accumulated other comprehensive income.......................... (184) (250)
------------- -------------
Total shareholders' equity............................. 220,183 290,061
------------- -------------
Total liabilities and shareholders' equity............. $ 277,462 $ 339,358
============= =============
See accompanying notes
-3-
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales............................................. $ 141,895 $115,489 $ 265,445 $ 226,209
Cost of sales......................................... 63,549 48,159 116,717 92,354
---------- ---------- ---------- -----------
Gross profit................................. 78,346 67,330 148,728 133,855
Selling, general and administrative expenses.......... 53,321 44,939 106,257 89,568
---------- ---------- ---------- -----------
Operating income............................. 25,025 22,391 42,471 44,287
Other income (expense):
Interest income.................................. 836 1,056 2,123 2,270
Other (expense) income........................... (6) (11) (13) 22
Interest expense................................. (1) (84) (10) (216)
---------- ---------- ---------- -----------
Income before income tax provision.................... 25,854 23,352 44,571 46,363
Income tax provision.................................. 9,642 8,384 16,605 16,190
---------- ---------- ---------- -----------
Net income............................................ $ 16,212 $ 14,968 $ 27,966 $ 30,173
========== ========== ========== ===========
Pro forma net income.................................. $ 16,212 $ 14,688 $ 27,966 $ 29,231
========== ========== ========== ===========
Net income per common share:
Basic............................................ $ 0.24 $ 0.21 $ 0.40 $ 0.43
========== ========== ========== ===========
Diluted.......................................... $ 0.23 $ 0.20 $ 0.39 $ 0.41
========== ========== ========== ===========
Pro forma net income per common share:
Basic............................................ $ 0.24 $ 0.21 $ 0.40 $ 0.41
========== ========== ========== ===========
Diluted.......................................... $ 0.23 $ 0.20 $ 0.39 $ 0.40
========== ========== ========== ===========
Weighted average common shares outstanding:
Basic............................................ 68,377,353 71,046,098 69,857,441 70,738,237
========== ========== ========== ===========
Diluted.......................................... 69,578,170 73,887,728 71,092,450 73,341,881
========== ========== ========== ===========
See accompanying notes
-4-
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Six Months Ended
February 28,
------------
1999 1998
---- ----
Cash flows provided by (used in) operating activities:
Net income...................................................... $ 27,966 $ 30,173
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.................................................... 4,123 2,291
Amortization.................................................... 1,175 863
Loss on sale of property and equipment.......................... 9 --
Deferred income taxes........................................... (177) (744)
Foreign exchange translation adjustment......................... 66 (88)
Compensatory options issued to non-employees.................... 870 588
Adjustment to conform fiscal year of pooled entity.............. -- (2,479)
Changes in assets and liabilities:
Trade accounts receivable..................................... (13,144) (19,564)
Inventory..................................................... 4,849 (30,397)
Prepaid expenses and other current assets..................... (2,017) (1,969)
Other assets.................................................. (2,465) (1,130)
Accounts payable.............................................. (4,534) 14,392
Accrued expenses and other current liabilities................ 12,802 8,960
Other liabilities............................................. (44) 31
------------ --------------
Net cash provided by operating activities.............. 29,479 927
------------ --------------
Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment.................... (11,628) (17,865)
Purchase of marketable securities............................... (13,428) (34,465)
Proceeds from sale of marketable securities..................... 45,473 31,644
Proceeds from sale of fixed assets.............................. 37 --
------------ --------------
Net cash provided by (used in) investing activities.... 20,454 (20,686)
------------ --------------
Cash flows provided by (used in) financing activities:
Purchase of Common Stock........................................ (99,999) --
Principal payments on long-term debt............................ -- (3,476)
Exercise of options to purchase Common Stock.................... 977 5,319
------------ --------------
