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 May 31, 1997 ------------ 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.) 851 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 (1) has 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 July 11, 1997, the number of shares outstanding of the Registrant's Common Stock was 33,546,459. 2 REXALL SUNDOWN, INC. TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of May 31, 1997 and August 31, 1996 .............................................3 Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 1997 and 1996 ............................4 Consolidated Statements of Cash Flows for the Nine Months Ended May 31, 1997 and 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 -2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS REXALL SUNDOWN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited) May 31, August 31, 1997 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 39,844 $ 13,450 Restricted cash -- 278 Marketable securities 60,718 7,988 Trade accounts receivable, net 18,726 11,410 Inventory 34,052 28,179 Prepaid expenses and other current assets 5,877 5,018 Net current assets of discontinued operations 3,958 3,855 --------- --------- Total current assets 163,175 70,178 Property, plant and equipment, net 32,551 24,078 Other assets 10,211 8,839 --------- --------- Total assets $ 205,937 $ 103,095 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 10,781 $ 5,599 Accrued expenses and other current liabilities 16,358 10,100 Current portion of long-term debt 181 346 --------- --------- Total current liabilities 27,320 16,045 Long-term debt -- 105 Other liabilities 265 253 --------- --------- Total liabilities 27,585 16,403 --------- --------- 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: 33,413,909 and 30,660,128, respectively 334 307 Capital in excess of par value 120,419 53,563 Retained earnings 58,016 32,943 Cumulative translation adjustment (417) (121) --------- --------- Total shareholders' equity 178,352 86,692 --------- --------- Total liabilities and shareholders' equity $ 205,937 $ 103,095 ========= ========= See accompanying notes -3- 4 REXALL SUNDOWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended May 31, May 31, ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------- ------------ ------------ Net sales $ 69,613 $ 54,568 $ 184,217 $ 135,618 Cost of sales 25,375 20,131 68,071 52,418 ------------ ------------ ------------ ------------ Gross profit 44,238 34,437 116,146 83,200 Selling, general and administrative expenses 31,124 25,240 80,017 62,217 ------------ ------------ ------------ ------------ Operating income 13,114 9,197 36,129 20,983 Other income (expense): Interest income 1,027 505 2,979 794 Other income 21 -- 52 20 Interest expense (20) (11) (35) (30) ------------ ------------ ------------ ------------ Income before income tax provision 14,142 9,691 39,125 21,767 Income tax provision 4,862 3,557 14,052 8,003 ------------ ------------ ------------ ------------ Net income $ 9,280 $ 6,134 $ 25,073 $ 13,764 ============ ============ ============ ============ Net income per common share $ 0.27 $ 0.20 $ 0.74 $ 0.45 ============ ============ ============ ============ Weighted average common shares outstanding 34,336,453 30,753,274 33,709,825 30,387,857 ============ ============ ============ ============ See accompanying notes -4- 5 REXALL SUNDOWN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Nine Months Ended May 31, --------------------- 1997 1996 -------- --------- Cash flows provided by (used in) operating activities: Net income $ 25,073 $ 13,764 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 2,538 1,978 Amortization 1,139 894 Gain on sale of property and equipment (5) (20) Deferred income taxes 132 2,025 Foreign exchange translation adjustment (296) (7) Changes in assets and liabilities: Trade accounts receivable (7,316) (7,200) Inventory (5,873) (6,118) Prepaid expenses and other current assets (859) (2,979) Other assets (2,511) (2,815) Accounts payable 5,182 4,752 Accrued expenses and other current liabilities 8,579 6,670 Other liabilities 12 -- Discontinued operations - non cash charges and changes in assets and liabilities (103) 4,167 -------- -------- Net cash provided by (used in) operating activities 25,692 15,111 -------- -------- Cash flows provided by (used in) investing activities: Acquisition of property, plant and equipment (11,012) (3,177) Purchase of marketable securities (58,718) (5,909) Proceeds from sale of marketable securities 5,988 -- Proceeds from sale of fixed assets 6 22 Other 278 (89) -------- -------- Net cash used in investing activities (63,458) (9,153) -------- -------- Cash flows provided by (used in) financing activities: Net proceeds from offering 62,287 -- Principal payments on long-term debt (270) (260) Exercise of options to purchase common stock 2,143 4,588 -------- -------- Net cash provided by financing activities 64,160 4,328 -------- -------- Net increase (decrease) in cash and cash equivalents 26,394 10,286 Cash and cash equivalents at beginning of period 13,450 1,154 -------- -------- Cash and cash equivalents at end of period $ 39,844 $ 11,440 ======== ======== See accompanying notes -5- 6 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 May 31, 1997 and August 31, 1996 are as follows: May 31, 1997 August 31, 1996 ------------ --------------- (Audited) Raw materials $16,131 $11,609 Work in process 1,011 1,732 Finished products 16,910 14,838 ------- ------- $34,052 $28,179 ======= ======= -6- 7 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 15.3% and 11.9% of net sales for the three months ended May 31, 1997 and 1996, respectively, and 15.6% and 7.5% of net sales for the nine months ended May 31, 1997 and 1996, respectively. Trade accounts receivable from this customer amounted to approximately $6,480 and $615 at May 31, 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 $144 and $1,436 for the three months ended May 31, 1997 and 1996, respectively, and $2,453 and $3,065 for the nine months ended May 31, 1997 and 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 certain financial covenants and ratios. There were no amounts outstanding under this revolving line of credit at May 31, 1997. -7- 8 REXALL SUNDOWN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (Dollars in thousands) (Unaudited) 8. EVENTS SUBSEQUENT TO FISCAL YEAR END, CONTINUED 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. On July 1, 1997, the Company announced that it is engaged in substantive discussions relating to a potential merger with Twinlab Corporation, which would contemplate that the Company would issue 0.74 shares of its common stock for each outstanding share of Twinlab common stock. Any agreement would be subject to a number of conditions, including satisfactory completion of due diligence by each party, appropriate confirmation of the applicability of pooling of interests accounting, negotiation of a definitive merger agreement, Board and shareholder approval of each party, receipt of a satisfactory fairness opinion by each party's Board of Directors and regulatory approval. There can be no assurance that a definitive agreement will be reached. -8- 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, 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 May 31, 1997 Compared to Three Months Ended May 31, 1996 Net sales for the three months ended May 31, 1997 were $69.6 million, an increase of $15.0 million or 27.6% over the comparable period in fiscal 1996. Of the $15.0 million increase, sales to retailers accounted for $7.5 million, an increase of 27.9% over the comparable period in fiscal 1996. The gain in sales to retailers was primarily attributable to increased distribution 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 $7.6 million, an increase of 32.3% over the comparable period in fiscal 1996. Net sales of the Company's mail order division, SDV, decreased by $100,000 or 2.4% over the comparable period in fiscal 1996. The increase in net sales to retailers and for Rexall Showcase was also due to increased unit sales. Gross profit for the three months ended May 31, 1997 was $44.2 million, an increase of $9.8 million or 28.5% over the comparable period in fiscal 1996. As a percentage of net sales, gross profit increased from 63.1% for the three months ended May 31, 1996 to 63.5% for the three months ended May 31, 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. The increase was also due, in part, to an increase in net sales of products with higher margins, related principally to the increased net sales of Rexall Showcase as a percentage of the Company's net sales. Selling, general and administrative expenses for the three months ended May 31, 1997 were $31.1 million, an increase of $5.9 million or 23.3% over the comparable period in fiscal 1996. As a percentage of net sales, such expenses decreased from 46.3% for the three months ended May 31, 1996 to 44.7% for the comparable period in fiscal 1997, primarily as a result of increased net sales and -9- 10 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 May 31, 1997 was $1.0 million, as compared to $505,000 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 third 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 $14.1 million for the three months ended May 31, 1997, an increase of $4.5 million or 45.9% over the comparable period in fiscal 1996. As a percentage of net sales, income before income tax provision increased from 17.8% for the three months ended May 31, 1996 to 20.3% for the comparable period in fiscal 1997. Net income was $9.3 million for the current fiscal quarter, an increase of $3.1 million or 51.3% from the prior year's comparable quarter, due to the reasons described above. Nine Months Ended May 31, 1997 Compared to Nine Months Ended May 31, 1996 Net sales for the nine months ended May 31, 1997 were $184.2 million, an increase of $48.6 million or 35.8% over the comparable period in fiscal 1996. Of the $48.6 million increase, sales to retailers accounted for $30.0 million, an increase of 44.8% 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, increased distribution and an increase in the Company's base business. Net sales of the Company's direct sales subsidiary, Rexall Showcase, increased by $18.3 million, an increase of 32.6% over the comparable period in fiscal 1996. The increase in direct sales was partially due to the nine months ended May 31, 1997 reflecting a full period of operations for Rexall Showcase in Mexico and Korea. Net sales of the Company's mail order division, SDV, increased by $300,000 or 2.2% 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 nine months ended May 31, 1997 was $116.1 million, an increase of $32.9 million or 39.6% over the comparable period in fiscal 1996. As a percentage of net sales, gross profit increased from 61.3% for the nine months ended May 31, 1996 to 63.0% for the nine months ended May 31, 