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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
851 Broken Sound Parkway, N.W.
Boca Raton, Florida 33487
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(561) 241-9400
________________________
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required 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
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares outstanding of the Registrant's common stock is
30,721,571 (as of October 10, 1996).
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is $354,608,780 (as of October 10, 1996).
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on February 6, 1997, which will be filed with the SEC,
are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Rexall Sundown, Inc. (the "Company") develops, manufactures, markets and
sells vitamins, nutritional supplements and consumer health products through
three channels of distribution: sales to retailers; direct sales through
independent distributors; and mail order. The Company offers a broad line of
approximately 1,500 products consisting of approximately 1,900 stock keeping
units ("SKUs"), including vitamins in both multivitamin and single-entity
formulas, minerals, herbals, homeopathic remedies, weight management products,
skin care products and over-the-counter ("OTC") pharmaceuticals.
The Company's principal executive offices are located at 851 Broken Sound
Parkway, NW, Boca Raton, Florida 33487 and its telephone number is (561)
241-9400. As used herein, the "Company" means Rexall Sundown, Inc. and its
subsidiaries, except where the context indicates otherwise.
INDUSTRY OVERVIEW
As reported by industry sources, the annual domestic retail market for
vitamins and nutritional supplements grew from $3.3 billion in 1991 to $4.9
billion in 1995. In the last several years, public awareness of the positive
effects of vitamins and nutritional supplements on health has been heightened
by widely publicized reports of scientific findings. Recent studies have
indicated a correlation between the regular consumption of selected vitamins
and nutritional supplements and reduced incidences of conditions such as heart
disease, cancer, stroke, osteoporosis and neural tube birth defects. The rise
of alternative medicine and the holistic health movement has also contributed
to increased sales of nutritional supplements.
The Company expects that the aging of the United States population,
together with a corresponding increased focus on preventative health measures,
will result in increased demand for vitamins and nutritional supplement
products. According to the United States Census Bureau, through 2010, the
35-and-older age group of consumers, which represents approximately 78% of
regular users of vitamin and nutritional supplements, is expected to grow
significantly faster than the general United States population. Based on a
national survey indicating that only 33% of Americans consumed vitamins and
nutritional supplements on a regular basis in 1995, the Company believes that
there is a large untapped domestic market for vitamins and nutritional
supplements. Industry sources also report that vitamin consumers are taking
more vitamins and nutritional supplements per day than in the past.
The primary channels of distribution in the vitamin and nutritional
supplement industry are: (i) mass market retailers which include mass
merchandisers, drug stores, supermarkets and discount stores; (ii) health food
stores; (iii) direct sales organizations; and (iv) mail order. Within the mass
market retailer channel, there are three primary vitamin product categories:
national brands, broadline and other brands, and private label brands. According
to industry sources, during 1994 and 1995, the market for national brands and
broadline and other brands of vitamins in the mass market was approximately 60%
of total domestic vitamin sales and the market for private label vitamins was
approximately 40% of such sales. For the first six months of calendar 1996,
industry sources indicate that the market for national brands and broadline and
other brands of vitamins in the mass market was approximately 63% of total
domestic vitamin sales and the market for private label vitamins was
approximately 37% of such sales. The national brand category primarily consists
of multivitamins and mineral products marketed under nationally advertised names
such as Centrum(R), One-A-Day(R) and Theragran(R). Broadline brands, such as the
Company's Sundown (R) brand, offer a complete range of products under one brand
name, including multivitamins, single-entity vitamins, minerals and nutritional
supplements, including herbal products. Private label products marketed under
the retailer's store brand name also offer a wide product assortment, albeit
somewhat narrower in scope than broadline brands, including national brand
equivalent formulas positioned as lower-priced "compare and save" products. The
Company believes that broadline brands have gained market share primarily at the
expense of national brands as consumers have increased their consumption of
single-entity vitamins and nutritional supplements while the market for
multivitamins has remained essentially flat.
While the retail channel of distribution for vitamins and nutritional
supplements has been consolidating, there has not yet been any significant
consolidation among the companies that manufacture and sell these products. The
vitamin and nutritional supplement industry remains fragmented, and the Company
believes that no company controls more than 10% of the market.
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SALES BY DISTRIBUTION CHANNEL
Set forth below for the periods indicated are the net sales and percent of
net sales of the Company's products through the Company's three current
distribution channels.
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------------
DISTRIBUTION CHANNEL 1992 1993 1994 1995 1996
- -------------------------------- --------------- --------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Sales to retailers:
Sundown....................... $42,112 56.7% $46,571 50.0% $ 54,216 47.5% $ 62,427 41.8% $ 71,387 38.0%
Other(1)...................... 10,293 13.9 12,231 13.2 14,050 12.3 17,722 11.8 22,728 12.1
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
Total net sales to 52,405 70.6 58,802 63.2 68,266 59.8 80,149 53.6 94,115 50.1
retailers.............
Direct sales -- Rexall 10,418 14.0 20,535 22.0 29,510 25.9 52,606 35.2 76,483 40.7
Showcase......................
Mail order -- SDV(R)............ 11,417 15.4 13,810 14.8 16,343 14.3 16,718 11.2 17,246 9.2
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
Total net sales......... $74,240 100.0% $93,147 100.0% $114,119 100.0% $149,473 100.0% $187,844 100.0%
======= ===== ======= ===== ======== ===== ======== ===== ======== =====
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(1) Rexall(R), Thompson(R), private label and Rexall Managed Care(R) sales.
SALES TO RETAILERS
For its sales of vitamins and nutritional supplements to retailers, the
Company employs a marketing strategy directed at the end-user, with an emphasis
on educating these consumers. The Company provides a wide product selection with
many unique formulations, value pricing, clear and informative labeling, timely
and innovative product introductions, and specially designed shelf organization
systems. Net sales to retailers have grown from $52.4 million in fiscal 1992 to
$94.1 million in fiscal 1996.
Sundown. The Company has been selling vitamins and nutritional supplements
under the Sundown tradename since 1976. The Sundown brand offers a broad
selection of high quality products at prices lower than comparable-quality
branded vitamins, thereby creating value for consumers as well as higher rates
of shelf inventory turnover for retailers. The Company believes that its retail
customers experience increased profits per linear shelf foot due to the high
sales velocity of the Sundown brand. According to data from Information
Resources, Inc. ("IRI"), a retail information gathering service, in the
broadline vitamin category, Sundown generates the highest rate of dollar and
unit sales per share of ACV distribution and is currently the number two brand
in dollar and unit sales, despite its availability in outlets representing only
35% of ACV sales.
Historically, a majority of the Sundown brand sales were to regional deep
discount retailers. The success of the Company's value pricing strategy and high
sales velocity has enabled the Company to increase its sales to mass
merchandisers, chain drug stores and supermarkets. In fiscal 1995, the Company
gained nationwide distribution of Sundown products to all Kmart stores. Since
May 1996, the Company has begun nationwide distribution of Sundown products to
all Wal*Mart stores and Thrifty-Payless and Eckerd drug stores. Sundown's net
sales have increased from $42.1 million in fiscal 1992 to $71.4 million in
fiscal 1996.
The Company sells approximately 290 vitamins and nutritional supplements
under the Sundown tradename, including among others, vitamin C, vitamin E,
multivitamins, folic acid, calcium, lecithin, selenium, magnesium, iron,
potassium, herbals and food supplements. Because the Company offers most of
its products in varying quantities, the Sundown line consists of approximately
750 SKUs. Vitamins and minerals are sold as single-entity supplements,
multivitamin combinations and in varying potency levels, and are offered in
tablet, softgel, two-piece capsule, chewable, liquid and powder forms to
accommodate various consumer preferences. The Company also offers national
brand comparisons under the Sundown brand which have comparable multivitamin
formulas to such products as Centrum(R), One-A-Day(R) and Theragran(R).
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The Company monitors new and developing health and nutrition trends in
order to anticipate consumer demand and to introduce new products and
reformulate existing products. Examples of the Company's anticipation of and
response to consumer demand in the past two years include the introduction of
(i) three new herbal and food supplements (Saw Palmetto, Hawthorn Berry and
Bilberry) to complement the early 1995 introduction of 13 herbal products; (ii)
Fortified Pycnogenol(R), which includes additional key antioxidants Coenzyme
Q-10, Selenium and Grape Seed Extract (the Pycnogenol(R) trademark is owned by
a third party); (iii) Grape Seed Extract, an antioxidant that provides abundant
amounts of proanthocyanidins; (iv) Melatonin at the lower 300 mcg level to
allow consumers to better regulate their dosage; (v) Intelligent Multiple(R),
a multivitamin that excludes vitamins C and E, which consumers often take
separately; and (vi) E-400/Folic Acid, fortified with vitamins B6 and B12,
which, when combined, play an important role in energy production and the
formation of red blood cells. The Company has not incurred material research
and development expenses with respect to vitamins and nutritional supplements.
Product concepts are internally developed by the Company's product development
team, which consists of representatives of the Company's research and
development, sales and marketing and purchasing departments and members of
senior management. See "-- Product Development."