Net cash (used in) provided by financing activities.... (99,022) 1,843
------------ --------------
Net decrease in cash and cash equivalents....................... (49,089) (17,916)
Cash and cash equivalents at beginning of period................ 87,349 81,943
------------ --------------
Cash and cash equivalents at end of period............. $ 38,260 $ 64,027
============ ==============
See accompanying notes
-5-
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share data)
(Unaudited)
Accumulated
Capital in Other
Number Common Excess of Retained Comprehensive
of Shares Stock Par Value Earnings Income
--------- ----- --------- -------- ------
Balance at August 31, 1998......................... 72,139,459 $721 $149,405 $140,185 $(250)
Net income...................................... -- -- -- 27,966 --
Exercise of stock options....................... 202,530 2 975 -- --
Tax benefit from exercise of options............ -- -- 242 -- --
Compensatory options issued to non-employees.... -- -- 870 -- --
Repurchase and retirement of Common Stock....... (6,865,700) (68) (14,304) (85,627) --
Cumulative translation adjustment............... -- -- -- -- 66
----------- ------- -------- ---------- -------
Balance at February 28, 1999....................... 65,476,289 $655 $137,188 $ 82,524 $(184)
=========== ======= ======== ========== =======
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 consolidated financial statements,
which are for interim periods, do not include all disclosures provided
in the annual consolidated financial statements of Rexall Sundown, Inc.
(the "Company"). These unaudited consolidated financial statements
should be read in conjunction with the consolidated financial
statements and the footnotes thereto contained in the Company's Annual
Report on Form 10-K for the year ended August 31, 1998, as filed with
the Securities and Exchange Commission.
In the opinion of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (which are of
a normal recurring nature) necessary for a fair presentation of the
financial statements. The results of operations for the interim periods
are not necessarily indicative of the results to be expected for the
full year.
On January 29, 1998, the Company consummated a business
combination with Richardson Labs, Inc. ("Richardson"), which was
accounted for as a pooling of interests. Prior to this transaction,
Richardson was an S corporation for Federal income tax purposes and,
accordingly, did not pay U.S. Federal income taxes. For periods prior
to the transaction with Richardson, pro forma net income on the
Consolidated Statements of Operations reflects a pro forma tax
provision for Richardson, as if it were subject to corporate income
taxes.
2. Net Income Per Common Share
---------------------------
Basic net income per common share is calculated by dividing
net income by the weighted average number of common shares outstanding.
Diluted net income per common share is calculated by dividing net
income by the weighted average number of common shares and potentially
dilutive common shares outstanding during the period. The Company's
potentially dilutive common shares consist of common stock options. For
the three months ended February 28, 1999, options to purchase
approximately 3,843,000 shares of common stock (the "Common Stock"),
$.01 par value, of the Company were excluded from the diluted earnings
per share calculation as the 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 second quarter and first half of fiscal 1999 and 1998,
the only component of other comprehensive income affecting the Company
has been foreign currency translation adjustment. Total comprehensive
income for the three and six months ended February 28, 1999 and 1998 is
as follows:
-7-
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
Net income..................... $16,212 $14,968 $27,966 $30,173
Foreign currency translation
adjustment.................. (148) 193 66 (88)
---------- ---------- ----------- ---------
Total comprehensive
income...................... $16,064 $15,161 $28,032 $30,085
========== ========== =========== =========
4. Inventory
---------
The components of inventory at February 28, 1999 and August
31, 1998 are as follows:
February 28, 1999 August 31, 1998
----------------- ---------------
Raw materials, bulk tablets
and capsules......................... $36,782 $36,011
Work in process......................... 5,022 4,436
Finished products....................... 31,074 37,280
-------- --------
$72,878 $77,727
======== ========
5. Sales to a Major Customer and Major Products
--------------------------------------------
The Company had sales to a national retailer that represented
approximately 26% and 29% of net sales for the three months ended
February 28, 1999 and 1998, respectively, and 27% and 29% of net sales
for the six months ended February 28, 1999 and 1998, respectively.
