-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HU9srqp7kfAGjcAR9tQKfB7p8XXz1zWIAB9vaTVMuJ6OZHx92jeag8T7UDqSDyDT y0k6CvTuwVg4DeHPruL+qg== 0001042910-99-000899.txt : 19990716 0001042910-99-000899.hdr.sgml : 19990716 ACCESSION NUMBER: 0001042910-99-000899 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990531 FILED AS OF DATE: 19990715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: REXALL SUNDOWN INC CENTRAL INDEX KEY: 0000901620 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 591688986 STATE OF INCORPORATION: FL FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21884 FILM NUMBER: 99665340 BUSINESS ADDRESS: STREET 1: 6111 BROKEN SOUND PARKWAY N W CITY: BOCA RATON STATE: FL ZIP: 33487 BUSINESS PHONE: 5612419400 MAIL ADDRESS: STREET 1: 6111 BROKEN SOUND PARKWAY NW CITY: BOCA RATON STATE: FL ZIP: 33487 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 1999 ------------ 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 July 12, 1999, the number of shares outstanding of the Registrant's Common Stock was 64,396,048. REXALL SUNDOWN, INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of May 31, 1999 and August 31, 1998............................... 3 Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 1999 and 1998.............. 4 Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1999 and 1998........................ 5 Consolidated Statement of Shareholders' Equity for the Nine Months Ended May 31, 1999................................. 6 Notes to Consolidated Financial Statements..................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................. 17 Part II. Other Information.............................................. 18 Signatures................................................................. 19 -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)
May 31, August 31, 1999 1998 --------- ---------- ASSETS Current assets: Cash and cash equivalents ................................... $ 6,669 $ 87,349 Marketable securities ....................................... -- 32,045 Trade accounts receivable, net .............................. 82,166 60,805 Inventory ................................................... 117,118 77,727 Prepaid expenses and other current assets ................... 11,425 7,554 Net current assets of discontinued operations ............... 4,076 4,076 --------- --------- Total current assets ............................... 221,454 269,556 Property, plant and equipment, net .......................... 68,263 56,697 Other assets ................................................ 15,271 13,105 --------- --------- Total assets ....................................... $ 304,988 $ 339,358 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................ $ 44,080 $ 21,653 Accrued expenses and other current liabilities .............. 29,297 27,260 Short-term debt ............................................. 15,000 -- --------- --------- Total current liabilities .......................... 88,377 48,913 Other liabilities ........................................... 240 384 --------- --------- Total liabilities .................................. 88,617 49,297 --------- --------- Shareholders' equity: Preferred stock, $.01 par value; authorized 5,000,000 shares, no shares outstanding ................................... -- -- Common stock, $.01 par value; authorized 200,000,000 shares, shares issued and outstanding: 64,345,166 and 72,139,459, respectively ................................ 643 721 Capital in excess of par value .............................. 136,737 149,405 Retained earnings ........................................... 79,079 140,185 Accumulated other comprehensive income ...................... (88) (250) --------- --------- Total shareholders' equity ......................... 216,371 290,061 --------- --------- Total liabilities and shareholders' equity ......... $ 304,988 $ 339,358 ========= =========
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 Nine Months Ended May 31, May 31, ------------------------------- ------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ Net sales ............................................. $ 171,211 $ 150,979 $ 436,656 $ 377,188 Cost of sales ......................................... 72,421 65,197 189,138 157,551 ------------ ------------ ------------ ------------ Gross profit ................................. 98,790 85,782 247,518 219,637 Selling, general and administrative expenses .......... 69,549 55,920 175,806 145,488 ------------ ------------ ------------ ------------ Operating income ............................. 29,241 29,862 71,712 74,149 Other income (expense): Interest income .................................. 339 1,141 2,462 3,411 Other expense .................................... (64) (29) (77) (7) Interest expense ................................. (38) (3) (48) (219) ------------ ------------ ------------ ------------ Income before income tax provision .................... 29,478 30,971 74,049 77,334 Income tax provision .................................. 10,984 11,591 27,589 27,781 ------------ ------------ ------------ ------------ Net income ............................................ $ 18,494 $ 19,380 $ 46,460 $ 49,553 ============ ============ ============ ============ Pro forma net income .................................. $ 18,494 $ 19,380 $ 46,460 $ 48,611 ============ ============ ============ ============ Net income per common share: Basic............................................. $ 0.29 $ 0.27 $ 0.68 $ 0.70 ============ ============ ============ ============ Diluted........................................... $ 0.28 $ 0.26 $ 0.67 $ 0.67 ============ ============ ============ ============ Pro forma net income per common share: Basic............................................. $ 0.29 $ 0.27 $ 0.68 $ 0.69 ============ ============ ============ ============ Diluted........................................... $ 0.28 $ 0.26 $ 0.67 $ 0.66 ============ ============ ============ ============ Weighted average common shares outstanding: Basic ............................................ 64,812,779 71,372,034 68,157,408 70,949,502 ============ ============ ============ ============ Diluted .......................................... 66,708,990 74,180,111 69,612,833 73,621,291 ============ ============ ============ ============