The Company markets its Sundown vitamin and nutritional supplements
internationally through a network of distributors. The Company has exclusive and
non-exclusive distribution agreements in foreign countries throughout the world,
with the majority of international revenues presently being generated from South
America. The Company believes that certain markets in South America, the Middle
East and the Far East represent the most attractive international outlets for
its products. All international sales are settled in United States currency.
Other Sales to Retailers. In addition to sales of Sundown products, the
Company's other sales to retailers include sales under the Rexall brand to
wholesalers, convenience stores and independent drug stores, the Thompson brand
to health food stores, private label products to selected mass merchandisers and
drug stores and the Rexall Managed Care brand to HMOs, hospitals and long-term
care facilities.
In 1989, the Company purchased the Rexall tradename, under which health
products have been marketed since 1903. An independent study has shown that the
Rexall tradename is widely recognized by households in the United States. The
Company's marketing strategy with respect to both its Rexall vitamin and OTC
drug lines is to emphasize a national branded product at generic prices. The
Company markets a full line of approximately 100 moderately-priced vitamins and
nutritional supplements under the Rexall tradename, primarily to independent
drug stores, wholesalers and convenience stores. In addition, approximately 75
OTC pharmaceutical products, including aspirin, cold remedies and analgesic
formulas, are offered under the Rexall tradename in formulas comparable to
nationally advertised products such as Bayer(R), Advil(R), Nuprin(R),
Tylenol(R), Contac(R), Robitussin(R), Sudafed(R), Benadryl(R) and Mylanta(R).
Recently, the Company has begun to license the Rexall name in various
international markets for vitamins and OTC pharmaceuticals.
In 1990, the Company acquired the operating assets of Wm. T. Thompson Co.,
Inc., which was founded in 1935, including the Thompson trademark. The "Rainbow"
line of Thompson vitamins is sold through health food stores and consists of
approximately 135 products in approximately 160 SKUs, many of which have high
potencies and are unique to Thompson. The Rainbow line represents the Company's
premium line, and is priced competitively with other similar vitamin products
sold in health food stores. Because the Company's targeted customer for Thompson
products is the sophisticated vitamin consumer, the Company's strategy includes
constantly monitoring new and developing trends in health and nutrition and
adapting its product offerings accordingly.
While the Company does not emphasize private label manufacturing, in select
instances the Company offers these products to accommodate specific customer
requests. For fiscal 1996, approximately 3.8% of the Company's net sales were
from private label products.
The Rexall Managed Care Division was formed in 1995 to market and sell
vitamins, nutritional supplements and OTC pharmaceuticals to the managed care
marketplace with a focus on HMOs, hospitals and long-term care facilities. The
Rexall Managed Care line currently consists of approximately 70 OTC
pharmaceuticals, 55 vitamin products and three prescription products.
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DIRECT SALES THROUGH INDEPENDENT DISTRIBUTORS
In 1990, the Company formed Rexall Showcase International, Inc. ("Rexall
Showcase") its network marketing subsidiary, to market and sell unique health
and wellness products through a sales force of independent distributors. Rexall
Showcase products include weight management products, homeopathic medicines,
personal care products, health and nutritional supplements and water
filtration systems. Rexall Showcase products are specially formulated and
packaged only for this distribution channel and are not available through
retailers. Rexall Showcase's independent distributors are not required to make
any inventory purchases and, to become a distributor, must only purchase a
$49.50 distributor kit. Rexall Showcase recently initiated its international
expansion by commencing operations in Mexico in February 1996 and South Korea
in April 1996 and intends to commence operations in selected other countries
in the future. Rexall Showcase's net sales have increased from $10.4 million
in fiscal 1992 to $76.5 million in fiscal 1996.
The Rexall Showcase distributor kit includes product brochures and
information, sales aids, order forms and other business information. Such
distributor kits are sold at approximately Rexall Showcase's cost. Rexall
Showcase processes, fills and ships orders from the Company's distribution
center, usually within a 24 hour period after the order is placed by the
distributor. Rexall Showcase guarantees the quality of its products and
customers may return any product to the selling distributor within 30 days for a
total refund or replacement. Prior to placing orders for additional products,
distributors are required to certify that they have sold at least 70% of their
prior order. In the event of termination of the relationship between Rexall
Showcase and a distributor, Rexall Showcase will repurchase from such
distributor all resaleable inventory purchased by such distributor within 12
months of such termination for 90% of the original net cost to the distributor.
To date, such returns have not been material.
Rexall Showcase's success is dependent upon continued sales of its products
to consumers by its distributors and the ongoing recruitment and maintenance of
a motivated, experienced network of distributors. Rexall Showcase sponsors and
conducts regional and national conventions in order to educate and recruit
distributors, and employs various technologies and innovations which allow for
fast and efficient communication and service between Rexall Showcase, its
distributors and their customers. These include such tools as (i) the Autoship
program, which allows products to be regularly shipped each month directly from
Rexall Showcase to the end-user; (ii) voice mail, which allows Rexall Showcase
or its distributors to send phone messages to large numbers of distributors at
once or communicate to specific distributors; and (iii) the private Rexnet(SM)
satellite network, which the Company uses to broadcast educational and training
programs describing Rexall Showcase products and business opportunities to
distributors, prospective distributors and customers. The Company also maintains
a dedicated department to provide information and assistance to distributors.
The Company publishes and distributes a bi-monthly newsletter to inform its
distributors of recent developments and other relevant information and to
recognize the accomplishments of certain distributors. Rexall Showcase also
offers participation in a stock option plan and stock purchase plan to
distributors who reach certain sales targets.
MAIL ORDER
The Company's mail order division markets and sells products primarily
under its SDV brand directly to consumers through catalogs and direct mailings.
This division targets approximately 200,000 of the most active customers out of
an approximate 565,000 household proprietary mailing list developed by the
Company since its inception in 1976. The Company's SDV division offers
approximately 420 products in approximately 940 SKUs, including a full line of
vitamins, minerals and other nutritional supplements along with selected
health-related products at prices which are competitive with those of other
mail order companies. Net sales for the Company's SDV division have increased
from $11.4 million in fiscal 1992 to $17.2 million in fiscal 1996. As the
Company has focused primarily on its Sundown brand and Rexall Showcase, the
Company has not allocated significantly increased resources to its mail order
division.
SALES SUPPORT AND CUSTOMER SERVICES FOR RETAILERS
The Company utilizes its information systems and staff of sales and
customer support professionals to provide retailers with a comprehensive array
of services. The Company seeks to assist the retailer with sales initiatives,
sales data analyses and marketing and merchandising programs, all of which are
designed to maximize in-store awareness of the Company's products and improve
results in the retailer's vitamin and nutritional supplement category. For a
number of its retail customers, the Company serves as a category manager, at no
additional cost to the retailer, actively analyzing, monitoring and advising on
product selection, profitability, sales velocity and overall performance of the
retailer's entire vitamin and nutritional supplement category. To help optimize
the performance of its retailers' departments, as well as sales of the Company's
products, the Company develops computerized plan-o-grams designed to efficiently
utilize shelf space and direct consumers' attention to the Company's products.
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In addition, the Company provides marketing support for its product lines
by developing customized marketing programs. The Company's graphic arts
department provides customer support by designing packaging displays and point
of purchase material for customers as well as informative, easy-to-read labels
and packages for the Company's products. The Company believes that its
double-sided label gives it a shelf-facing advantage appreciated by retailers.
Support for retail sales is further provided through various in-store
merchandising centers, including information pamphlets for consumers, displays'
featuring key and topical products and "Nutrition News," a Company publication
directed to pharmacists. The Company employs and contracts with merchandisers
who periodically visit certain retailers to restock the shelves, place new
orders and monitor and update the presentation of the Company's product line
through floor displays, side wings, shelf-talkers, store signs, promotional
packs and other individualized promotions.
To further support sales, the Company has historically expended
approximately 2% of its net sales on advertising. To date, this spending has
primarily been in the form of cooperative support to retailers; however, the
Company has also conducted some brand advertising on a limited basis. In
addition, Dick Clark is the Company's national spokesperson, Sundown is the
official vitamin brand of the Miami Dolphins and the Company sponsors various
sports personalities and events. In the future, the Company expects to use
various forms of mass media advertisement to build the national reputation and
recognition of its brands, primarily Sundown.
At October 1, 1996, the Company had a total sales force of approximately 30
employees responsible for accounts located throughout the United States, who are
paid on a salary and commission basis. In addition, the Company utilizes a
national brokerage alliance of approximately 70 independent representative
organizations in the United States and internationally, substantially all of
which sell the Company's brands on an exclusive basis in their respective
product categories. The Company also had a total of approximately 80 employees
devoted to customer service and support for retailers.
PRODUCT DEVELOPMENT
The Company consistently and timely introduces new and innovative products.
