1
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, 1997
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 12 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-21884
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REXALL SUNDOWN, INC.
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(Exact Name of Registrant as Specified in its Charter)
FLORIDA 59-1688986
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
851 Broken Sound Parkway, NW, Boca Raton, Florida 33487
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (561) 241-9400
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Indicate by check mark whether Registrant has (1) filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
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As of April 11, 1997, the number of shares outstanding of the Registrant's
Common Stock was 33,380,204.
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REXALL SUNDOWN, INC.
TABLE OF CONTENTS
Page No.
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PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets as of
February 28, 1997 and August 31, 1996 ...................................................... 3
Consolidated Statements of Operations for the
Three and Six Months Ended February 28, 1997
and February 29, 1996 ...................................................................... 4
Consolidated Statements of Cash Flows for the
Six Months Ended February 28, 1997
and February 29,1996 ....................................................................... 5
Notes to Consolidated Financial Statements ................................................. 6
Item 2.Management's Discussion and Analysis
of Financial Condition and Results of Operations ........................................... 9
PART II OTHER INFORMATION .......................................................................... 13
SIGNATURES ......................................................................................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
February 28, August 31,
1997 1996
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 38,618 $ 13,450
Restricted cash 88 278
Marketable securities 60,146 7,988
Trade accounts receivable, net 18,077 11,410
Inventory 28,125 28,179
Prepaid expenses and other current assets 5,764 5,018
Net current assets of discontinued operations 3,917 3,855
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Total current assets 154,735 70,178
Property, plant and equipment, net 25,843 24,078
Other assets 10,013 8,839
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Total assets $ 190,591 $ 103,095
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,593 $ 5,599
Accrued expenses and other current liabilities 10,999 10,100
Current portion of long-term debt 306 346
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Total current liabilities 21,898 16,045
Long-term debt - 105
Other liabilities 101 253
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Total liabilities 21,999 16,403
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Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares, no shares outstanding - -
Common stock, $.01 par value; authorized 100,000,000 shares,
shares issued: 33,339,446 and 30,660,128, respectively 333 307
Capital in excess of par value 119,944 53,563
Retained earnings 48,736 32,943
Cumulative translation adjustment (421) (121)
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Total shareholders' equity 168,592 86,692
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Total liabilities and shareholders' equity $ 190,591 $ 103,095
========= =========
See accompanying notes
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
February 28, February 29, February 28, February 29,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net sales $ 58,534 $ 40,371 $ 114,604 $ 81,050
Cost of sales 22,017 15,904 42,696 32,287
------------ ------------ ------------ ------------
Gross profit 36,517 24,467 71,908 48,763
Selling, general and administrative expenses 24,438 18,221 48,893 36,977
------------ ------------ ------------ ------------
Operating income 12,079 6,246 23,015 11,786
Other income (expense):
Interest income 1,383 195 1,952 289
Other income 31 10 31 20
Interest expense (6) (14) (15) (19)
------------ ------------ ------------ ------------
Income before income tax provision 13,487 6,437 24,983 12,076
Income tax provision 4,936 2,363 9,190 4,446
------------ ------------ ------------ ------------
Net income $ 8,551 $ 4,074 $ 15,793 $ 7,630
============ ============ ============ ============
Net income per common share $ 0.25 $ 0.13 $ 0.47 $ 0.25
============ ============ ============ ============
Weighted average common shares outstanding 34,370,914 30,385,182 33,396,511 30,205,149
============ ============ ============ ============
See accompanying notes
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended
------------------------
February 28, February 29,
1997 1996