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. Selling, general and administrative expenses for the nine months ended May 31, 1997 were $80.0 million, an increase of $17.8 million or 28.6% over the comparable period in fiscal 1996. As a percentage of net sales, such expenses decreased from 45.9% for the nine months ended May 31, 1996 to 43.4% 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 nine months ended May 31, 1997 was $3.0 million, as compared to $794,000 for the comparable period in fiscal 1996. Such increase was primarily a result of investment of -10- 11 the Company's available cash balances, which were higher in the first nine months 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 $39.1 million for the nine months ended May 31, 1997, an increase of $17.4 million or 79.7% over the comparable period in fiscal 1996. As a percentage of net sales, income before income tax provision increased from 16.1% for the nine months ended May 31, 1996 to 21.2% for the comparable period in fiscal 1997. Net income was $25.1 million for the first nine months of the current fiscal year, an increase of $11.3 million or 82.2% from the first nine 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 $135.9 million as of May 31, 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 nine months ended May 31, 1997 was $25.7 million compared to $15.1 million for the comparable period in fiscal 1996. Net cash provided by operating activities increased primarily due to increased net income. Net cash used in investing activities was $63.5 million for the nine months ended May 31, 1997 compared to $9.2 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 nine months ended May 31, 1997, which primarily represents investment of the net proceeds from the Offering. Net cash provided by financing activities was $64.2 million for the nine months ended May 31, 1997 compared to $4.3 million for the comparable period in fiscal 1996 reflecting $62.3 million of net proceeds received from the Offering in the first nine months of fiscal 1997. 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. -11- 12 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. -12- 13 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 - Letter Agreement dated March 27, 1997 between the Company and Carl DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Carl DeSantis. 10.2 - Letter Agreement dated March 27, 1997 between the Company and Christian Nast amending that certain Employment Agreement dated April 24, 1995 between the Company and Christian Nast. 10.3 - Letter Agreement dated March 27, 1997 between the Company and Dean DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Dean DeSantis. 10.4 - Letter Agreement dated March 27, 1997 between the Company and Damon DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Damon DeSantis. 10.5 - Letter Agreement dated March 27, 1997 between the Company and Nickolas Palin amending that certain Employment Agreement dated April 1, 1995 between the Company and Nickolas Palin. 10.6 - Letter Agreement dated March 27, 1997 between the Company and Geary Cotton amending that certain Employment Agreement dated April 1, 1995 between the Company and Geary Cotton. 10.7 - Letter Agreement dated March 27, 1997 between the Company and Richard Werber amending that certain Employment Agreement dated April 1, 1995 between the Company and Richard Werber. -13- 14 PART II - OTHER INFORMATION, CONTINUED 10.8 - Third Forbearance Agreement dated April 1, 1997 between Oakmont Pharmaceuticals, Inc. and the Company. 11 - Earnings Per Share Computation. 27 - Financial Data Schedule (for SEC use only) (b) Reports on Form 8-K. None. -14- 15 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 11, 1997 By: /s/ Carl DeSantis ------------------------------------ Carl DeSantis, Chairman of the Board Date: July 11, 1997 By: /s/ Geary Cotton ------------------------------------ Geary Cotton, Vice President-Finance, Chief Financial Officer, Treasurer and Chief Accounting Officer -15- 16 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - -------------- ----------- 10.1 Letter Agreement dated March 27, 1997 between the Company and Carl DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Carl DeSantis. 10.2 Letter Agreement dated March 27, 1997 between the Company and Christian Nast amending that certain Employment Agreement dated April 24, 1995 between the Company and Christian Nast. 10.3 Letter Agreement dated March 27, 1997 between the Company and Dean DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Dean DeSantis. 10.4 Letter Agreement dated March 27, 1997 between the Company and Damon DeSantis amending that certain Employment Agreement dated April 1, 1995 between the Company and Damon DeSantis. 10.5 Letter Agreement dated March 27, 1997 between the Company and Nickolas Palin amending that certain Employment Agreement dated April 1, 1995 between the Company and Nickolas Palin. 10.6 Letter Agreement dated March 27, 1997 between the Company and Geary Cotton amending that certain Employment Agreement dated April 1, 1995 between the Company and Geary Cotton. 10.7 Letter Agreement dated March 27, 1997 between the Company and Richard Werber amending that certain Employment Agreement dated April 1, 1995 between the Company and Richard Werber. 10.8 Third Forbearance Agreement dated April 1, 1997 between Oakmont Pharmaceuticals, Inc. and the Company. 11 Earnings Per Share Computation. 27 Financial Data Schedule (for SEC use only)