New product ideas are generated from a variety of sources, including clinical
studies reported in scientific and medical periodicals such as the New England
Journal of Medicine and the Journal of the American Medical Association. The
Company also responds to suggestions from vendors and consumers. Such product
ideas are developed by the Company's product development team which consists of
representatives of the Company's research and development, sales and marketing
and purchasing departments and members of senior management. For select
products, the Company's product development team is assisted by independent
consultants. The ideas are then submitted to the Company's operations
department which determines the overall feasibility of developing and producing
the product. As part of this overall feasibility analysis, the Company's
regulatory department conducts a thorough investigation of the safety and
potential regulatory issues with respect to the new product, and reviews any
patent and trademark issues. Following the regulatory department's review, the
Company's purchasing department obtains any raw materials necessary to produce
the new product and, after applicable testing, the Company begins production of
an initial pilot sample to study various characteristics of the products. The
Company's technical services department conducts tests on the pilot sample to
ensure that the new product meets all applicable regulatory and internal
quality standards. Based on these tests, final labels and product
specifications, including any substantiated statements of nutritional support,
such as structure and function claims for the new product, are developed, along
with the final costs of production which are reviewed by the financial and
marketing teams to determine that expected margins can be obtained based on the
anticipated sales price. The Company has typically been able to complete the
cycle from product concept to final production in a period ranging from several
weeks to several months. During fiscal 1996, the Company introduced 15 new
products for Sundown, 10 new products for Rexall Showcase and 24 new products
for other divisions.
MANUFACTURING AND QUALITY CONTROL
In June 1994, the Company commenced manufacturing vitamin tablets at its
82,000 square foot plant located adjacent to the Company's administrative office
building in Boca Raton, Florida. The Company's vitamin manufacturing facility
enables the Company to better ensure continued sources of supply, reduce cost of
goods sold and maintain high product quality. The Company recently began
manufacturing two-piece capsules at this facility. Currently, the Company
manufactures approximately 60% of its products. The balance of the Company's
vitamins and nutritional products are purchased from independent third parties
that manufacture such products to the Company's specifications and standards.
At this time, the Company does not believe it is cost-effective to manufacture
softgels and, accordingly, it will continue to purchase these products from
independent suppliers. In the future, the Company will continue to monitor the
cost of manufacturing other products in order to determine whether in-house
manufacturing of such products would be cost-effective. The Company purchases
all of its OTC pharmaceuticals from various independent suppliers. The
Company's manufacturing and distribution operations employ over 350 persons and
have recently been enhanced by the opening of its western distribution facility
in Sparks, Nevada.
The Company emphasizes quality control. All of the Company's products are
manufactured in accordance with the applicable CGMPs of the FDA and other
applicable regulatory and compendial standards, such as the United States
Pharmacopeia ("USP"). All raw materials and finished products undergo various
testing procedures, including sample testing, weight testing, purity testing
and, where required, microbiological testing. In November 1995, H.V. Shuster,
Inc., an independent quality assurance and testing service, awarded the Company
its highest rating for vitamin manufacturing companies for its vitamin
manufacturing facility and operations, including its manufacturing, testing and
quality control procedures.
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Upon receipt by the Company of raw materials or finished products such as
tablets or softgels at its manufacturing facilities, such raw materials or
products are placed in quarantine and tested by the Company's technical services
department. When the raw materials released from quality control are ready for
production, they are blended and produced into tablets or two-piece capsules.
The principal raw materials used in the manufacturing process are natural and
synthetic vitamins, which are purchased by the Company from bulk manufacturers
in the United States and internationally and are believed to be readily
available from numerous sources. Although the Company believes that all of its
sources of raw materials and products are reliable, the Company's results of
operations could be adversely impacted should it be forced to find replacement
sources of supply on short notice.
GOVERNMENT REGULATION
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission (the "FTC"),
the Consumer Products Safety Commission, the United States Department of
Agriculture, the United States Postal Service, the United States Environmental
Protection Agency and the Occupational Safety and Health Administration. These
activities are also regulated by various agencies of the states, localities and
foreign countries, in which the Company's products are sold. In particular, the
FDA regulates the safety, manufacturing, labeling and distribution of dietary
supplements, including vitamins, minerals and herbs, food additives, food
supplements, OTC and prescription drugs and cosmetics. In addition, the FTC has
overlapping jurisdiction with the FDA to regulate the labeling, promotion and
advertising of dietary supplements, OTC drugs, cosmetics and foods.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994. DSHEA amends the Federal Food, Drug and Cosmetic
Act by defining dietary supplements, which include vitamins, minerals,
nutritional supplements and herbs as a new category of food separate from
conventional food. DSHEA provides a regulatory framework to ensure safe, quality
dietary supplements and the dissemination of accurate information about such
products. Under DSHEA, the FDA is generally prohibited from regulating dietary
supplements as food additives or as drugs unless product claims, such as claims
that a product may heal, mitigate, cure or prevent an illness, disease or
malady, trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997, although final regulations have not been
published and the FDA has indicated that implementation will be delayed. DSHEA
permits substantiated, truthful and non-misleading statements of nutritional
support to be made in labeling, such as statements describing general well-being
resulting from consumption of a dietary ingredient or the role of a nutrient or
dietary ingredient in affecting or maintaining structure or function of the
body. Any statement of nutritional support beyond traditional claims must be
accompanied by disclosure that the FDA has not evaluated such statement and that
the product is not intended to cure or prevent any disease. The Company
anticipates that the FDA will promulgate CGMPs which are specific to dietary
supplements and require at least some of the quality control provisions
contained in the CGMPs for drugs. The Company currently manufactures its
vitamins and nutritional supplement products in compliance with the applicable
food CGMPs.
The FDA has proposed but not finalized regulations to implement DSHEA. The
Company cannot determine what effect such regulations, when promulgated, will
have on its business in the future. Such regulations are likely to require
expanded or different labeling for the Company's vitamins and nutritional
supplement products and could, among other things, require the recall,
reformulation or discontinuance of certain products, additional recordkeeping,
warnings, notification procedures and expanded documentation of the properties
of certain products and scientific substantiation regarding ingredients, product
claims, safety or efficacy. The Company believes that it is in material
compliance with all applicable laws.
DSHEA created two new governmental bodies. The Commission on Dietary
Supplements was established for two years to provide recommendations for the
regulation of supplement labeling and health claims, including procedures for
making disease-related claims. The Office of Dietary Supplements, established
within the National Institute of Health, is charged with coordinating research
on dietary supplements and disease prevention, compiling research results, and
advising the Secretary of Health and Human Services on supplement regulation,
safety and health claims.
Although the vitamin and nutritional supplement industry is subject to
regulation by the FDA and local authorities, dietary supplements, including
vitamins, minerals, herbs and nutritional supplements, now have been statutorily
affirmed as a food and not as a drug or food additive. Therefore, the regulation
of dietary supplements is far less restrictive than that imposed upon
manufacturers and distributors of drugs or food additives. Unlike food
additives, which are more pervasively regulated, and new drugs, which require
regulatory approval of formulation and labeling prior to marketing, dietary
supplement companies are authorized to make substantiated statements of
nutritional support and to market manufacturer-substantiated-as-safe dietary
supplement products without FDA preclearances. Failure to comply with applicable
FDA requirements can result in sanctions being imposed on the Company or the
manufacturers of its products, including warning letters, fines, product recalls
and seizures.
The OTC pharmaceutical products distributed by the Company's Rexall, Rexall
Showcase and Rexall Managed Care divisions are subject to regulation by a number
of federal and state governmental agencies. In particular, the FDA regulates the
formulation, manufacture, packaging and labeling of all OTC pharmaceutical
products. Rexall Showcase is subject to regulation under various international,
state and local laws which include provisions regulating, among other things,
the operations of direct sales programs.
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COMPETITION
The market for the sale of vitamins and nutritional supplements is highly
competitive. Competition is based principally upon price, quality of products,
customer service and marketing support. There are numerous companies in the
vitamin and nutritional supplement industry selling products to retailers such
as mass merchandisers, drug store chains, independent drug stores, supermarkets
and health food stores. Most companies are privately held and the Company is
unable to precisely assess the size of such competitors. No company is believed
to control more than 10% of this market.
The market for OTC pharmaceuticals and health and beauty care products is
highly competitive. Competition is based principally upon price, quality of
products, customer service and marketing support. The Rexall brand competes with
nationally advertised brand name products and private label products.
Although Rexall Showcase competes with other health and nutritional food
companies, the Company believes its primary competition stems from direct sales
companies. The Company competes in the recruitment of independent sales people
with other direct sales organizations whose product lines may or may not compete
with the Company's products.
Although certain of the Company's competitors are substantially larger than
the Company and have greater financial resources, the Company believes that it
competes favorably with other vitamin and nutritional supplement companies and
other OTC pharmaceutical companies because of its competitive pricing, marketing
strategies, sales support and the quality, uniqueness and breadth of its of
product line.
