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 NOVEMBER 30, 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 has (1) filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. X Yes No
--- ---
As of January 9, 1998, the number of shares outstanding of the Registrant's
Common Stock was 68,106,054.
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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
November 30, 1997 and August 31, 1997 .................. 3
Consolidated Statements of Operations for the
Three Months Ended November 30, 1997 and 1996 .......... 4
Consolidated Statements of Cash Flows for the
Three Months Ended November 30, 1997 and 1996 .......... 5
Notes to Consolidated Financial Statements ............. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ....... 8
PART II. OTHER INFORMATION ...................................... 11
SIGNATURES ...................................................... 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
November 30, August 31,
1997 1997
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 78,987 $ 81,942
Marketable securities 19,985 24,829
Trade accounts receivable, net 40,246 22,294
Inventory 45,273 38,623
Prepaid expenses and other current assets 8,083 5,941
Net current assets of discontinued operations 4,076 4,076
--------- ---------
Total current assets 196,650 177,705
Property, plant and equipment, net 45,905 33,789
Other assets 13,261 12,620
--------- ---------
Total assets $ 255,816 $ 224,114
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,644 $ 11,781
Accrued expenses and other current liabilities 26,526 20,295
--------- ---------
Total current liabilities 44,170 32,076
Other liabilities 512 449
--------- ---------
Total liabilities 44,682 32,525
--------- ---------
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: 67,880,901 and 67,260,018, respectively 679 673
Capital in excess of par value 129,672 123,402
Retained earnings 81,554 68,004
Cumulative translation adjustment (771) (490)
--------- ---------
Total shareholders' equity 211,134 191,589
--------- ---------
Total liabilities and shareholders' equity $ 255,816 $ 224,114
========= =========
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
November 30,
----------------------------------
1997 1996
------------ ------------
Net sales $ 102,493 $ 56,070
Cost of sales 39,982 20,679
------------ ------------
Gross profit 62,511 35,391
Selling, general and administrative expenses 42,327 24,455
------------ ------------
Operating income 20,184 10,936
Other income (expense):
Interest income 1,208 569
Other income 33 --
Interest expense (69) (9)
------------ ------------
Income before income tax provision 21,356 11,496
Income tax provision 7,806 4,254
------------ ------------
Net income $ 13,550 $ 7,242
============ ============
Net income per common share $ 0.19 $ 0.11
============ ============
Weighted average common shares outstanding 69,911,035 64,844,214
============ ============
See accompanying notes
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REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
November 30,
--------------------------
1997 1996
-------- --------
Cash flows provided by (used in) operating activities:
Net income $ 13,550 $ 7,242
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 983 754
Amortization 320 482
Deferred income taxes (422) 44
Foreign exchange translation adjustment (281) (95)
Compensatory stock options issued 238 --
Changes in assets and liabilities:
Trade accounts receivable (17,952) (4,588)
Inventory (6,650) 496
Prepaid expenses and other current assets (2,142) (751)
Other assets (505) (656)
Accounts payable 5,863 (512)
Accrued expenses and other current liabilities 9,664 4,364
Other liabilities 63 (21)
Discontinued operations - non cash charges
and changes in assets and liabilities -- (72)
-------- --------
Net cash provided by operating activities 2,729 6,687
-------- --------
Cash flows provided by (used in) investing activities:
Acquisition of property, plant and equipment (13,099) (1,712)
Payments for purchase of marketable securities (15,595) --
Proceeds from sale of marketable securities 20,439 5,988
Proceeds from sale of fixed assets -- 16
Other -- 186
-------- --------
Net cash provided by (used in) investing activities (8,255) 4,478
-------- --------
Cash flows provided by (used in) financing activities:
Net proceeds from offering -- 51,870
Exercise of options to purchase common stock 2,571 599
-------- --------
Net cash provided by financing activities 2,571 52,469
-------- --------
Net increase (decrease) in cash and cash equivalents (2,955) 63,634
Cash and cash equivalents at beginning of period 81,942 13,450
-------- --------
Cash and cash equivalents at end of period $ 78,987 $ 77,084
======== ========
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, 1997, as filed with the
Securities and Exchange Commission. The August 31, 1997 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.
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). Net income per share of
common stock is presented in the accompanying consolidated statements
of income on an adjusted basis, which gives retroactive effect to a
two-for-one stock split paid on October 23, 1997 to shareholders of
record on October 7, 1997. All references to the number of shares of
common stock, except shares authorized, and to per share data in the
consolidated financial statements have been adjusted to reflect the
stock split on a retroactive basis.