Additionally, the Company had sales to an affiliate of such national
retailer that represented approximately 3% and 4% of net sales for the
three and six months ended February 28, 1999, respectively.
In the fourth quarter of fiscal 1997, the Company introduced
its Osteo Bi-Flex(R) brand, a combination of the two dietary
ingredients, glucosamine and chondroitin. For the three months ended
February 28, 1999 and 1998, net sales of this product were
approximately 21% and 10% of the Company's net sales, respectively,
which includes sales to the national retailer discussed above. For the
six months ended February 28, 1999 and 1998, net sales of this product
were approximately 20% and 11% of the Company's net sales,
respectively, which includes sales to the national retailer discussed
above.
6. 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.
-8-
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(Amounts in thousands, except share and per share data)
(Unaudited)
In the first half of fiscal 1999, several class action
complaints alleging violations of the federal securities laws were
filed against the Company and certain officers and directors of the
Company, which 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, the lawsuit is groundless, and the Company will
vigorously defend against it, although no assurance can be given that
the Company will ultimately prevail in its defense.
7. Supplemental Disclosure of Non-Cash Financing Activities
--------------------------------------------------------
The Company recognized a reduction of income taxes payable and
a corresponding increase in additional paid-in-capital related to the
exercise of stock options of $163 and $3,986 for the three months ended
February 28, 1999 and 1998, respectively, and $242 and $7,453 for the
six months ended February 28, 1999 and 1998, respectively.
8. Share Repurchase Program
------------------------
On September 29, 1998, the Company's Board of Directors
authorized a share repurchase program, which allowed the Company to buy
back up to $100,000 of its Common Stock. Under the terms of the
program, which had no expiration date, the Company could buy shares
from time to time in the open market or in privately negotiated
transactions, depending on market conditions and other factors. As of
February 28, 1999, the Company had completed the initial share
repurchase program by repurchasing and retiring 6,865,700 shares of
Common Stock pursuant to the program. Furthermore, on March 16, 1999,
the Company's Board of Directors authorized a new share repurchase
program which will allow the Company to buy up to an additional
$100,000 of its Common Stock. As with the previous share repurchase
program, the new program has no expiration date and allows the Company
to buy shares from time to time in the open market or in privately
negotiated transactions, depending on market conditions and other
factors.
9. Discontinued Operations
-----------------------
On December 21, 1998, the purchaser of the assets of Pennex
Laboratories, Inc. ("Pennex") was in default under the collateralized
note and the terms of the most recent forbearance agreement with
respect to payments due to the Company. As such, the Company has taken
back possession of the property and is in the process of selling the
assets of Pennex. Based on Company investigations, the Company believes
that the current fair market value of the net assets of Pennex exceeds
the net book value of such assets at February 28, 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.
-9-
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 a large number of customers, which are
primarily in the United States. 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, Mexico, Hong Kong, Taiwan and
South Korea. Rexall Showcase intends to commence operations in Japan in the
third quarter of fiscal 1999 and selected other countries in the future.
Currently, net sales and operating income derived from the Asia Pacific region
of the world (i.e., Hong Kong, Taiwan and South Korea) are not material when
compared to the Company's total net sales. Although not material, net sales and
operating income could be adversely affected by fluctuations in Asian currencies
and 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 acquiring sales
agreements with certain retail customers are amortized over the expected term of
the relevant agreement and the amortization of such costs is recorded as a
reduction in net sales. Cost of goods sold includes the cost of raw materials
and all labor and overhead associated with the manufacturing and packaging of
the products.
Gross margins are impacted by changes in the relative sales mix among
the Company's channels of distribution. In particular, gross margins are
positively impacted if sales of 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.
-10-
Results of Operations
Three Months Ended February 28, 1999 Compared to Three Months Ended February
- ----------------------------------------------------------------------------
28, 1998
- --------
Net sales for the three months ended February 28, 1999 were $141.9
million, an increase of $26.4 million or 22.9% over the comparable period in
fiscal 1998. Of the $26.4 million increase, sales to retailers accounted for
$20.9 million, an increase of 27.6% over the comparable period in fiscal 1998.