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Cash flows provided by (used in) operating activities:
Net income $ 15,793 $ 7,630
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,654 1,268
Amortization 804 300
Gain on sale of property and equipment - (19)
Deferred income taxes 88 1,975
Foreign exchange translation adjustment (300) (34)
Changes in assets and liabilities:
Trade accounts receivable (6,667) (3,046)
Inventory 54 1,360
Prepaid expenses and other current assets (746) (1,841)
Other assets (1,978) (2,121)
Accounts payable 4,994 303
Accrued expenses and other current liabilities 3,120 3,620
Other liabilities (152) 100
Discontinued operations - non cash charges
and changes in assets and liabilities (62) 3,741
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Net cash provided by (used in) operating activities 16,602 13,236
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Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment (3,419) (1,786)
Purchase of marketable securities (58,146) -
Proceeds from sale of marketable securities 5,988 -
Proceeds from sale of fixed assets - 22
Other 190 -
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Net cash used in investing activities (55,387) (1,764)
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Cash flows provided by (used in) financing activities:
Net proceeds from offering 62,287 -
Principal payments on long-term debt (145) (179)
Exercise of options to purchase common stock 1,811 3,555
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Net cash provided by financing activities 63,953 3,376
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Net increase (decrease) in cash and cash equivalents 25,168 14,848
Cash and cash equivalents at beginning of period 13,450 1,154
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Cash and cash equivalents at end of period $ 38,618 $ 16,002
======== ========
See accompanying notes
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(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. These unaudited
consolidated financial statements should be read in conjunction with
the consolidated financial statements and the footnotes thereto
contained in the Rexall Sundown, Inc. (the "Company") Annual Report on
Form 10-K for the year ended August 31, 1996, as filed with the
Securities and Exchange Commission. The August 31, 1996 balance sheet
was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
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.
Certain prior period amounts have been reclassified to conform
with the fiscal 1997 presentation.
2. NET INCOME PER COMMON SHARE
Net income per common share is calculated by dividing net
income by weighted average shares outstanding, giving effect to common
stock equivalents (common stock options).
3. INVENTORY
The components of inventory as of February 28, 1997 and August
31, 1996 are as follows:
February 28, 1997 August 31, 1996
----------------- ---------------
(Audited)
Raw materials $13,284 $11,609
Work in process 1,034 1,732
Finished products 13,807 14,838
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$28,125 $28,179
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands)
(Unaudited)
4. SALES TO A MAJOR CUSTOMER
The Company had sales to a national retailer which represented
approximately 18.1% and 5.6% of net sales for the three months ended
February 28, 1997 and February 29, 1996, respectively, and 15.8% and
4.5% of net sales for the six months ended February 28, 1997 and
February 29, 1996, respectively. Trade accounts receivable from this
customer amounted to approximately $7,579 and $615 at February 28, 1997
and August 31, 1996, respectively.
5. CONTINGENCIES
The Company believes that it is not presently a party to any
litigation, the outcome of which would have a material adverse impact
on the Company.
6. 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 $1,328 and $649 for the three months
ended February 28, 1997 and February 29, 1996, respectively, and
$2,309 and $1,629 for the six months ended February 28, 1997 and
February 29, 1996, respectively.
7. COMMON STOCK TRANSACTIONS
On November 5, 1996, the Company consummated a public offering
of 4,000,000 shares of common stock. Of those shares, 2,000,000 were
sold by the Company and 2,000,000 were sold by certain shareholders of
the Company. On December 3, 1996, the underwriters' over-allotment
option to purchase an additional 600,000 shares was exercised. Of those
600,000 shares, 400,000 were sold by the Company and 200,000 were sold
by a shareholder of the Company. The Company intends to use the net
proceeds of approximately $62.3 million primarily to acquire
complementary products, product lines or businesses, to provide working
capital and for general corporate purposes.
8. EVENTS SUBSEQUENT TO FISCAL YEAR END
In December 1996, the Company entered into a revolving line of
credit with a financial institution with a borrowing amount of $20
million, which line of credit is subject to annual extensions.