See accompanying notes -4- REXALL SUNDOWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Nine Months Ended May 31, ---------------------------- 1999 1998 --------- --------- Cash flows provided by (used in) operating activities: Net income ................................................. $ 46,460 $ 49,553 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ............................................... 6,859 4,105 Amortization ............................................... 2,143 1,193 (Gain)/loss on sale of property and equipment .............. (32) 56 Deferred income taxes ...................................... (216) (402) Foreign exchange translation adjustment .................... 162 185 Compensatory options issued to non-employees ............... 1,397 1,069 Adjustment to conform fiscal year of pooled entity ......... -- (2,479) Changes in assets and liabilities: Trade accounts receivable ................................ (21,361) (17,054) Inventory ................................................ (39,391) (32,184) Prepaid expenses and other current assets ................ (3,871) (1,426) Other assets ............................................. (4,093) (348) Accounts payable ......................................... 22,427 (4,302) Accrued expenses and other current liabilities ........... 2,841 15,585 Other liabilities ........................................ (144) 105 --------- --------- Net cash provided by operating activities ......... 13,181 13,656 --------- --------- Cash flows provided by (used in) investing activities: Acquisition of property, plant and equipment ............... (18,531) (23,308) Purchase of marketable securities .......................... (13,428) (48,528) Proceeds from sale of marketable securities ................ 45,473 40,295 Proceeds from sale of fixed assets ......................... 138 266 --------- --------- Net cash provided by (used in) investing activities 13,652 (31,275) --------- --------- Cash flows provided by (used in) financing activities: Purchase of common stock ................................... (124,788) -- Net borrowings on line of credit ........................... 15,000 -- Principal payments on long-term debt ....................... -- (3,476) Exercise of options to purchase common stock ............... 2,275 5,681 --------- --------- Net cash (used in) provided by financing activities (107,513) 2,205 --------- --------- Net decrease in cash and cash equivalents .................. (80,680) (15,414) Cash and cash equivalents at beginning of period ........... 87,349 81,943 --------- --------- Cash and cash equivalents at end of period ........ $ 6,669 $ 66,529 ========= =========
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...................................... -- -- -- 46,460 -- Exercise of stock options....................... 424,907 4 2,271 -- -- Tax benefit from exercise of options............ -- -- 804 -- -- Compensatory options issued to non-employees.... -- -- 1,397 -- -- Repurchase and retirement of common stock....... (8,219,200) (82) (17,140) (107,566) -- Cumulative translation adjustment............... -- -- -- -- 162 ---------- ---- -------- --------- ------ Balance at May 31, 1999............................ 64,345,166 $643 $136,737 $ 79,079 $ (88) ========== ==== ======== ========= ======
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 interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in the Company's Annual Report on Form 10-K for the year ended August 31, 1998, as filed with the Securities and Exchange Commission. In the opinion of the Company, the accompanying unaudited interim consolidated financial statements contain all adjustments (which are of a normal recurring nature) necessary for a fair presentation of the financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. On January 29, 1998, the Company consummated a business combination with Richardson Labs, Inc. ("Richardson"), which was accounted for as a pooling of interests. Prior to this transaction, Richardson was an S corporation for Federal income tax purposes and, accordingly, did not pay U.S. Federal income taxes. For periods prior to the transaction with Richardson, pro forma net income on the Consolidated Statements of Operations reflects a pro forma tax provision for Richardson, as if it were subject to corporate income taxes. 2. Net Income Per Common Share Basic net income per common share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted net income per common share is calculated by dividing net income by the weighted average number of common shares and potentially dilutive common shares outstanding during the period. The Company's potentially dilutive common shares consist of common stock options. For the three months ended May 31, 1999, options to purchase approximately 1,787,000 shares of the Company's common stock, $.01 par value (the "Common Stock"), were excluded from the diluted earnings per share calculation as the exercise prices of these options were greater than the average market price of the Common Stock. 3. Comprehensive Income During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components. The adoption of SFAS No. 130 does not affect the Company's results of operations or financial position, but does impact financial statement disclosures. SFAS No. 130 requires that enterprises separately disclose items of other comprehensive income by their nature. For the third quarter and first nine months of fiscal 1999 and 1998, the only component of other comprehensive income that affected the Company was the foreign currency translation adjustment. Total comprehensive income for the three and nine months ended May 31, 1999 and 1998 was as follows: -7- REXALL SUNDOWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Amounts in thousands, except share and per share data) (Unaudited)
Three Months Ended Nine Months Ended May 31, May 31, ---------------------- --------------------- 1999 1998 1999 1998 ------- ------- ------- ------- Net income..................... $18,494 $19,380 $46,460 $49,553 Foreign currency translation adjustment................ 96 273 162 185 ------- ------- ------- ------- Total comprehensive income.................... $18,590 $19,653 $46,622 $49,738 ======= ======= ======= =======