The increase in sales to retailers was primarily attributable to the increase in
sales of Osteo-Bi-Flex, new product introductions, expanded distribution to the
Company's existing customers and new account distribution. These increases were
partially offset by a decline in net sales of St. John's Wort from the second
quarter of fiscal 1998 primarily caused by heightened media attention in the
fiscal 1998 period. However, the Company's Sundown(R) St. Johns Wort is still
the #1 selling brand in the food, drug and mass markets. Net sales of Rexall
Showcase increased by $7.0 million, an increase of 20.6% over the comparable
period in fiscal 1998. The $7.0 million increase was primarily due to the
expansion of Rexall Showcase's independent distributor base, the commencement of
operations in Taiwan in November 1998 and the introduction of new products. The
increase in net sales to retailers and for Rexall Showcase for the second
quarter of fiscal 1999 was associated with increased unit sales, as pricing has
remained essentially flat. Net sales of the Company's mail order division,
SDV(R), decreased by $1.5 million or 29.0% over the comparable period in fiscal
1998. This decrease was primarily attributable to non-recurring promotions held
in the second quarter of fiscal 1998. In addition, in recent years, the Company
has not allocated significant resources to this division.
Gross profit for the three months ended February 28, 1999 was $78.3
million, an increase of $11.0 million or 16.4% over the comparable period in
fiscal 1998. As a percentage of net sales, gross profit decreased from 58.3% for
the three months ended February 28, 1998 to 55.2% for the three months ended
February 28, 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 which was built to support an anticipated
higher level of sales.
SG&A expenses for the three months ended February 28, 1999 were $53.3
million, an increase of $8.4 million or 18.7% 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 $10.9 million. Of this
increase, $3.3 million related to the increase in sales commissions paid to
Rexall Showcase's independent distributors due to higher sales volumes.
Furthermore, an additional $0.9 million of the increase was due to an increase
in consumer advertising, as the Company continues its strategy to enhance
support for its products. The remaining increase in SG&A expenses was primarily
due to the costs incurred by the Company in strengthening its infrastructure,
including sales and marketing personnel, product development, increased costs
associated with the Company's new administrative facilities and other personnel,
to support anticipated higher levels of sales in the future. Excluding the
non-recurring pooling expenses described above, as a percentage of net sales,
SG&A expenses increased from 36.7% for the three months ended February 28, 1998
to 37.6% for the three months ended February 28, 1999.
-11-
Other income, net, decreased from $1.0 million in the second quarter of
fiscal 1998 to $0.8 million in the second quarter of fiscal 1999. Other income,
net, is predominantly comprised of interest income ($0.8 million for the three
months ended February 28, 1999 and $1.1 million for the three months ended
February 28, 1998) which is derived from the investment of the Company's
available cash balances. These balances were lower in the second quarter of
fiscal 1999 as a result of the completion of the Company's $100.0 million share
repurchase program.
Income before income tax provision was $25.9 million for the three
months ended February 28, 1999, an increase of $2.5 million or 10.7% as compared
to the same period in fiscal 1998. As a percentage of net sales, income before
income tax provision decreased from 20.2% for the three months ended February
28, 1998 to 18.2% for the three months ended February 28, 1999. Pro forma net
income was $16.2 million for the first quarter of fiscal 1999, an increase of
$1.5 million or 10.4% from the prior year's comparable quarter. The increase in
income before income tax provision and pro forma net income was primarily due to
the reasons described above.