Borrowings under the line of credit will bear interest at LIBOR plus
1.5 percent. The line of credit is collateralized by accounts
receivable and inventory and is subject to compliance with
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollars in thousands)
(Unaudited)
8. EVENTS SUBSEQUENT TO FISCAL YEAR END, continued
certain financial covenants and ratios. There were no amounts
outstanding under this revolving line of credit at February 28, 1997.
As of April 1, 1997, the Company extended the maturity of the
collateralized note related to the sale of the assets of Pennex
Laboratories, Inc. to July 31, 1997. Interest continues to accrue and
is payable in accordance with the previous terms. Assuming full
collection of the balance of the collateralized note, the Company
expects to record in the fourth quarter of fiscal 1997 a reduction to
the estimated loss on disposition of approximately $1,400 (net of tax),
or $.04 per share, which would be reflected as an adjustment to
discontinued operations.
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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, 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.
On November 5, 1996, the Company consummated a public offering (the
"Offering") of 4,000,000 shares of Common Stock. Of those shares, 2,000,000 were
sold by the Company and 2,000,000 were sold by certain shareholders of the
Company. On December 3, 1996, the underwriters' over-allotment option to
purchase an additional 600,000 shares was exercised. Of those 600,000 shares,
400,000 were sold by the Company and 200,000 were sold by a shareholder of the
Company. The Company intends to use the net proceeds of approximately $62.3
million primarily to acquire complementary products, product lines or
businesses, to provide working capital and for general corporate purposes.
RESULTS OF CONTINUING OPERATIONS
Three Months Ended February 28, 1997 Compared to Three Months Ended February 29,
1996
Net sales for the three months ended February 28, 1997 were $58.5
million, an increase of $18.2 million or 45.0% over the comparable period in
fiscal 1996. Of the $18.2 million increase, sales to retailers accounted for
$11.8 million, an increase of 56.9% over the comparable period in fiscal 1996.
The gain in sales to retailers was primarily attributable to new customers added
in the second half of fiscal 1996 as well as an increase in the Company's base
business. Net sales of the Company's direct sales subsidiary, Rexall Showcase
International, Inc. ("Rexall Showcase"), increased by $5.9 million, an increase
of 38.7% over the comparable period in fiscal 1996. The increase in direct sales
was partially due to the commencement of Rexall Showcase's operations in Mexico
in February 1996 and South Korea in April 1996. Net sales of the Company's mail
order division, SDV, increased by $466,000 or 10.6% over the comparable period
in fiscal 1996. The increase in net sales in each division was also due to
increased unit sales.
Gross profit for the three months ended February 28, 1997 was $36.5
million, an increase of $12.1 million or 49.3% over the comparable period in
fiscal 1996. As a percentage of net sales, gross profit increased from 60.6% for
the three months ended February 29, 1996 to 62.4% for the three months ended
February 28, 1997. The increase in gross margin was due, in part, to improved
margins as a result of manufacturing efficiencies achieved from higher volume at
the Company's vitamin manufacturing facility as well as a favorable product mix.
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Selling, general and administrative expenses for the three months ended
February 28, 1997 were $24.4 million, an increase of $6.2 million or 34.1% over
the comparable period in fiscal 1996. As a percentage of net sales, such
expenses decreased from 45.1% for the three months ended February 29, 1996 to
41.8% for the comparable period in fiscal 1997, primarily as a result of
increased net sales and the relatively fixed nature of such expenses except for
the commission expense of Rexall Showcase, which is variable and comprises the
majority of Rexall Showcase's selling, general and administrative expenses.
Interest income for the three months ended February 28, 1997 was $1.4
million, as compared to $195,000 for the comparable period in fiscal 1996. Such
increase was primarily a result of investment of the Company's available cash
balances, which were higher in the second quarter of fiscal 1997 than the
comparable period in fiscal 1996 primarily due to the net proceeds of $62.3
million received from the Offering.