4. Inventory The components of inventory at May 31, 1999 and August 31, 1998 were as follows: May 31, 1999 August 31, 1998 ------------ --------------- Raw materials, bulk tablets and capsules......................... $ 55,301 $36,011 Work in process......................... 6,987 4,436 Finished products....................... 54,830 37,280 -------- ------- $117,118 $77,727 ======== ======= 5. Short-term Debt In April 1999, the Company entered into a $50,000 line of credit with a financial institution. At May 31, 1999, the Company had $15,000 outstanding under this line of credit bearing interest at 5.65% and maturing on June 25, 1999. Such maturity date was extended into the fourth quarter. 6. Sales to a Major Customer and Major Products The Company had sales to a national retailer that represented approximately 24% and 31% of net sales for the three months ended May 31, 1999 and 1998, respectively, and 26% and 30% of net sales for the nine months ended May 31, 1999 and 1998, respectively. Additionally, the Company had sales to an affiliate of such national retailer that represented approximately 4% and 2% of net sales for the three months ended May 31, 1999 and 1998, respectively, and 4% and 1% of net sales for the nine months ended May 31, 1999 and 1998, respectively. -8- REXALL SUNDOWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Amounts in thousands, except share and per share data) (Unaudited) For the three months ended May 31, 1999 and 1998, net sales of the Company's Osteo Bi-Flex(R) brand of nutritional supplements containing the two dietary ingredients, glucosamine and chondroitin, which help promote cartilage regeneration and healthy joints, were approximately 11% and 17% of the Company's net sales, respectively. For the nine months ended May 31, 1999 and 1998, net sales of these products were approximately 16% and 13% of the Company's net sales, respectively. The percentage of net sales for the three and nine month periods include sales to the national retailer discussed above. At the end of the second quarter of fiscal 1999, the Company introduced Cellasene(TM) in the United States pursuant to an exclusive distributorship agreement. Cellasene is a dietary supplement formulated for women to help eliminate cellulite. For the three and nine months ended May 31, 1999, net sales of this product were approximately 21% and 9% of the Company's net sales, respectively, which includes sales to the national retailer discussed above. 7. Contingencies The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company. During 1999, several class action complaints alleging violations of the federal securities laws were filed against the Company and certain of its officers and directors. These complaints were consolidated into one action in the United States District Court for the Southern District of Florida under the caption In re Rexall Sundown, Inc. Securities Litigation (98-8798). The plaintiffs filed an amended complaint in February 1999 and in April 1999, the Company and the individuals named in the action filed a motion to dismiss the complaint on numerous grounds, including the failure to allege actionable claims. The suit purports to be on behalf of all persons who were damaged by the purchase of the Company's Common Stock between March 19, 1998 and November 5, 1998. After a review of the amended complaint, the Company believes that the allegations are without merit. While the Company will vigorously defend against the lawsuit, there can be no assurance that the Company will ultimately prevail in its defense. 8. Supplemental Disclosure of Non-Cash Financing Activities The Company recognized a reduction of income taxes payable and a corresponding increase in additional paid-in-capital related to the exercise of stock options of $562 and $233 for the three months ended May 31, 1999 and 1998, respectively, and $804 and $7,686 for the nine months ended May 31, 1999 and 1998, respectively. -9- REXALL SUNDOWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued (Amounts in thousands, except share and per share data) (Unaudited) 9. Share Repurchase Program On September 29, 1998, the Company's Board of Directors authorized a share repurchase program to buy back up to $100,000 of its Common Stock. As of February 28, 1999, the Company had completed this repurchase program by repurchasing and retiring 6,865,700 shares of Common Stock. On March 16, 1999, the Company's Board of Directors authorized a new share repurchase program to buy back up to an additional $100,000 of its Common Stock. As with the initial share repurchase program, the new share repurchase program has no expiration date and allows the Company to buy shares of its Common Stock from time to time in the open market or in privately negotiated transactions, depending on market conditions and other factors. As of May 31, 1999, the Company had repurchased and retired 1,353,500 shares pursuant to the new program. 10. Discontinued Operations On December 21, 1998, the purchaser of the assets of Pennex Laboratories, Inc. ("Pennex") was in default under the collateralized note and the terms of the most recent forbearance agreement with respect to payments due to the Company. As such, the Company has taken back possession of the property and is in the process of selling the assets of Pennex. Based on Company investigations, the Company believes that the current fair market value of the net assets of Pennex approximates the net book value of such assets at May 31, 1999. In addition, as the Company was recording interest under the collateralized note only when it was paid to the Company, no write-off of accrued interest is necessary. 11. Recent Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires all derivatives to be measured at fair value and recognized as either assets or liabilities on the balance sheet. Furthermore, the accounting for changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company believes that the adoption of SFAS No. 133 will not have a material effect on its consolidated financial statements. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General Rexall Sundown, Inc. (the "Company") develops, manufactures, markets and sells vitamins, herbals, nutritional supplements and consumer health products. The Company distributes its products using three channels of distribution: sales to retailers; direct sales through independent distributors; and mail order. The Company offers a broad product line including vitamins in both multivitamin and single-entity formulas, minerals, herbals, homeopathic remedies, weight management products and personal care products. The Company sells products to customers throughout the world. The sales to retailers and mail order divisions of the Company operate predominantly within the United States, while Rexall Showcase International, Inc. ("Rexall Showcase"), the Company's direct sales subsidiary, has operations in the United States, Japan, Hong Kong, Taiwan, South Korea and Mexico. Rexall Showcase intends to continue expanding operations to other selected countries in the future. Currently, net sales and operating income derived from the Asia Pacific region of the world are not material when compared to the Company's total net sales. Notwithstanding this fact, net sales and operating income could be adversely affected by fluctuations in Asian currencies and the weakening of Asian economies. The Company will continue to monitor the economic situation within this region. Revenue from the sale of the Company's products is recognized at the time products are shipped. Net sales are recorded net of all discounts, allowances, returns and credits. Initial costs associated with entering into sales agreements with certain retail customers are amortized over the expected term of the relevant agreement and the amortization of such costs is recorded as a reduction in net sales. Cost of goods sold includes the cost of raw materials and all labor and overhead associated with the manufacturing and packaging of the products. Gross margins are impacted by changes in the relative sales mix among the Company's channels of distribution. In particular, gross margins are positively impacted if sales of Rexall Showcase increase as a percentage of the Company's net sales because such products command a higher gross margin. In a related manner, selling, general and administrative ("SG&A") expenses as a percentage of net sales are typically higher if sales of Rexall Showcase increase as a percentage of net sales because of the commissions paid to Rexall Showcase's independent distributors. Conversely, if Rexall Showcase's sales as a percentage of net sales decrease, gross margins will be negatively impacted and SG&A expenses will decrease as a percentage of net sales. Historically, operating margins from sales to retailers and mail order have been higher than operating margins from the Rexall Showcase division. The Company expects that Rexall Showcase's net sales, as a percentage of total Company net sales, will remain relatively consistent in fiscal 1999 with the percentage achieved in fiscal 1998, although no assurances can be given in this regard. -11- Results of Operations Three Months Ended May 31, 1999 Compared to Three Months Ended May 31, 1998 Net sales for the three months ended May 31, 1999 were $171.2 million, an increase of $20.2 million or 13.4% over the comparable period in fiscal 1998. Of the $20.2 million increase, sales to retailers accounted for $20.1 million, an increase of 19.7% over the comparable period in fiscal 1998. The increase in sales to retailers was primarily attributable to net sales of Cellasene, which totaled approximately $35.0 million and represented the Company's initial distribution of this product to its customers. Additionally, net sales increased primarily due to the Company's expanded distribution to its existing customers, as the introduction of newer products, such as Cellasene and the Twist 'N Learn(TM) line of herbal supplements, have allowed the Company to gain additional distribution. These increases, however, were partially offset by a decline in net sales of herbal supplements and Osteo-Bi-Flex. The decline in net sales of herbal supplements from the third quarter of fiscal 1998 was primarily caused by these products receiving less media attention in the fiscal 1999 period. The decline in net sales of Osteo-Bi-Flex was primarily attributable to the timing of promotions for the Osteo-Bi-Flex brand in fiscal 1998. The increase in net sales to retailers for the third quarter of fiscal 1999 was primarily associated with product mix resulting from new product introductions, as pricing remained essentially unchanged. Net sales of Rexall Showcase increased 1.1% in the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998. The increase in net sales was primarily due to the commencement of Rexall Showcase operations in Japan in late May 1999 and the commencement of operations in Taiwan in November 1998. Net sales of the Company's mail order division, SDV(R), decreased by $0.4 million to $3.3 million or an 11.1% decline over the comparable period in fiscal 1998. In recent years, the Company has not allocated significant resources to this division. Gross profit for the three months ended May 31, 1999 was $98.8 million, an increase of $13.0 million or 15.2% over the comparable period in fiscal 1998. As a percentage of net sales, gross profit increased from 56.8% for the three months ended May 31, 1998 to 57.7% for the three months ended May 31, 1999. The increase in gross profit was primarily due to lower product royalty expenses in the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998. This increase, however, was partially offset by increased infrastructure costs associated with the expansion of the Company's manufacturing and packaging capacity and by product mix, as the Company had a higher percentage of sales to retailers in the third quarter versus the same period in fiscal 1998. SG&A expenses for the three months ended May 31, 1999 were $69.5 million, an increase of $13.6 million or 24.4% over the comparable period in fiscal 1998. As a percentage of net sales, SG&A increased from 37.0% for the three months ended May 31, 1998 to 40.6% for the three months ended May 31, 1999. This increase was primarily the result of increased advertising expense, as the Company continues its strategy to support its nationally branded products, and costs incurred by the Company in strengthening its infrastructure. For the third quarter of fiscal 1999, the Company spent approximately $18.3 million in consumer advertising as compared to $4.3 million for the third quarter of fiscal 1998. These increases in SG&A, however, were partially offset by the reversal of bonus expenses