Six Months Ended February 28, 1999 Compared to Six Months Ended February 28,
- ---------------------------------------------------------------------------
1998
- ----
Net sales for the six months ended February 28, 1999 were $265.4
million, an increase of $39.2 million or 17.3% over the comparable period in
fiscal 1998. Sales to retailers accounted for $28.7 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 increase in sales of
Osteo-Bi-Flex, expanded distribution to the Company's existing customers as well
as new account distribution and new product introductions. These increases were
partially offset by a decline in net sales of St. John's Wort from the first
half of fiscal 1998 primarily caused by heightened media attention in the fiscal
1998 period. Net sales of Rexall Showcase increased by $12.4 million, an
increase of 17.6% over the comparable period in fiscal 1998. The increase was
primarily due to the expansion of Rexall Showcase's independent distributor
base, the introduction of new products, the inclusion of a full six months of
activity for the Hong Kong operations in fiscal 1999 (which commenced operations
in late October 1997) and the commencement of operations in Taiwan in November
1998. The increase in net sales to retailers and for Rexall Showcase was
primarily associated with increased unit sales, as pricing has remained
essentially flat. Net sales of the Company's mail order division decreased by
$1.9 million or 20.2% 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 six months ended February 28, 1999 was $148.7
million, an increase of $14.9 million or 11.1% over the comparable period in
fiscal 1998. As a percentage of net sales, gross profit decreased from 59.2% for
the six months ended February 28, 1998 to 56.0% for the six months ended
February 28, 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 which was built to support an anticipated
higher level of sales.
SG&A expenses for the six months ended February 28, 1999 were $106.3
million, an increase of $16.7 million or 18.6% 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
-12-
year, SG&A expenses increased approximately $19.2 million. Of the increase, $5.0
million related to the increase in sales commissions paid to Rexall Showcase's
independent distributors due to higher sales volumes. The remaining increase was
primarily due to the costs incurred by the Company in strengthening its
infrastructure, including sales and marketing personnel, product development,
increased costs associated with the Company's new administrative facilities and
other personnel, to support anticipated higher levels of sales in the future.
These additional costs were partially offset by an approximately $1.1 million
reduction, in the first half of fiscal 1999 as compared to the comparable period
in the prior year, in consumer advertising which resulted from the timing of new
product releases. Excluding the non-recurring pooling expenses described above,
as a percentage of net sales, SG&A expenses increased from 38.5% for the six
months ended February 28, 1998 to 40.0% for the six months ended February 28,
1999, reflecting the lower than anticipated sales volume.
Other income, net, of $2.1 million in the first half of fiscal 1999
remained consistent with the $2.1 million recorded in the first half of fiscal
1998. Other income, net, is predominantly comprised of interest income ($2.1
million for the six months ended February 28, 1999 and $2.3 million for the six
months ended February 28, 1998) which is derived from the investment of the
Company's available cash balances.
Income before income tax provision was $44.6 million for the six months
ended February 28, 1999, a decrease of $1.8 million or 3.9% 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 six months ended February 28, 1998 to
16.8% for the six months ended February 28, 1999. Pro forma net income was $28.0
million for the first half of fiscal 1999, a decrease of $1.3 million or 4.3%
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 increased cost
of the Company's infrastructure, including SG&A expenses, which were not fully
absorbed at the current level of sales.
Seasonality
The Company believes that its business is not subject to significant
seasonality based on historical trends, with the exception of Rexall Showcase,
which typically experiences lower revenues in the second and fourth fiscal
quarters due to winter and summer holiday seasons, respectively.
Liquidity and Capital Resources
The Company had working capital of $141.8 million as of February 28,
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. As of February 28, 1999, the Company had repurchased
and retired 6,865,700 shares of Common Stock at a cost of $100.0 million
pursuant to this program. Trade accounts receivable, net, at February 28, 1999,
increased $13.1 million as compared to fiscal 1998 year-end, while inventory
decreased $4.8 million during the same period. The increase in trade accounts
receivable can be primarily attributed to higher sales to retailers during the
last half of the second quarter of fiscal 1999 as customer order patterns
returned to more normal levels coupled with new products and marketing
initiatives which were introduced in February 1999. The decrease in inventory
resulted primarily from increased sales volume.