TRADEMARKS AND PATENTS
The Company owns trademarks registered with the United States Patent and
Trademark Office or certain other countries for its Sundown(R), Thompson(R),
Rexall Showcase International(R) and Rexall(R) trademarks, and has rights to use
other names material to its business. In addition, the Company has obtained
trademarks for certain of its products including Plenamins(R), Super
Plenamins(R), SunVite(R), Ultra Max(R), Perfect Iron(R), Perfect Antioxidant(R),
Ginstamina(R), Circus Chews(R), Digest-It(R), Bios Life 2(R), In-Vigor-ol(R),
Calmplex(R), Metaba-trol(R), Nature Force(R), Human Nature(R), Mature
Choices(R), Memory Plus(R), Advanced Release Technology(R), Cardio Basics(R),
Defend-ol(R), Intern-ol(R) and Traum-ex(R). The Company has trademark and
service mark applications pending for Cellular Essentials(TM), Vascular
Complete(TM), Rexnet(SM), Rexweb(SM) and Rextel(SM). Federally registered
trademarks have perpetual life, as long as they are renewed on a timely basis
and used properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. The Company regards its trademarks and other
proprietary rights as valuable assets and believes they have significant value
in the marketing of its products. The Company vigorously protects its trademarks
against infringement. The Company owns certain patents in the United States
relating to its Bios Life 2 and Bios Life 2 Natural weight management products
and a patent for double-sided labels in the vitamin industry. Although the
Company owns the Rexall(R) trademark, none of the operating Rexall Drug Stores
are owned by the Company or have any obligation to purchase products from the
Company.
PRODUCT LIABILITY INSURANCE
The Company, like other manufacturers, wholesalers, distributors and
retailers of products that are ingested, faces an inherent risk of exposure to
product liability claims if, among other things, the use of its products results
in injury. The Company currently has product liability insurance for its
operations in amounts the Company believes is adequate for its operations. There
can be no assurance, however, that such insurance will continue to be available
at a reasonable cost, or if available, will be adequate to cover liabilities.
The Company requires that each of its suppliers certify that it carries adequate
product liability insurance covering the Company.
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EMPLOYEES
At October 1, 1996, the Company employed approximately 740 full-time
persons. None of the Company's employees is represented by a collective
bargaining unit. The Company believes that its relationship with its employees
is good.
ITEM 2. PROPERTIES.
As of August 31, 1996, the Company owned or leased the following
facilities:
APPROXIMATE EXPIRATION DATE OF
LOCATION TYPE OF FACILITY SQUARE FEET LEASED OR OWNED LEASE
- ------------------- --------------------------- -------------------- --------------- --------------------
Boca Raton, Florida Administrative Offices 58,000 Owned --
Boca Raton, Florida Manufacturing and 82,000 Owned --
Production
Boca Raton, Florida Warehouse and Distribution 100,000 Owned --
Boca Raton, Florida Warehouse and Distribution 90,000 Leased (1)
Sparks, Nevada Warehouse and Distribution 65,000 Leased September 1999
Seoul, South Korea Administrative Offices 4,700 Leased December 1996
Seoul, South Korea Distribution Service Center 5,000 Leased March 1997
Seoul, South Korea Warehouse 3,500 Leased April 1997
Mexico City, Mexico Administrative Offices, 5,600 Leased December 1997
Warehouse and Distribution
(1) This facility is subject to two leases. The lease for 60,000 square feet
of the facility expires in March 1998 and the lease for 30,000 square feet
of the facility expires in April 1997.
ITEM 3. LEGAL PROCEEDINGS.
L-Tryptophan Litigation. Numerous unrelated manufacturers, distributors,
suppliers, importers and retailers of manufactured L-tryptophan are or were
defendants in an estimated 2,000 lawsuits brought in federal and state courts
seeking compensatory and punitive damages for alleged personal injury from
ingestion of products containing manufactured L-tryptophan. The Company has
been named in 27 lawsuits, of which 25 have been settled or discontinued
through October 1, 1996 and additional suits may be filed. Prior to a request
from the FDA in November 1989 for a national, industry-wide recall, the Company
halted sales and distribution of, and also ordered a recall of, L-tryptophan
products. Subsequently, the FDA indicated that there is a strong
epidemiological link between the ingestion of the allegedly contaminated
L-tryptophan and a blood disorder known as eosinophilia myalgia syndrome
("EMS"). Investigators at the United States Center for Disease Control suspect
that a contaminant was introduced during the manufacture of the product in
Japan. While intensive independent investigations are continuing, there has
been no indication that EMS was caused by any formulation or manufacturing
fault of the Company's supplier or any of the other companies that manufactured
tablets or capsules containing L-tryptophan.
The Company and certain companies in the vitamin industry, including
distributors, wholesalers and retailers, have entered into an agreement (the
"Indemnification Agreement") with Showa Denko America, Inc. ("SDA"), under
which SDA, a United States subsidiary of a Japanese corporation, Showa Denko
K.K. ("SDK"), which appears to be the supplier of the apparently contaminated
product, has assumed the defense of all claims
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against the Company arising out of the ingestion of L-tryptophan products and
has agreed to pay the legal fees and expenses in that defense. SDA has agreed
to indemnify the Company against any judgments and to fund settlements arising
out of those actions and claims if it is determined that a cause of the
injuries sustained by the plaintiffs was a constituent in the bulk material
sold by SDA to the Company or its suppliers, except to the extent that the
Company is found to have any part of the responsibility for those injuries and
except for certain claims relating to punitive damages. While the
Indemnification Agreement remains in effect, the Company and SDA have agreed
not to institute litigation against each other relating to claims based upon
products containing L-tryptophan. In March 1993, SDK entered into an agreement
with the Company to guarantee the payment by its subsidiary, SDA, pursuant to
the Indemnification Agreement. However, it should be noted, in attempting to
prosecute claims against foreign nationals, complex legal problems arise, such
as jurisdiction, service of process, conflict of laws, enforceability of
judgments and cultural differences, among others.
It is the intention of the Company to hold SDA, and if necessary, SDK,
responsible for any liabilities and expenses incurred in connection with this
litigation, even if the Indemnification Agreement is terminated. SDA has posted
a revolving irrevocable letter of credit of $20 million to be used for the
benefit of the Company and other indemnified parties if SDA is unable or
unwilling to satisfy any claims or judgments. Although the parties have agreed
that the letter of credit will be replenished as needed, there can be no
assurance that such replenishment will occur or that there will be sufficient
funds available for the satisfaction of any and all claims or judgments. The
Company has product liability insurance, as does its supplier of L-tryptophan
products, which the Company believes provides coverage for all of its
L-tryptophan products subject to these claims, including legal defense costs.
Due to the multitude of defendants, the probability that some or all of the
total liability will be assessed against other defendants and the fact that
discovery in these actions is not complete, it is impossible to predict the
outcome of these actions or to assess the ultimate financial exposure of the
Company. The Company does not believe the outcome of these actions will have a
material adverse effect on the Company, and, accordingly, no provision has been
made in the Consolidated Financial Statements for any loss that may be
incurred by the Company as a result of these actions.
Hines Litigation. In April 1992, an action was commenced by Patrick J.
Hines, on behalf of himself and others similarly situated against the Company,
Rexall Showcase and certain of its officers in the United States District Court
for the Southern District of Florida (CIV 92-6387). The complaint alleges,
among other things, violation of the United States securities laws, RICO and
unfair advertising with respect to the operations of Rexall Showcase. Virtually
identical lawsuits on behalf of various plaintiffs were filed at approximately
the same time against various other direct sales companies by two law firms,
including the law firm representing Mr. Hines. The Company and Rexall Showcase
filed a motion to dismiss the complaint on numerous grounds, including failure
to state a cause of action and violations of the federal civil procedural
rules. Such motion was granted in June 1994 and the plaintiff was given leave
to file a new complaint, which he did. The allegations in the new complaint
are similar to those in the original complaint and include additional claims of
violations of various Florida statutes, including those relating to deceptive
advertising, business opportunities, franchises and securities. The Company and
Rexall Showcase have filed a motion to dismiss the new complaint on numerous
grounds, including failure to state a cause of action and violations of the
federal rules of civil procedure. Although the Company believes that such
lawsuit is without merit, no assurances can be given in this regard. The
Company will vigorously defend itself and believes any adverse decision will
not have a material adverse impact on the Company or Rexall Showcase.
Other Litigation. The Company is also involved in litigation relating to
claims arising out of its operations in the normal course of business, none of
which are expected, individually or in the aggregate, to have a material
adverse affect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders during the fourth
quarter of fiscal 1996.
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EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the
executive officers of the Company:
NAME AGE POSITION
- ---- --- -------------------------------------------------------------
Carl DeSantis....... 57 Chairman of the Board and Chief Executive Officer
Christian Nast...... 65 President, Chief Operating Officer and Director
Dean DeSantis....... 34 Senior Vice President-Operations and Director
Damon DeSantis...... 32 Executive Vice President, President of Rexall Showcase and
Director
Nickolas Palin...... 49 Senior Vice President-Sales and Marketing and Director
Geary Cotton........ 44 Vice President-Finance, Chief Financial Officer and Treasurer
Richard Werber...... 44 Vice President-Legal Affairs, General Counsel and Secretary
CARL DESANTIS founded the Company in 1976, has served as its Chairman of
the Board and Chief Executive Officer since its inception, and served as its
President from 1976 to April 1995. Mr. DeSantis has had over 17 years of
experience with retail drug store companies, including Super-X Drug Stores and
Walgreen Drug Stores. He is the father of Dean DeSantis and Damon DeSantis.