3. INVENTORY
The components of inventory as of November 30, 1997 and August
31, 1997 are as follows:
NOVEMBER 30, 1997 AUGUST 31, 1997
----------------- ---------------
Raw materials, bulk tablets
and capsules $24,307 $20,429
Work in process 5,013 1,147
Finished products 15,953 17,047
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$45,273 $38,623
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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 30% and 13% of net sales for the three months ended
November 30, 1997 and 1996, respectively. Trade accounts receivable
from this customer amounted to approximately $24,240 and $11,310 at
November 30, 1997 and August 31, 1997, 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 $3,467 and $981 for the three months ended
November 30, 1997 and 1996, respectively.
7. RECENT ACCOUNTING STANDARDS
SFAS No. 128 changes the method of calculating earnings per
share. The statement requires the presentation of "basic" earnings per
share ("EPS") and "diluted" EPS on the face of the income statement.
SFAS No. 128 is effective for financial statements issued for periods
ended after December 15, 1997 and requires restatement of all
prior-period EPS data presented. The Company has not yet determined the
impact, if any, the adoption will have on the Company's financial
statements.
8. SUBSEQUENT EVENTS
On December 24, 1997, the Company signed a definitive
agreement to merge with Richardson Labs, Inc., a provider of diet and
weight management supplements. To consummate the transaction, which
will be structured as a pooling of interests, the Company will issue
approximately 2,885,000 shares of its common stock to Richardson Labs'
shareholders. The transaction is subject to certain approvals and is
expected to close in late January 1998.
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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.
Revenue from the sale of the Company's products is recognized at the
time products are shipped. Net sales are net of all discounts, allowances,
returns and credits. Initial costs associated with acquiring sales agreements
with certain retail customers are amortized over the expected term of the
relevant agreement and the amortization of such costs is recorded as a reduction
in net sales.
Gross margins are impacted by changes in the relative sales mix among
the Company's channels of distribution. In particular, gross margin is
positively impacted if sales of the Company's direct sales subsidiary, Rexall
Showcase International, Inc. ("Rexall Showcase") increase as a percentage of net
sales because such products command a higher gross margin. In a related manner,
selling, general and administrative expenses as a percentage of net sales are
typically 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 decrease as a percentage of net sales and
selling, general and administrative expenses will increase as a percentage of
net sales. Historically, operating margins from sales to retailers and mail
order have been higher than operating margins from the Rexall Showcase division.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
NOVEMBER 30, 1996
Net sales for the three months ended November 30, 1997 were $102.5
million, an increase of $46.4 million or 82.8% over the comparable period in
fiscal 1997. Of the $46.4 million increase, sales to retailers accounted for $32
million, an increase of 107.1% over the comparable period in fiscal 1997. The
increase in sales to retailers was primarily attributable to increased
distribution as well as an increase in the Company's existing customer base
business. Net sales of Rexall Showcase increased by $14.1 million, an increase
of 63.3% over the comparable period in fiscal 1997. Net sales of the Company's
mail order division, SDV, increased by $321,000 or 8.3% over the comparable
period in fiscal 1997. The increase in net sales in each division was primarily
due to increased unit sales.
Gross profit for the three months ended November 30, 1997 was $62.5
million, an increase of $27.1 million or 76.6% over the comparable period in
fiscal 1997. As a percentage of net sales, gross profit decreased from 63.1% for
the three months ended November 30, 1996 to 61.0% for the three months ended
November 30, 1997. The decrease in gross margin was related principally to the
decreased net sales of Rexall Showcase as a percentage of the Company's net
sales.
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Selling, general and administrative expenses for the three months ended
November 30, 1997 were $42.3 million, an increase of $17.9 million or 73.1% over
the comparable period in fiscal 1997. As a percentage of net sales, such
expenses decreased from 43.6% for the three months ended November 30, 1997 to
41.3% 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. Such
commission expense increased by $7.8 million over the comparable period in
fiscal 1997. The Company also had approximately $3.3 million in expenses related
to national television advertising for which there was no corresponding expense
in the same period last year.
Interest income for the three months ended November 30, 1997 was $1.2
million, as compared to $569,000 for the comparable period in fiscal 1997. Such
increase was primarily a result of investment of the Company's available cash
balances, which were higher in the first quarter of fiscal 1998 than the
comparable period in fiscal 1997.