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Net cash provided by operating activities for the six months ended
February 28, 1999 was $29.5 million compared to $0.9 million for the comparable
period in fiscal 1998. The increase, as compared to the first half of fiscal
1998, was primarily due to a decrease in cash used by working capital ($2.0
million of cash used for the first half of fiscal 1999 as compared to $28.6
million of cash used for the first half of fiscal 1998) as a result of improved
working capital management. Net cash provided by investing activities was $20.5
million for the six months ended February 28, 1999 compared to $20.7 million of
cash used in investing activities for the comparable period in fiscal 1998.
During the first half 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 $11.6 million for the six months ended February 28,
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 $99.0 million for the six months ended February 28, 1999 compared to net
cash provided of $1.8 million for the comparable period in fiscal 1998, with the
first half of fiscal 1999 reflecting $100.0 million used for the Company's
initial share repurchase program.
The Company believes that its existing cash balances, internally
generated funds from operations and borrowing capabilities 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.
Potential Year 2000 Issues
The Year 2000 issue generally refers to the inability of computer
hardware and software to properly recognize a year that begins with "20" instead
of "19." This issue arose as a result of computer systems and programs being
designed to accept a calendar year reference as two-digits as opposed to
four-digits. If the Year 2000 issue is not corrected, computer applications may
stop processing date-related computations or process them incorrectly. The
Company has recognized the severity of the Year 2000 issue and has designated it
as a priority, allocating appropriate resources in order to minimize the impact
of Year 2000 date-related problems on its business. The Company has assembled an
internal task force which is headed by its information technology vice president
to review and evaluate the Year 2000 issue as it relates to its internal
computer based and non-computer based systems as well as third party computer
systems including those of its vendors and customers. The scope of the Company's
Year 2000 analysis encompasses the Company's traditional enterprise-wide
software, its mid-range and personal computing systems, and its embedded
microprocessor systems.
For the Company's internal computer and non-computer-based systems, the
task force will identify the scope of any Year 2000 problems, prepare test
scripts in order to determine whether these systems will be Year 2000 compliant
and implement the test scripts by conducting appropriate testing in order to
confirm actual compliance. The Company 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 June 1999. The task force has identified and tested the applicable internal
non-computer systems which potentially may be affected by Year 2000.
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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
June 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 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.
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.
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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.
The Company's Annual Meeting of Shareholders was held on
February 23, 1999. The holders of 68,538,399 shares of Common
Stock were entitled to vote at the Annual Meeting and there
were present, in person or by proxy, holders of 68,122,545
shares of Common Stock (99.4% of the shares entitled to vote).
The following individuals were elected as Directors of the
Company to serve until the 2000 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 67,279,744 (98.8%) 842,801 (1.2%)
Christian Nast 67,282,824 (98.8%) 839,721 (1.2%)
Damon DeSantis 67,278,094 (98.8%) 844,451 (1.2%)
Nickolas Palin 67,281,364 (98.8%) 841,181 (1.2%)
Dean Desantis 67,278,344 (98.8%) 844,201 (1.2%)
Stanley Leedy 67,283,684 (98.8%) 838,861 (1.2%)
Melvin T. Stith 67,280,844 (98.8%) 841,701 (1.2%)
The proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the Company's independent
accountants for the fiscal year ending August 31, 1999 was
approved as follows: 67,876,440 (99.6%) shares were cast for
the proposal; 136,257 (.2%) shares were cast against the
proposal; and 109,698 (.2%) shares abstained.
Item 5. Other Information.
Not applicable.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27 - Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K.
None.
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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 9, 1999 By: /s/ Damon DeSantis
------------------------------------------------
Damon DeSantis, President and Chief Executive
Officer
Date: April 9, 1999 By: /s/ Geary Cotton
------------------------------------------------
Geary Cotton, Chief Financial Officer,
Treasurer and Chief Accounting Officer
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