accrued through the first half of the year of approximately $5.0 million and with product mix, as Rexall Showcase sales comprised a smaller percentage of net sales for the three months ended May 31, 1999 as compared to the three months ended May 31, 1998. -12- Other income, net, decreased from $1.1 million in the third quarter of fiscal 1998 to $0.2 million in the third quarter of fiscal 1999. Other income, net, is predominantly comprised of interest income ($0.3 million for the three months ended May 31, 1999 and $1.1 million for the three months ended May 31, 1998) which is derived from the investment of the Company's available cash balances. The Company's cash balances were lower in the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998 due to the repurchase of 8,219,200 shares of the Company's Common Stock for a total cost of approximately $124.8 million. Income before income tax provision was $29.5 million for the three months ended May 31, 1999, a decrease of $1.5 million or 4.8% as compared to the same period in fiscal 1998. As a percentage of net sales, income before income tax provision decreased from 20.5% for the three months ended May 31, 1998 to 17.2% for the three months ended May 31, 1999. Pro forma net income was $18.5 million for the third quarter of fiscal 1999, a decrease of $0.9 million or 4.6% from the prior year's comparable quarter. The decrease in income before income tax provision and pro forma net income was primarily due to the reasons discussed above. Nine Months Ended May 31, 1999 Compared to Nine Months Ended May 31, 1998 Net sales for the nine months ended May 31, 1999 were $436.7 million, an increase of $59.5 million or 15.8% over the comparable period in fiscal 1998. Sales to retailers accounted for $48.9 million of the sales growth, an increase of 19.7% over the comparable period in fiscal 1998. The increase in sales to retailers was primarily attributable to the launch of Cellasene, which began at the end of the second fiscal quarter of 1999, an increase in net sales of Osteo-Bi-Flex, expanded distribution to the Company's existing customers as well as new account distribution. These increases were partially offset by a decline in net sales of herbal supplements from the first nine months of fiscal 1998 which was primarily caused by these supplements receiving less media attention in the fiscal 1999 period. The increase in net sales to retailers for the nine months ended May 31, 1999 was primarily associated with product mix resulting from new product introductions, as pricing remained essentially unchanged. Net sales of Rexall Showcase increased by $12.9 million, an increase of 11.2% over the comparable period in fiscal 1998. The increase was primarily due to the commencement of operations in Japan in May 1999, the commencement of operations in Taiwan in November 1998 and the inclusion of a full nine months of activity for the Hong Kong operations in fiscal 1999 (which commenced operations in late October 1997). The increase in net sales for Rexall Showcase was primarily associated with increased unit sales, as pricing remained essentially unchanged. Net sales of the Company's mail order division decreased by $2.3 million or 17.7% over the comparable period in fiscal 1998 primarily due to non-recurring promotions held in the fiscal 1998 period. In addition, in recent years, the Company has not allocated significant resources to this division. Gross profit for the nine months ended May 31, 1999 was $247.5 million, an increase of $27.9 million or 12.7% over the comparable period in fiscal 1998. As a percentage of net sales, gross profit decreased from 58.2% for the nine months ended May 31, 1998 to 56.7% for the nine months ended May 31, 1999. The decrease in gross profit was primarily due to increased infrastructure costs associated with the expansion of the Company's manufacturing and packaging capacity, partially offset by lower product royalty expenses. -13- SG&A expenses for the nine months ended May 31, 1999 were $175.8 million, an increase of $30.3 million or 20.8% over the comparable period in fiscal 1998. Excluding approximately $2.5 million of pooling expenses incurred in the second quarter of fiscal 1998 related to the business combination with Richardson, for which there was no corresponding expenses in the same period this year, SG&A expenses increased approximately $32.8 million. The increase in SG&A expenses was primarily attributable to increased consumer advertising in the fiscal 1999 period and increased costs incurred by the Company in strengthening its infrastructure. Consumer advertising expense for the nine months ended May 31, 1999 was $23.4 million compared to $10.5 million for the corresponding fiscal 1998 period. Additionally, $4.5 million of the increase in SG&A expense related to increased sales commissions paid to Rexall Showcase's independent distributors resulting from higher sales volumes. These additional SG&A costs, however, were partially offset by the reduction in bonus expense, as the Company had no bonus expense for the first nine months of fiscal 1999 as compared to $2.8 million of bonus expense for the first nine months of fiscal 1998. Excluding the non-recurring pooling expenses described above, as a percentage of net sales, SG&A expenses increased from 37.9% for the nine months ended May 31, 1998 to 40.3% for the nine months ended May 31, 1999. Other income, net, was $2.3 million in the first nine months of fiscal 1999, a $0.9 million decrease as compared to the $3.2 million recorded in the first nine months of fiscal 1998. Other income, net, is predominantly comprised of interest income ($2.5 million for the nine months ended May 31, 1999 and $3.4 million for the nine months ended May 31, 1998) which is derived from the investment of the Company's available cash balances. The Company's cash balances were lower during the first nine months of fiscal 1999 as compared to the first nine months of fiscal 1998 due to the repurchase of 8,219,200 shares of the Company's Common Stock for a total cost of approximately $124.8 million. Income before income tax provision was $74.0 million for the nine months ended May 31, 1999, a decrease of $3.3 million or 4.2% as compared to the same period in fiscal 1998. As a percentage of net sales, income before income tax provision decreased from 20.5% for