Income before income tax provision was $13.5 million for the three
months ended February 28, 1997, an increase of $7.1 million or 109.5% over the
comparable period in fiscal 1996. As a percentage of net sales, income before
income tax provision increased from 15.9% for the three months ended February
29, 1996 to 23% for the comparable period in fiscal 1997. Net income was $8.6
million for the current fiscal quarter, an increase of $4.5 million or 109.9%
from the prior year's comparable quarter, due to the reasons described above.
Six Months Ended February 28, 1997 Compared to Six Months Ended February 29,
1996
Net sales for the six months ended February 28, 1997 were $114.6
million, an increase of $33.6 million or 41.4% over the comparable period in
fiscal 1996. Of the $33.6 million increase, sales to retailers accounted for
$22.4 million, an increase of 56.1% over the comparable period in fiscal 1996.
The gain in sales to retailers was primarily attributable to new customers added
in the second half of fiscal 1996 as well as an increase in the Company's base
business. Net sales of the Company's direct sales subsidiary, Rexall Showcase,
increased by $10.8 million, an increase of 32.9% over the comparable period in
fiscal 1996. The increase in direct sales was partially due to the commencement
of Rexall Showcase's operations in Mexico in February 1996 and South Korea in
April 1996. Net sales of the Company's mail order division, SDV, increased by
$367,000 or 4.4% over the comparable period in fiscal 1996. The increase in net
sales in each division was also due to increased unit sales.
Gross profit for the six months ended February 28, 1997 was $71.9
million, an increase of $23.1 million or 47.5% over the comparable period in
fiscal 1996. As a percentage of net sales, gross profit increased from 60.2% for
the six months ended February 29, 1996 to 62.7% for the six months ended
February 28, 1997. The increase in gross margin was due, in part, to improved
margins as a result of manufacturing efficiencies achieved from higher volume at
the Company's vitamin manufacturing facility as well as a favorable product mix.
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Selling, general and administrative expenses for the six months ended
February 28, 1997 were $48.9 million, an increase of $11.9 million or 32.2% over
the comparable period in fiscal 1996. As a percentage of net sales, such
expenses decreased from 45.6% for the six months ended February 29, 1996 to
42.7% for the comparable period in fiscal 1997, primarily as a result of
increased net sales and the relatively fixed nature of such expenses except for
the commission expense of Rexall Showcase, which is variable and comprises the
majority of Rexall Showcase's selling, general and administrative expenses.
Interest income for the six months ended February 28, 1997 was $2.0
million, as compared to $289,000 for the comparable period in fiscal 1996. Such
increase was primarily a result of investment of the Company's available cash
balances, which were higher in the first half of fiscal 1997 than the comparable
period in fiscal 1996 primarily due to the net proceeds of $62.3 million
received from the Offering.
Income before income tax provision was $25 million for the six months
ended February 28, 1997, an increase of $12.9 million or 106.9% over the
comparable period in fiscal 1996. As a percentage of net sales, income before
income tax provision increased from 14.9% for the six months ended February 29,
1996 to 21.8% for the comparable period in fiscal 1997. Net income was $15.8
million for the first six months of the current fiscal year, an increase of $8.2
million or 107% from the first six months of the prior fiscal year due to the
reasons described 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $132.8 million as of February 28,
1997, compared to $54.1 million as of August 31, 1996. This increase was
principally the result of increased cash and cash equivalents and marketable
securities as a result of the net proceeds from the Offering.
Net cash provided by operating activities for the six months ended
February 28, 1997 was $16.6 million compared to $13.2 million for the comparable
period in fiscal 1996. Net cash provided by operating activities increased
primarily due to increased net income and increased accounts payable, partially
offset by increases in accounts receivable. Net cash used in investing
activities was $55.4 million for the six months ended February 28, 1997 compared
to $1.8 million for the comparable period in fiscal 1996. Net cash used in
investing activities increased primarily due to the purchase of marketable
securities in the six months ended February 28, 1997, which primarily represents
investment of the proceeds from the Offering. Net cash provided by financing
activities was $64 million for the six months ended February 28, 1997 compared
to $3.4 million for the comparable period in fiscal 1996 reflecting $62.3
million of net proceeds received from the Offering in the first half of fiscal
1997.