CHRISTIAN NAST has been President and Chief Operating Officer of the
Company since April 1995 and a Director of the Company since October 1993. From
December 1989 to April 1995, Mr. Nast was employed by Colgate Palmolive Co. as
its executive vice president--North America. Mr. Nast has over 40 years of
experience in the consumer products industry with companies such as
Bristol-Myers Company, Chesebrough-Ponds, Inc. and the Procter & Gamble
Company.
DEAN DESANTIS has been Senior Vice President- Operations of the Company
since June 1989, a Director of the Company since March 1990 and joined the
Company in 1985. He is the son of Carl DeSantis and the brother of Damon
DeSantis.
DAMON DESANTIS has been President of Rexall Showcase since January 1993,
Executive Vice President and a Director of the Company since July 1988, and was
a Vice President of the Company from September 1983, when he joined the
Company, until July 1988. He is the son of Carl DeSantis and the brother of
Dean DeSantis.
NICKOLAS PALIN has been Senior Vice President-Sales and Marketing of the
Company since August 1989, a Director of the Company since December 1995 and
joined the Company in 1984. Prior to 1989 he served as the Company's General
Manager-Sales and Administration.
GEARY COTTON has been Vice President-Finance and Treasurer of the Company
since March 1993, Chief Financial Officer of the Company since August 1989, and
joined the Company in 1986. Mr. Cotton is a Certified Public Accountant.
RICHARD WERBER has been Vice President-Legal Affairs and General Counsel
of the Company since August 1991 and Secretary of the Company since March 1993.
Prior to that, Mr. Werber was a partner in the law firm of Holland & Knight.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock was first quoted and began trading on the Nasdaq National
Market on June 18, 1993 under the symbol RXSD.
Set forth below are the high and low sales prices of the Common Stock as
reported on the Nasdaq National Market for the periods indicated, retroactively
adjusted to reflect the two-for-one stock split effected on October 28, 1993
and the three-for-two stock split effected on April 4, 1996.
HIGH LOW
------ ------
FISCAL YEAR ENDED AUGUST 31, 1995:
First Quarter..................... $ 8.50 $ 5.83
Second Quarter.................... 8.67 6.25
Third Quarter..................... 7.33 5.50
Fourth Quarter.................... 10.75 5.50
FISCAL YEAR ENDED AUGUST 31, 1996:
First Quarter..................... 13.00 9.08
Second Quarter.................... 19.00 11.67
Third Quarter..................... 37.00 16.75
Fourth Quarter.................... 36.25 21.25
The Company presently intends to retain all earnings for the operation and
development of its business and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. Any future determination as to
the payment of cash dividends will depend on a number of factors, including
future earnings, capital requirements, the financial condition and prospects of
the Company and any restrictions under credit agreements existing from time to
time, as well as such other factors as the Company's Board of Directors may
deem relevant. The Company's current line of credit prohibits the payment of
any dividends on the Company's Common Stock. The approximate number of record
holders of the Common Stock as of October 10, 1996 was 700.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data presented below is derived from
the Consolidated Financial Statements. The Consolidated Financial Statements as
of and for the years ended August 31, 1992, 1993, 1994, 1995 and 1996 have been
audited by Coopers & Lybrand L.L.P., independent accountants. The following
information should be read in conjunction with Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and related notes and other consolidated
financial information included herein.
FISCAL YEAR ENDED AUGUST 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
(In thousands, except per share data)
OPERATING DATA:
Net sales..................................... $74,240 $93,147 $114,119 $149,473 $187,844
Cost of sales................................. 40,238 45,447 54,475 65,032 71,682
------- ------- -------- -------- --------
Gross profit................................ 34,002 47,700 59,644 84,441 116,162
Selling, general and administrative expenses.. 29,301 37,390 47,005 65,825 86,673
------- ------- -------- -------- --------
Operating income............................ 4,701 10,310 12,639 18,616 29,489
Other income, net............................. 50 810 1,080 588 2,602
------- ------- -------- -------- --------
Income before income tax provision............ 4,751 11,120 13,719 19,204 32,091
------- ------- -------- -------- --------
Income from continuing operations (pro
forma)(1)................................... 2,905 7,104 8,572 12,338 20,293
Loss from discontinued operations(2).......... -- -- (2,377) (7,976) --
------- ------- -------- -------- --------
Net income (pro forma)(1)..................... $ 2,905 $ 7,104 $ 6,195 $ 4,362 $ 20,293
======= ======= ======== ======== ========
Income (loss) per share (pro forma)(1):
Continuing operations....................... $0.13 $0.31 $0.29 $0.42 $0.66
Discontinued operations..................... -- -- (0.08) (0.27) --
------- ------- -------- -------- --------
Net income per share................ $0.13 $0.31 $0.21 $0.15 $0.66
======= ======= ======== ======== ========
Weighted average shares outstanding........... 21,942 23,168 29,269 29,497 30,726
AUGUST 31,
--------------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
BALANCE SHEET DATA:
Working capital............................... $ 5,289 $28,771 $ 21,027 $ 29,292 $ 54,133
Total assets.................................. 22,194 53,126 61,633 67,351 103,095
Long-term debt, net of current portion........ 4,938 1,151 776 448 105
Shareholders' equity.......................... 8,273 41,714 48,962 55,038 86,692
- ---------------
(1) The Company was an S Corporation until June 1993 and accordingly was not
subject to corporate income taxes until the termination of its S
Corporation status. For fiscal years 1992 and 1993, income from continuing
operations, net income, income per share from continuing operations and net
income per share have been computed as if the Company was subject to
corporate income taxes, based on tax laws in effect during such periods.
(2) Net of tax benefit.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements, and the Notes to the Consolidated
Financial Statements included herein. Additionally, certain divisional data of
the Company is set forth in Item 1 - "Business -- General."
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, and sales to Rexall Showcase's independent distributors are
recorded at wholesale prices. Initial costs associated with acquiring sales
agreements with certain retail customers are amortized over the term of the
relevant agreement and the amortization of such costs is recorded as a reduction
in net sales. Approximately 96.2% of the Company's net sales are of products
sold under one of the following brand names: Sundown, Rexall Showcase, Rexall,
Thompson, SDV and Rexall Managed Care. Sales of private label products
accounted for approximately 3.8% of net sales for fiscal 1996.
Cost of goods sold includes the cost of raw materials and all labor and
overhead associated with the manufacturing and packaging of the products. The
majority of the Company's products are in tablet, softgel or two-piece capsule
forms. In 1994, the Company initiated manufacturing, beginning with vitamins
in tablet form, which resulted in lower costs than outsourcing such
manufacturing. Presently, the Company manufactures approximately 90% of its
tablet formulations and recently began manufacturing two-piece capsules. The
Company does not presently intend to manufacture softgel formulations or other
products. The Company's manufacturing facility as currently configured is
estimated to be operating at approximately 70% of capacity. However, the
Company believes capacity could be doubled by adding additional equipment,
personnel and shifts.
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 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. Historically, operating margins from sales to retailers and mail
order have been higher than operating margins from Rexall Showcase sales.
On August 31, 1995, the Company approved a plan to divest Pennex
Laboratories, Inc. ("Pennex"), its subsidiary which manufactured and sold OTC
pharmaceuticals. The fiscal 1994 and 1995 results of Pennex have been presented
as discontinued operations in the Consolidated Financial Statements. See
"-- Discontinued Operations."
On October 3, 1996 the Company filed a registration statement with the
Securities and Exchange Commission in connection with a proposed public offering
of 4,000,000 shares of Common Stock. Of those shares, 2,000,000 are being
offered by the Company and 2,000,000 are being offered by certain shareholders
of the Company. The Company intends to use the net proceeds received from the
offering primarily to acquire complementary products, product lines or
businesses, to provide working capital and for general corporate purposes.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
FISCAL YEAR ENDED AUGUST 31,
-----------------------------
1994 1995 1996
----- ----- -----
Net sales............................................... 100.0% 100.0% 100.0%
Cost of sales........................................... 47.7 43.5 38.2
----- ----- -----
Gross profit.......................................... 52.3 56.5 61.8
Selling, general and administrative expenses............ 41.2 44.0 46.1
----- ----- -----
Operating income...................................... 11.1 12.5 15.7
Other income, net....................................... 0.9 0.4 1.4
----- ----- -----
Income before income tax provision...................... 12.0 12.9 17.1
Income from continuing operations....................... 7.5% 8.3% 10.8%
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FISCAL YEAR ENDED AUGUST 31, 1996 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1995
Net sales for fiscal 1996 were $187.8 million, an increase of $38.4 million
or 25.7% over fiscal 1995. Of the $38.4 million increase, sales to retailers
accounted for $14.0 million, an increase of 17.4% over fiscal 1995. The increase
in sales to retailers was partially attributable to approximately $7.0 million
of initial shipments of Sundown products to Wal*Mart and Thrifty-Payless in the
second half of fiscal 1996. Net sales of the Company's direct sales subsidiary,
Rexall Showcase, increased by $23.9 million, an increase of 45.4% over fiscal
1995. 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 $528,000
or 3.2% over fiscal 1995. The increase in net sales in each division was
primarily due to increased unit sales.