the nine months ended May 31, 1998 to 17.0% for the nine months ended May 31, 1999. Pro forma net income was $46.5 million for the first nine months of fiscal 1999, a decrease of $2.2 million or 4.4% from the prior year's comparable period. The decrease in income before income tax provision and pro forma net income was primarily due to the reasons discussed above. Seasonality The Company believes that its business is not subject to significant seasonality based on historical trends, with the exception of Rexall Showcase, which typically experiences lower revenues in the second and fourth fiscal quarters due to winter and summer holiday seasons, respectively. -14- Liquidity and Capital Resources The Company had working capital of $133.1 million as of May 31, 1999, compared to $220.6 million as of August 31, 1998. This decrease was principally due to the implementation and completion of the Company's initial stock repurchase program and the implementation of the Company's new stock repurchase program. As of May 31, 1999, the Company had repurchased and retired 8,219,200 shares of Common Stock at a cost of approximately $124.8 million pursuant to these programs. Additionally, trade accounts receivable, net, at May 31, 1999, increased $21.4 million as compared to the fiscal 1998 year-end, while inventory increased $39.4 million during the same period. The increase in trade accounts receivable can be primarily attributed to Cellasene shipments to retailers during the latter part of the third quarter of fiscal 1999 due to the timing of receipt of Cellasene inventory. The increase in inventory resulted primarily from inventory for Cellasene, inventory necessary to support the opening of Rexall Showcase Japan and increases in the Company's overall target inventory to satisfy customer needs. Accounts payable at May 31, 1999 increased $22.4 million as compared to fiscal 1998 year-end, primarily reflecting the timing of payments. Net cash provided by operating activities for the nine months ended May 31, 1999 was $13.2 million compared to $13.7 million for the comparable period in fiscal 1998. Net cash provided by investing activities was $13.7 million for the nine months ended May 31, 1999 compared to $31.3 million of cash used in investing activities for the comparable period in fiscal 1998. During the first nine months of 1999, net proceeds from the sale of marketable securities provided $32.0 million of cash necessary to fund the Company's initial share repurchase program. Offsetting these proceeds, the Company made capital expenditures of $18.5 million for the nine months ended May 31, 1999, primarily related to investments in the Company's new softgel facility, computer systems to support the global operations of Rexall Showcase, expanded lab facilities and facility enhancements. Net cash used in financing activities was $107.5 million for the nine months ended May 31, 1999 compared to net cash provided of $2.2 million for the comparable period in fiscal 1998. The first nine months of fiscal 1999 reflected $124.8 million used for the Company's share repurchase programs, partially offset by $15.0 million provided by net borrowings on a line of credit necessary to fund a portion of the repurchase of the Company's Common Stock and increased working capital requirements. The Company believes that its existing cash balances, internally generated funds from operations and the Company's credit line will provide the liquidity necessary to satisfy the Company's working capital needs, including the purchase and maintenance of inventory, the financing of the Company's accounts receivable and anticipated capital expenditures, as well as any future repurchase of shares under the Company's new share repurchase program. Inflation Inflation has not had a significant impact on the Company in the past three years nor is it expected to have a significant impact in the foreseeable future. -15- Potential Year 2000 Issues The Year 2000 issue generally refers to the inability of computer hardware and software to properly recognize a year that begins with "20" instead of "19." This issue arose as a result of computer systems and programs being designed to accept a calendar year reference as two-digits as opposed to four-digits. If the Year 2000 issue is not corrected, computer applications may stop processing date-related computations or process them incorrectly. The Company has recognized the severity of the Year 2000 issue and has designated it as a priority, allocating appropriate resources in order to minimize the impact of Year 2000 date-related problems on its business. The Company has assembled an internal task force to review and evaluate the Year 2000 issue as it relates to its internal computer-based and non-computer-based systems as well as third party computer systems including those of its vendors and customers. The scope of the Company's Year 2000 analysis encompasses the Company's traditional enterprise-wide software, its mid-range and personal computing systems, and its embedded microprocessor systems. For the Company's internal computer and non-computer-based systems, the task force has identified the scope of any Year 2000 problems, prepared test scripts in order to determine whether these systems are Year 2000 compliant and implemented the test scripts by conducting appropriate testing in order to confirm actual compliance. The Company has substantially completed testing its internal computer-based systems and expects to complete test scripts and testing for the remainder of its less crucial internal computer-based systems by the end of August 1999. The task force has identified and tested the applicable internal non-computer systems which potentially may be affected by Year 2000. In order to determine the state of readiness of third parties, including the Company's significant vendors and customers, to handle Year 2000 issues and whether it will impact the Company's business, the Company has sent letters of inquiry to substantially all of the third parties with whom it does business. The Company's vendors and customers are at various stages in analyzing this issue and the Company is in the process of receiving and analyzing their responses to the Company's letter. The Company expects to have identified any potential Year 2000 problems with its key vendors and customers