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The Company believes that its existing cash balances, internally
generated funds from operations and its available bank line of credit will
provide the liquidity necessary to satisfy the Company's working capital needs,
including the purchase and maintenance of inventory, the financing of the
Company's accounts receivable, as well as the financing of anticipated capital
expenditures.
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.
FORWARD LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the
meaning of Section 21E of the Securities Act of 1934, which represent the
Company's expectations or beliefs. For this purpose, any statements contained in
this Report that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate" or "continue" or the negative or other variations thereof or
comparable terminology are intended to identify forward-looking statements.
These statements by their nature involve substantial risks and uncertainties,
certain of which are beyond the Company's control, and actual results may differ
materially depending on a variety of important factors described in the
Company's filings with the SEC.
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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 6,
1997. The holders of 33,143,056 shares of Common Stock were entitled to vote at
the Annual Meeting and there were present, in person or by proxy, holders of
31,654,917 shares of Common Stock (95.5% of the shares entitled to vote).
The following individuals were elected as Directors of the Company to
serve until the 1998 Annual Meeting by the following votes (the numbers in
parentheses represent the percent of the shares of Common Stock voted at the
Annual Meeting):
FOR WITHHELD AUTHORITY
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Carl DeSantis 31,582,615 (99.8%) 72,302 (.2%)
Christian Nast 31,582,465 (99.8%) 72,452 (.2%)
Dean DeSantis 31,581,215 (99.8%) 73,702 (.2%)
Damon DeSantis 31,581,115 (99.8%) 73,802 (.2%)
Nickolas Palin 31,581,170 (99.8%) 73,747 (.2%)
Stanley Leedy 31,582,570 (99.8%) 72,347 (.2%)
Raymond Monteleone 31,582,670 (99.8%) 72,247 (.2%)
Howard Yenke 31,582,620 (99.8%) 72,297 (.2%)
The proposal to amend the Company's Amended and Restated 1993 Stock
Incentive Plan was approved as follows: 30,461,084 (96.2%) shares were cast for
the proposal; 701,535 (2.2%) shares were cast against the proposal; and 97,913
(.3%) shares abstained.
The proposal to amend the Company's Amended and Restated 1993
Non-Employee Director Stock Option Plan was approved as follows: 30,584,569
(96.6%) shares were cast for the proposal; 571,064 (1.8%) shares were cast
against the proposal; and 104,899 (.3%) shares abstained.
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The proposal to amend the Company's 1994 Non-Employee Director Stock
Option Plan was approved as follows: 30,373,908 (96.0%) shares were cast for the
proposal; 782,082 (2.5%) shares were cast against the proposal; and 104,542
(.3%) shares abstained.
The selection of Coopers & Lybrand L.L.P. as the Company's independent
auditors for the fiscal year ending August 31, 1997 was ratified as follows:
31,558,976 (99.7%) shares were cast for the proposal; 26,173 (.1%) shares were
cast against the proposal; and 69,768 (.2%) shares abstained.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
10.1 - Employment Agreement dated February 3, 1997 by
and between the Company and Gary Malloch.
11 - Earnings Per Share Computation.
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 11, 1997 By: /s/ Carl DeSantis
----------------------
Carl DeSantis, Chairman of the Board
Date: April 11, 1997 By: /s/ Geary Cotton
--------------------
Geary Cotton, Vice President-Finance,
Chief Financial Officer, Treasurer and
Chief Accounting Officer
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EXHIBIT INDEX
SEQUENTIALLY
NUMBERED
EXHIBIT NUMBER DESCRIPTION PAGE
10.1 Employment Agreement dated February 3, 1997 by and between the
Company and Gary N. Malloch.
11 Earnings Per Share Computation.
27 Financial Data Schedule (for SEC use only)