Gross profit for fiscal 1996 was $116.2 million, an increase of $31.7
million or 37.6% over fiscal 1995. As a percentage of net sales, gross margin
increased from 56.5% for fiscal 1995 to 61.8% for fiscal 1996. The increase in
gross margin was due primarily 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. The increase was also due,
in part, to improved margins as a result of manufacturing efficiencies achieved
from higher volume at the Company's vitamin manufacturing facility. The average
number of tablets manufactured per month increased from approximately 85 million
tablets for fiscal 1995 to approximately 170 million tablets for fiscal 1996.
Selling, general and administrative expenses for fiscal 1996 were $86.7
million, an increase of $20.8 million or 31.7% over fiscal 1995. As a percentage
of net sales, such expenses increased from 44.0% for fiscal 1995 to 46.1% for
fiscal 1996, primarily as a result of increased sales of Rexall Showcase as a
percentage of the Company's net sales. In addition, selling, general and
administrative expenses associated with Rexall Showcase increased due to the
commencement of international operations. This increase was partially offset by
reductions of other divisions' selling, general and administrative expenses as a
percentage of net sales. The reduction in other divisions' selling, general and
administrative expenses was due in part to new incentive and cost control
programs initiated by management in fiscal 1996.
Other income, net, increased from $588,000 in fiscal 1995 to $2.6 million
in fiscal 1996 as a result of increased interest income, decreased interest
expense and increased amounts included in other income. Interest income for
fiscal 1996 was $1.3 million, as compared to $119,000 for fiscal 1995. Such
increase was primarily a result of investment of the Company's available cash
balances, which were higher in fiscal 1996 than fiscal 1995, and interest
received in fiscal 1996 from the note receivable related to the sale of
Pennex's assets, which interest is at a higher rate than the Company's average
rate of return on available cash balances. Interest expense for fiscal 1996 was
$40,000 as compared to $424,000 for fiscal 1995 as there were no borrowings
under the Company's line of credit in fiscal 1996.
Income from continuing operations before income tax provision was $32.1
million for fiscal 1996, an increase of $12.9 million or 67.1% over fiscal 1995.
As a percentage of net sales, income from continuing operations before income
tax provision increased from 12.9% for fiscal 1995 to 17.1% for fiscal 1996.
Income from continuing operations was $20.3 million for fiscal 1996, an
increase of $8.0 million or 64.5% over fiscal 1995. As a percentage of net
sales, income from continuing operations increased from 8.3% for fiscal 1995 to
10.8% for fiscal 1996 due to the reasons described above.
FISCAL YEAR ENDED AUGUST 31, 1995 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1994
Net sales for fiscal 1995 were $149.5 million, an increase of $35.4 million
or 31.0% over fiscal 1994. Of the $35.4 million increase, sales to retailers
accounted for $11.9 million, an increase of 17.4% over fiscal 1994. Included in
sales to retailers is $1.7 million of net sales of the Company's Rexall Managed
Care division for which there were minimal sales in fiscal 1994. Net sales of
Rexall Showcase increased by $23.1 million, an increase of 78.3% over fiscal
1994. Net sales of SDV increased by $375,000 or 2.3% over fiscal 1994. The
increase in net sales in each division was primarily due to increased unit
sales.
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Gross profit for fiscal 1995 was $84.4 million, an increase of $24.8
million or 41.6% over fiscal 1994. As a percentage of net sales, gross margin
increased from 52.3% for the fiscal year ended August 31, 1994 to 56.5% for
fiscal 1995. The increase in gross margin was due primarily 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. In
fiscal 1995, the Company achieved a modest increase in gross margin of its other
divisions.
Selling, general and administrative expenses for fiscal 1995 were $65.8
million, an increase of $18.8 million or 40.0% over fiscal 1994. As a percentage
of net sales, such expenses increased from 41.2% for the fiscal year ended
August 31, 1994 to 44.0% for fiscal 1995, primarily as a result of increased net
sales of Rexall Showcase as a percentage of the Company's net sales. While
selling, general and administrative expenses in the Company's other business
divisions increased in absolute dollars, such expenses declined as a percentage
of net sales.
Other income, net, decreased from $1.1 million in fiscal 1994 to $588,000
in fiscal 1995, primarily as a result of reduced interest income and increased
interest expense. Interest income for fiscal 1995 was $119,000, as compared to
$361,000 for fiscal 1994. This decrease is a result of the reduction of
marketable securities. Interest expense for fiscal 1995 was $424,000 as compared
to $109,000 for fiscal 1994. This increase resulted from borrowings under the
Company's line of credit.
Income from continuing operations before income tax provision was $19.2
million for fiscal 1995, an increase of $5.5 million or 40.0% over fiscal 1994.
As a percentage of net sales, income from continuing operations before income
tax provision increased from 12.0% for fiscal 1994 to 12.9% for fiscal 1995.
Income from continuing operations was $12.3 million for fiscal 1995, an
increase of $3.8 million or 43.9% from fiscal 1994. As a percentage of net
sales, income from continuing operations increased from 7.5% for fiscal 1994 to
8.3% for fiscal 1995 due to the reasons described above.
DISCONTINUED OPERATIONS
On September 30, 1993, Pennex acquired substantially all the assets of
Pennex Products Co., Inc., a manufacturer of OTC pharmaceuticals. The assets
primarily consisted of a 300,000 square foot manufacturing and distribution
facility along with all manufacturing equipment and inventory located on
approximately 22 acres in Verona, Pennsylvania. The purchase price was $5.1
million in cash. On August 31, 1995, the Company approved a plan to divest
Pennex and the Company's Consolidated Financial Statements for fiscal 1994 and
1995 have been presented to include Pennex's results as discontinued operations.
In the fourth quarter of fiscal 1995, the Company recorded an estimated loss on
the disposition of Pennex in the amount of $3.7 million, net of the related tax
benefit of $2.1 million, for the loss on disposition of the related assets and
liabilities of Pennex and other expenses related to the closing of Pennex. This
amount included $964,000 for the estimated operating losses of Pennex during the
phase-out period. On November 17, 1995, Pennex ceased operations and on February
1, 1996, substantially all the remaining assets of Pennex were sold for
$6,495,000. The Company received a $500,000 deposit and a collateralized note
for the balance. The terms of such note provide for interest at 12%, payable
monthly through March 1996. The rate of interest increased to 18% on April 1,
1996, although interest is currently being paid at 12% with the balance
accruing until February 28, 1997, when the entire balance under such note is
due in full. The note was assigned from Pennex to the Company as partial
consideration for amounts owed to the Company by Pennex. The Company has been
recording interest income on the 12% interest paid to the Company.
As of August 31, 1996, the Company had recorded net assets of discontinued
operations of $3.9 million. Assuming full collection of the balance of the
collateralized note, the Company expects to record a reduction to the estimated
loss on disposition of approximately $1.4 million (net of tax) or $.04 per
share, which would be reflected as an adjustment to discontinued operations.
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QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth certain quarterly financial data for fiscal
1995 and 1996. This quarterly information is unaudited, has been prepared on the
same basis as the annual financial statements and, in the opinion of the
Company's management, reflects all normally recurring adjustments necessary for
fair presentation of the information for the periods presented. Operating
results for any quarter are not necessarily indicative of results of any future
period.
FISCAL 1995 FISCAL 1996
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net sales......................... $32,105 $37,868 $38,291 $41,209 $40,867 $40,560 $54,781 $51,636
Operating income.................. 4,371 5,245 4,133 4,867 5,314 5,932 8,801 9,442
Income from continuing
operations(1)................... 2,750 3,488 2,965 3,135 3,556 4,074 6,134 6,529
Income per share from continuing
operations(1)................... $0.09 $0.12 $0.10 $0.11 $0.12 $0.13 $0.20 $0.21
- ----------------------
(1) Does not reflect discontinued operations. See "Selected Consolidated
Financial Data," "--Discontinued Operations" and Notes to the Consolidated
Financial Statements.
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 $54.1 million as of August 31, 1996,
compared to $29.3 million as of August 31, 1995. This increase was principally
the result of increased cash and cash equivalents, marketable securities,
inventory and trade accounts receivable due to higher sales in fiscal 1996
compared to fiscal 1995.
Net cash provided by operating activities for fiscal 1996 was $19.6 million
compared to $4.3 million for fiscal 1995. Net cash provided by operating
activities increased primarily due to increased net income, decreases in net
assets of discontinued operations and recognition of deferred income taxes,
partially offset by increases in accounts receivable and inventory. Net cash
used in investing activities was $13.5 million for fiscal 1996 compared to $5.1
million for fiscal 1995. Net cash used in investing activities, including $5.4
million used for capital expenditures, increased primarily due to the purchase
of marketable securities in fiscal 1996. Net cash provided by financing
activities was $6.2 million for fiscal 1996 compared to $123,000 for fiscal
1995. The Company's cash flow from financing activities for fiscal 1996 of $6.2
million reflects $6.5 million received for the exercise of options to purchase
Common Stock partially offset by debt payments.
The Company presently has a line of credit with a financial institution in
the amount of $10 million, under which there were no borrowings in fiscal 1996.