Income before income tax provision was $21.4 million for the three
months ended November 30, 1997, an increase of $9.9 million or 85.8% over the
comparable period in fiscal 1997. As a percentage of net sales, income before
income tax provision increased from 20.5% for the three months ended November
30, 1996 to 20.8% for the comparable period in fiscal 1998. Net income was $13.6
million for the current fiscal quarter, an increase of $6.3 million or 87.1%
from the prior year's comparable quarter, 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 $152.5 million as of November 30,
1997, compared to $145.6 million as of August 31, 1997. This increase was
principally the result of increased inventory and trade accounts receivable due
to higher sales in the first quarter of fiscal 1998.
Net cash provided by operating activities for the three months ended
November 30, 1997 was $2.8 million compared to $6.8 million for the comparable
period in fiscal 1997. Net cash provided by operating activities decreased
primarily due to increased accounts receivable and inventory, partially offset
by increases in net income, accounts payable and accrued expenses, all of which
were primarily a result of increased sales in the first quarter of fiscal 1998.
Net cash used in investing activities was $8.3 million for the three months
ended November 30, 1997 compared to $4.5 million provided by investing
activities for the comparable period in fiscal 1997. Net cash used in investing
activities increased primarily due to capital expenditures of $13.1 million,
partially offset by net proceeds from the purchase and sale of marketable
securities of $4.8 million. Net cash provided by financing activities was $2.5
million for the three months ended November 30, 1997 compared to $52.4 million
for the comparable period in fiscal 1997 reflecting $51.9 million of net
proceeds received from the public offering in the first quarter 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.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
SFAS No. 128 changes the method of calculating earnings per share. The
statement requires the presentation of "basic" earnings per share ("EPS") and
"diluted" EPS on the face of the income statement. SFAS No. 128 is effective for
financial statements issued for periods ended after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company has not
yet determined the impact, if any, the adoption will have on the Company's
financial statements.
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 Securities and Exchange Commission.
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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.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 Letter Agreement dated September 1, 1997 by and
between the Company and Carl DeSantis (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and Carl
DeSantis).
10.2 Letter Agreement dated September 1, 1997 by and
between the Company and Christian Nast (amending
the terms of that certain Employment Agreement
dated April 24, 1995 between the Company and
Christian Nast).
10.3 Letter Agreement dated September 1, 1997 by and
between the Company and Dean DeSantis (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and Dean
DeSantis).
10.4 Letter Agreement dated September 1, 1997 by and
between the Company and Damon DeSantis (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and
Damon DeSantis).
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10.5 Letter Agreement dated September 1, 1997 by and
between the Company and Nickolas Palin (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and
Nickolas Palin).
10.6 Letter Agreement dated September 1, 1997 by and
between the Company and Geary Cotton (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and
Geary Cotton).
10.7 Letter Agreement dated September 1, 1997 by and
between the Company and Richard Werber (amending
the terms of that certain Employment Agreement
dated April 1, 1995 between the Company and
Richard Werber).
10.8 Employment Agreement dated November 3, 1997 by and
between the Company and Gerry Holly.
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: January 13, 1998 By: /s/ Carl DeSantis
----------------------------------------
Carl DeSantis, Chairman of the Board
Date: January 13, 1998 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 Letter Agreement dated September 1, 1997 by and between the
Company and Carl DeSantis (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Carl DeSantis).
10.2 Letter Agreement dated September 1, 1997 by and between the
Company and Christian Nast (amending the terms of that certain
Employment Agreement dated April 24, 1995 between the Company
and Christian Nast).
10.3 Letter Agreement dated September 1, 1997 by and between the
Company and Dean DeSantis (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Dean DeSantis).
10.4 Letter Agreement dated September 1, 1997 by and between the
Company and Damon DeSantis (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Damon DeSantis).
10.5 Letter Agreement dated September 1, 1997 by and between the
Company and Nickolas Palin (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Nickolas Palin).
10.6 Letter Agreement dated September 1, 1997 by and between the
Company and Geary Cotton (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Geary Cotton).
10.7 Letter Agreement dated September 1, 1997 by and between the
Company and Richard Werber (amending the terms of that certain
Employment Agreement dated April 1, 1995 between the Company
and Richard Werber).
10.8 Employment Agreement dated November 3, 1997 by and between the
Company and Gerry Holly.
11 Earnings Per Share Computation
27 Financial Data Schedule (for SEC use only)