by the end of August 1999. The Company has also begun to schedule site visits with its key vendors and customers in order to confirm Year 2000 compliance. The Company has not yet established any contingency plans but will develop such plans as needed once it identifies the scope and magnitude of any compliance issues with third parties. There can be no assurance that the systems of other companies on which the Company's systems rely or interface will be timely converted, which failure by a key vendor or customer could prevent the Company's products from being distributed in a timely manner. The Company has incurred and will continue to incur internal staff costs as well as consulting, travel and other expenses related to Year 2000 issues. The Company does not separately track internal costs incurred for the Year 2000 project, the majority of which are payroll-related for the Company's information technology professionals. If any of the Company's internal systems or equipment are found to be non-compliant with Year 2000, they will need to be upgraded or replaced. To date, none of these costs have been material. The recent growth of the Company which prompted it in October 1997 to install new enterprise-wide computer systems which is utilized for the Company's manufacturing, distribution, finance and sales functions for all of its distribution channels, substantially reduces the likelihood that the costs incurred by the Company in becoming Year 2000 compliant will be material. These enterprise-wide systems are warranted to be Year 2000 compliant by their manufacturers and are in the process of being tested by the Company to -16- confirm their compliance. The Company does not expect that the total costs involved in becoming Year 2000 compliant will be material to the Company's financial position, results of operations or cash flows. Recent Accounting Standards In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS No. 133 requires all derivatives to be measured at fair value and recognized as either assets or liabilities on the balance sheet. Furthermore, the accounting for changes in the fair value of a derivative (i.e., gains and losses) depends on the intended use of the derivative. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company believes that the adoption of SFAS No. 133 will not have a material effect on the consolidated financial statements. Forward-Looking Statements This report contains certain "forward-looking statements" as such term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases, which represents the Company's interpretation or beliefs. These forward-looking statements, by their nature, involve substantial risks and uncertainties, certain of which may be beyond the Company's control and actual results may differ materially depending on a variety of important factors including uncertainties related to acquisitions, government regulation, managing and maintaining growth, the effect of adverse publicity, litigation, reliance on independent distributors of Rexall Showcase, competition and other factors described in the Company's filings with the Securities and Exchange Commission. For this purpose, any statements contained in this Report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate," or "continue" or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable. -17- PART II - OTHER INFORMATION Item 1. Legal Proceedings. Not applicable. Item 2. Changes in Securities. Not applicable. Item 3. Defaults Upon Senior Securities. Not applicable. Item 4. Submission of Matters to a Vote of Security Holders. Not applicable. Item 5. Other Information. Not applicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 10.1 Master Promissory Note dated April 22, 1999 by Rexall Sundown, Inc. for the benefit of NationsBank, N.A. 27 Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K. None. -18- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. REXALL SUNDOWN, INC. Date: July 14, 1999 By: /s/ Damon DeSantis ----------------------------------- Damon DeSantis, President and Chief Executive Officer Date: July 14, 1999 By: /s/ Geary Cotton -------------------------------------- Geary Cotton, Chief Financial Officer, Treasurer and Chief Accounting Officer -19- EX-10.1 2 MASTER PROMISSORY NOTE MASTER PROMISSORY NOTE $50,000,000 April 22, 1999 FOR VALUE RECEIVED, the undersigned Rexall Sundown, Inc., a Florida corporation ("Borrower"), hereby promises to pay to the order of NationsBank, N.A. ("Lender"), at its office at Charlotte, North Carolina (or at such other place as Lender may designate from time to time), in lawful money of the United States of America and in immediately available funds, the principal amount of Fifty Million Dollars ($50,000,000) or such lesser amount as shall equal the aggregate unpaid principal amount of the advances (the "Advances") made by Lender to Borrower under this Master Promissory Note (this "Note"), and to pay interest on the unpaid principal amount of each such Advance at the rates per annum and on the dates specified below. Each Advance hereunder shall be at the sole discretion of Lender. Each Advance shall have a maturity date and shall bear interest at the rate per annum quoted to Borrower by Lender and accepted by Borrower prior to the making of such Advance (which acceptance shall in any event be deemed to occur upon receipt by Borrower of the proceeds of any Advance). Each Advance, and accrued and unpaid interest thereon, shall be due and payable ,on the earlier of (a) the maturity date of such Advance, or (b) April 19, 2000. No Advance shall have a maturity of more than 30 days. Lender may, if and to the extent any payment is not made when due hereunder, charge from time to time against any or all of Borrower's accounts with Lender any amount so due. The date, amount, interest rate, and maturity date of each Advance, and each payment of principal and interest hereon, shall be recorded by Lender on its books, which recordations shall, in the absence of manifest error, be conclusive as to such matters; provided, that the failure of Lender to make any such recordation or any error therein shall not limit or otherwise affect the obligations of Borrower hereunder. Borrower may, upon at least one business days' notice to Lender, prepay any Advance in whole or in part; provided, however, that Borrower shall at the