The Company believes that the net proceeds to the Company from this offering,
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 and the financing of the Company's accounts receivable, and
anticipated capital expenditures for the next fiscal year. Capital expenditures
for fiscal 1997 are anticipated to be approximately $11 million, including
approximately $6 million for upgrades to the Company's information systems and
the majority of the balance for manufacturing equipment.
-18-
19
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.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted by the Company until fiscal 1997, include
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and SFAS No. 123, "Accounting for Stock Based Compensation."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This pronouncement is not expected to have a material impact on the
financial statements of the Company.
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Companies that choose not to adopt the new fair value accounting rules
will be required to disclose pro forma net income and earnings per share under
the new method. The Company anticipates adopting the disclosure provisions of
SFAS No. 123, although the impact of such disclosure has not been determined.
-19-
20
FORWARD LOOKING STATEMENTS
This Report contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
which represent the Company's expectations or beliefs, including, but not
limited to, statements concerning industry performance, the Company's
operations, performance, financial condition, growth and acquisition
strategies, margins and growth in sales of the Company's products. 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, including uncertainty related to acquisitions,
government regulation, managing and maintaining growth, the effect of adverse
publicity, reliance on independent distributors of Rexall Showcase, the
centralized location of the Company's manufacturing operations, availability of
raw materials, risks associated with international operations, competition,
product liability claims, volatility of stock price and those factors described
in the Company's filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data for the Company are on the
following pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
-20-
21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Shareholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
F-1
22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Rexall Sundown, Inc.
Boca Raton, Florida
We have audited the consolidated financial statements and financial statement
schedule of Rexall Sundown, Inc. and subsidiaries listed in Item 14(a) of this
Form 10-K. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Rexall
Sundown, Inc. and subsidiaries as of August 31, 1995 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1996 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
October 4, 1996
F-2
23
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AUGUST 31,
--------------------
1995 1996
------- --------
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 1,154 $ 13,450
Restricted cash....................................................... -- 278
Marketable securities................................................. -- 7,988
Trade accounts receivable, net of allowance for doubtful accounts of
$78 at August 31, 1995 and 1996.................................... 6,957 11,410
Inventory............................................................. 20,512 28,179
Prepaid expenses and other current assets............................. 4,526 5,018
Net current assets of discontinued operations......................... 8,008 3,855
------- --------
Total current assets.......................................... 41,157 70,178
Property, plant and equipment, net...................................... 21,489 24,078
Other assets............................................................ 4,705 8,839
------- --------
Total assets.................................................. $67,351 $103,095
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 5,592 $ 5,599
Accrued expenses and other current liabilities........................ 5,941 10,100
Current portion of long-term debt..................................... 332 346
------- --------
Total current liabilities..................................... 11,865 16,045
Long-term debt.......................................................... 448 105
Other liabilities....................................................... -- 253
------- --------
Total liabilities............................................. 12,313 16,403
------- --------
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred stock, $0.01 par value; authorized 5,000,000 shares, no
shares outstanding................................................. -- --
Common stock, $0.01 par value; authorized 100,000,000 shares, shares
issued: 29,416,050 and 30,660,128, respectively.................... 196 307
Capital in excess of par value........................................ 42,192 53,563
Retained earnings..................................................... 12,650 32,943
Cumulative translation adjustment..................................... -- (121)
------- --------
Total shareholders' equity.................................... 55,038 86,692
------- --------
Total liabilities and shareholders' equity.................... $67,351 $103,095
======= ========
See accompanying notes
F-3
24
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEARS ENDED AUGUST 31,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Net sales.................................................. $ 114,119 $ 149,473 $ 187,844
Cost of sales.............................................. 54,475 65,032 71,682
---------- ---------- ----------
Gross profit..................................... 59,644 84,441 116,162
Selling, general and administrative expenses............... 47,005 65,825 86,673
---------- ---------- ----------
Operating income................................. 12,639 18,616 29,489
Other income (expense):
Interest income.......................................... 361 119 1,251
Interest expense......................................... (109) (424) (40)
Other income............................................. 849 938 1,391
Minority interests in income of consolidated
subsidiary............................................ (21) (45) --
---------- ---------- ----------
Income before income tax provision......................... 13,719 19,204 32,091
Income tax provision....................................... 5,147 6,866 11,798
---------- ---------- ----------
Income from continuing operations.......................... 8,572 12,338 20,293
Discontinued operations:
Loss from discontinued operations (net of tax benefit of
$1,302 and $2,425 in 1994 and 1995, respectively)..... (2,377) (4,278) --
Loss on disposal of discontinued operations including a
provision of $964 for operating losses during the
phase-out period (net of tax benefit of $2,057)....... -- (3,698) --
---------- ---------- ----------
Net income................................................. $ 6,195 $ 4,362 $ 20,293
========== ========== ==========
Income (loss) per share:
Continuing operations.................................... $ .29 $ .42 $ .66
Discontinued operations.................................. (.08) (.15) --
Disposal of discontinued operations...................... -- (.12) --
---------- ---------- ----------
Net income per share............................. $ .21 $ .15 $ .66
========== ========== ==========
Weighted average common shares outstanding................. 29,268,633 29,497,166 30,726,232
See accompanying notes
F-4
25
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
CAPITAL
IN CUMULATIVE
NUMBER OF COMMON EXCESS OF RETAINED TRANSLATION
SHARES STOCK PAR VALUE EARNINGS ADJUSTMENT
---------- ------ --------- -------- -----------
Balance at August 31, 1993............. 19,312,000 $193 $ 39,428 $ 2,093 $ --
Net income........................... -- -- -- 6,195 --
Exercise of stock options............ 118,000 1 653 -- --
Tax benefit from exercise of
options........................... -- -- 399 -- --
---------- ---- -------- ------- -------
Balance at August 31, 1994............. 19,430,000 194 40,480 8,288 --
Net income........................... -- -- -- 4,362 --
Exercise of stock options............ 80,500 1 428 -- --
Tax benefit from exercise of
options........................... -- -- 285 -- --
Issuance of shares for non-compete
agreement......................... 100,200 1 999 -- --
---------- ---- -------- ------- -------
Balance at August 31, 1995............. 19,610,700 196 42,192 12,650 --
Net income........................... -- -- -- 20,293 --
Exercise of stock options............ 1,244,078 13 6,469 -- --
Tax benefit from exercise of
options........................... -- -- 5,000 -- --
Three-for-two common stock split..... 9,805,350 98 (98) -- --
Cumulative translation adjustment.... -- -- -- -- (121)
---------- ---- -------- ------- -------
Balance at August 31, 1996............. 30,660,128 $307 $ 53,563 $32,943 $ (121)
========== ==== ======== ======= =======
See accompanying notes
F-5
26
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEARS ENDED AUGUST 31,
------------------------------
1994 1995 1996
-------- -------- --------
Cash flows provided by (used in) operating activities:
Net income............................................................. $ 6,195 $ 4,362 $ 20,293
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation......................................................... 1,161 2,400 2,797
Amortization......................................................... 346 400 1,202
Loss (gain) on sale of property and equipment........................ 93 158 (18)
Minority interest.................................................... 21 45 --
Deferred income taxes................................................ (75) (1,789) 2,076
Foreign exchange translation adjustment.............................. -- -- (121)
Changes in assets and liabilities:
Trade accounts receivable.......................................... (307) (1,276) (4,453)
Inventory.......................................................... (5,641) (3,063) (7,667)
Prepaid expenses and other current assets.......................... (986) 102 (2,546)
Other assets....................................................... 1,043 85 (5,501)
Accounts payable................................................... 2,338 (2,523) 7
Accrued expenses and other current liabilities..................... (86) 2,493 9,137
Income taxes payable............................................... (918) -- --
Other liabilities.................................................. 22 (22) 253
Discontinued operations -- non-cash charges and changes in assets
and liabilities................................................... (4,199) 2,923 4,153
-------- -------- --------
Net cash provided by (used in) operating activities............. (993) 4,295 19,612
-------- -------- --------
Cash flows provided by (used in) investing activities:
Acquisition of assets of Pennex Products Co., Inc...................... (4,324) -- --
Purchase of marketable securities...................................... (23,335) -- (5,988)
Proceeds from sale of marketable securities............................ 41,443 12 --
Acquisition of property, plant and equipment........................... (10,491) (3,590) (5,391)
Acquisition of computer software....................................... -- (409) (1,835)
Proceeds from sale of property, plant and equipment.................... 32 5 23
Investing activities of discontinued operations........................ (1,247) (1,160) --
Other.................................................................. -- -- (278)
-------- -------- --------
Net cash provided by (used in) investing activities............. 2,078 (5,142) (13,469)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from bank line of credit...................................... -- 10,500 --
Payments on bank line of credit........................................ -- (10,500) --
Principal payments on long-term debt................................... (380) (306) (329)
Principal payments under capital lease obligations..................... (95) -- --
Exercise of options to purchase common stock........................... 655 429 6,482
-------- -------- --------
Net cash provided by financing activities....................... 180 123 6,153
-------- -------- --------
Net increase (decrease) in cash and cash equivalents................... 1,265 (724) 12,296
Cash and cash equivalents at beginning of period....................... 613 1,878 1,154
-------- -------- --------
Cash and cash equivalents at end of period............................. $ 1,878 $ 1,154 $ 13,450
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest............................................................... $ 109 $ 403 $ 42
======== ======== ========
Income taxes........................................................... $ 4,838 $ 3,495 $ 3,725
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITY:
On September 30, 1993, the Company acquired substantially all of the assets and
assumed certain liabilities of Pennex Products Co., Inc. (see Note 14) as
follows:
Assets acquired.................................. $ 7,372
Cash paid (including advances under debtor-
in-possession financing in fiscal 1993)......... (5,115)
--------
Liabilities assumed.............................. $ 2,257
========
See accompanying notes
F-6
27
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
BUSINESS
Rexall Sundown, Inc. (the "Company") develops, manufactures, markets and
sells vitamins, nutritional supplements and consumer health products through
three channels of distribution: sales to retailers; direct sales through
independent distributors; and mail order sales.