time of prepayment compensate Lender for any loss, cost, or expense that Lender incurs as a result of such prepayment. Interest shall be computed on the basis of a year of 360 days and the actual days elapsed (including the first day but excluding the last day). Overdue principal and, to the extent permitted by applicable law, interest shall bear interest, payable upon demand, for each day from and including the due date to but excluding the date of actual payment at a rate per annum equal to the sum of 2% plus the rate of interest publicly announced by Lender from time to time as its prime rate. The Lender's prime rate is a rate set by Lender based upon various factors including Lender's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Whenever any payment under this Note is due on a day that is not a day Lender is open to conduct substantially all of its business (each a "business day"), such payment shall be made on the next succeeding day on which Lender is open to conduct substantially all of its business, and such extension of time shall in such case be included in the computation of the payment of interest. Each of the following shall constitute an Event of Default hereunder: (a) Borrower shall fail to pay when due any principal of or interest on any Advance, (b) a default or event of default shall occur under the terms of any other material indebtedness for which Borrower or any of its subsidiaries is liable, whether as principal obligor, guarantor, or otherwise, (c) any representation, warranty, certification, or statement made by Borrower to Lender shall prove to have been incorrect or misleading in any material respect, (d) Borrower shall dissolve, liquidate, or terminate its legal existence or shall convey, transfer, lease, or dispose of (whether in one transaction or a series of transactions) all or substantially all of its assets to any person or entity, or (e) a petition shall be filed by or against Borrower or any of its subsidiaries under any law relating to bankruptcy, reorganization, or insolvency, or (f) Borrower or any of its subsidiaries shall make an assignment for the benefit of creditors or fail generally to pay its debts as they become due, or a receiver, trustee, or similar official shall be appointed over Borrower or any of its subsidiaries or a substantial portion of any of their respective assets. If an Event of Default shall have occurred and be continuing, Lender may declare the outstanding principal of and accrued and unpaid interest on this Note to be immediately due and payable without presentment, protest, demand, or other notice of any kind, all of which are hereby waived by Borrower; provided, however, that upon the occurrence of any event specified in (e) above, the outstanding principal and accrued and unpaid interest on this Note shall become immediately due and payable without presentment, protest, demand, or other notice of any kind, all of which are hereby waived by Borrower. The request of Borrower for any Advance and the receipt by Borrower of the proceeds thereof shall be deemed a representation by Borrower as of each such date that no Event of Default has occurred and that Borrower is duly authorized to incur such indebtedness hereunder. No failure or delay by Lender in exercising, and no course of dealing with respect to, any right, power, or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies of Lender provided herein shall be cumulative and not exclusive of any other rights or remedies provided by law. If any provision of this Note shall be held invalid or unenforceable in whole or in part, such invalidity or unenforceability shall not affect the remaining provisions hereof. No provision of this Note may be modified or waived except by a written instrument signed by Lender and Borrower. Lender shall incur no liability to Borrower in acting upon any telephone, telex, or other communication that Lender in good faith believes has been given by an authorized representative of Borrower. Lender may assign to one or more banks or other entities all or any part of, or may grant participations to one or more banks or other entities in or to all or any part of, this Note or any Advance or Advances hereunder. Borrower shall pay on demand all costs and expenses (including reasonable attorneys' fees and the allocated costs of internal counsel) incurred by Lender in connection with any Event of Default or the enforcement or attempted enforcement of this Note. Notwithstanding anything to the contrary contained herein, the interest paid or agreed to be paid hereunder shall not exceed the maximum rate of non-usurious interest permitted by applicable law (the "Maximum Rate"). If Lender shall receive interest in an amount that exceeds the Maximum Rate, the excessive interest shall be applied to the principal of this Note or, if it exceeds the unpaid principal, refunded to Borrower. In determining whether the interest contracted for, charged, or received by Lender exceeds the Maximum Rate, Lender may, to the extent permitted by applicable law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the stated term of this Note. This Note shall be governed by and construed in accordance with the laws of the State of Florida. Borrower hereby submits to the nonexclusive jurisdiction of the Federal and State courts in the City of Miami, Florida for the purposes of all legal proceedings arising out of or relating to this Note. Borrower irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. Borrower and Lender by acceptance of this Note hereby irrevocably waive any and all right to trial by jury in any legal proceeding arising out of or relating to this Note. THIS NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. REXALL SUNDOWN, INC. By: /s/ Richard Werber ------------------------------------ Name: Richard Werber Title: Vice President, General Counsel and Secretary EX-27 3 FDS --
5 (THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS). 9-MOS AUG-31-1999 MAY-31-1999 6,669,092 0 82,165,588 0 117,118,459 221,453,516 68,262,832 0 304,987,584 88,376,670 0 0 0 643,452 215,727,349 304,987,584 436,656,256 436,656,256 189,138,694 189,138,694 175,806,143 0 47,293 74,049,285 27,589,716 46,459,569 0 0 0 46,459,569 0.68 0.67 (1) Net of allowance. (2) Net of accumulated depreciation.
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