The Company's wholly-owned operating subsidiary, Rexall Showcase
International, Inc. ("Rexall Showcase") markets and distributes health and
wellness products under the Rexall Showcase tradename through a sales force of
independent distributors. On August 31, 1995, the Company purchased the 1%
minority interest of Rexall Showcase, which was owned by the Company's Chairman
of the Board and Chief Executive Officer. Rexall Showcase formed two foreign
subsidiaries located in Mexico and South Korea in order to conduct business
operations in such foreign countries. The Company still owns the stock of
Pennex Laboratories, Inc., now known as RSL Holdings, Inc. ("Pennex"), for
which operations have been discontinued. Pennex manufactured and distributed
over-the-counter ("OTC") pharmaceuticals and health and beauty care products and
is presented as discontinued operations (see Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the 1996 presentation.
MARKETABLE SECURITIES
As of August 31, 1995, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with SFAS No. 115, marketable
securities are classified in three categories and accounted for as follows: (1)
held-to-maturity securities are debt securities, which the Company has the
positive intent and ability to hold to maturity, and are reported at amortized
cost; (2) trading securities are debt and equity securities that are bought and
held principally for the purpose of selling them in the near term and are
reported at fair value, with unrealized gains and losses included in current
earnings; and (3) available-for-sale securities are debt and equity securities
not classified as either held-to-maturity securities or trading securities and
are reported at fair value, with unrealized gains and losses excluded from
current earnings and reported in a separate component of shareholders' equity.
Marketable securities consist primarily of government debt instruments and
are classified as available-for-sale securities. Gains and losses realized on
the sale of marketable securities are determined using the specific
identification method. At August 31, 1995 and 1996 the fair value of the
securities approximated cost.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is charged to expense over the estimated useful lives
of the assets and is computed principally using accelerated methods. Maintenance
and repairs are charged to expense when incurred and betterments are
capitalized. Upon
F-7
28
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
retirement or sale, the cost and accumulated depreciation are eliminated from
the accounts and the gain or loss, if any, is included in the determination of
net income.
INTANGIBLE ASSETS
Intangible assets, which are included in other assets (non-current), are
stated at cost less accumulated amortization. Intangible assets are amortized on
a straight-line basis over their estimated useful lives which range from three
to fourteen years.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents.
RESTRICTED CASH
Restricted cash consists of funds held in South Korea by the local
government to ensure that funds are available to satisfy customer demands for
refunds. Deposits of 10% of sales are made monthly and monies are refunded
three months after the date of deposit.
INCOME TAXES
The Company utilizes the liability method of accounting for deferred income
taxes. This method requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statement or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Deferred tax assets are
also established for the future tax benefits of loss and credit carryovers.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment, and such revenue is recorded
net of estimated sales returns, discounts and allowances.
PREPAID CUSTOMER ALLOWANCES
Costs associated with acquiring sales agreements with certain customers are
amortized over the terms of the agreements. These costs consist of the cost of
inventory provided at no charge and other allowances and are included in other
assets (both current and non-current). The amortization of these costs is
recorded as a reduction of net sales.
ADVERTISING AND CATALOG COSTS
Advertising and mail order catalog costs are expensed as incurred.
RESERVE FOR ESTIMATED CHARGEBACKS
The Company's Rexall Managed Care division, which began operations in
fiscal 1995, markets and distributes vitamins, nutritional supplements and OTC
pharmaceuticals to the managed care market. The Company enters into contracts to
provide such products to various managed care providers who purchase the
F-8
29
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
products through wholesalers. The difference between the Company's price to the
wholesaler and the Company's contract price to the providers is charged back to
the Company by the wholesaler. Upon sale to the wholesaler, the Company provides
for a reserve of estimated future chargebacks.
FOREIGN CURRENCY TRANSLATION
The financial statements and transactions of the Company's foreign
operations (which began operations in February 1996) are maintained in their
functional currency and translated into United States dollars in accordance with
SFAS No. 52. Assets and liabilities are translated at current exchange rates in
effect at the balance sheet date. Revenues and expenses are translated at the
average exchange rate for each period. Translation adjustments, which result
from the process of translating financial statements into United States dollars,
are accumulated in a separate component of shareholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET INCOME PER SHARE
Net income per share of common stock (the "Common Stock"), $.01 par value,
of the Company is calculated by dividing net income by weighted average shares
of Common Stock outstanding, giving effect to Common Stock equivalents (Common
Stock options).
NEW ACCOUNTING STANDARDS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted by the Company until fiscal 1997, include SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of " and SFAS No. 123, "Accounting for Stock Based
Compensation."
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. This pronouncement is not expected to have a material impact on the
financial statements of the Company.
SFAS No. 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. It encourages, but does not require,
companies to recognize compensation expense for grants of stock, stock options
and other equity instruments to employees based on new fair value accounting
rules. Companies that choose not to adopt the new fair value accounting rules
will be required to disclose pro forma net income and earnings per share under
the new method. The Company anticipates adopting the disclosure provisions of
SFAS No. 123, although the impact of such disclosure has not been determined.
F-9
30
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
3. INVENTORY
The components of inventory are as follows:
AUGUST 31,
-------------------
1995 1996
------- -------
Raw materials........................................ $ 8,376 $11,609
Work in process...................................... 1,117 1,732
Finished products.................................... 11,019 14,838
------- -------
Total inventory............................ $20,512 $28,179
======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of:
AUGUST 31,
-------------------
1995 1996
------- -------
Land................................................. $ 2,022 $ 2,022
Buildings and improvements........................... 13,894 14,064
Machinery and equipment.............................. 10,112 14,479
Leasehold improvements............................... 251 506
Furniture and fixtures............................... 1,128 1,508
Other assets......................................... 21 212
------- -------
27,428 32,791
Less accumulated depreciation and amortization..... (5,939) (8,713)
------- -------
Property, plant and equipment, net......... $21,489 $24,078
======= =======
5. OTHER ASSETS
Other assets consist of the following:
AUGUST 31,
------------------ USEFUL
1995 1996 LIVES
------ ------- ------------
Intangible assets:
Non-compete agreement..................... $ 1,000 $ 1,000 5 years
License and registration fees............. 170 170 5 years
Organizational costs...................... -- 450 3 years
Computer software......................... 622 2,457 5 years
Trademarks................................ 224 224 10-14 years
Purchased technology...................... 500 --
Patents................................... -- 1,500 10.5 years
Other securities............................ 2,000 150
Prepaid customer allowances................. 573 3,121
Other....................................... 184 1,042
------ -------
5,273 10,114
Less accumulated amortization............. (568) (1,275)
------ ------
Total other assets................ $ 4,705 $ 8,839
======= =======
F-10
31
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities is comprised of the
following:
AUGUST 31,
------------------
1995 1996
------ -------
Accrued customer rebates.......................................... $ 542 $ 2,166
Reserve for estimated chargebacks................................. 894 460
Accrued commissions............................................... 2,461 2,823
Accrued salaries and bonuses...................................... 844 2,099
Income taxes...................................................... -- 823
Other............................................................. 1,200 1,729
------ -------
Total accrued expenses and other current liabilities.... $5,941 $10,100
====== =======
7. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consists of the following:
AUGUST 31,
------------------
1995 1996
------ -------
Non-compete agreement, non-interest bearing net of discount
imputed at 8%, of $67 and $23 at August 31, 1995 and 1996,
respectively, maturing in January 1998, guaranteed by the
Company's Chief Executive Officer............................... $ 650 $ 403
$650 promissory note, interest at 9%, maturing in April 1997...... 130 48
---- ----
780 451
Less current portion......................................... 332 346
---- ----
Total long-term debt.................................... $ 448 $ 105
====== =======
On September 7, 1994, the Company entered into a revolving line of credit
with a financial institution that provides for borrowings up to $10 million,
subject to annual extensions. The revolving line of credit was renewed on
September 7, 1995 and was extended for ninety days on September 7, 1996.
Borrowings under the line of credit bear interest at the prime rate. The line of
credit is collateralized by accounts receivable and inventory and is subject to
compliance with certain financial covenants and ratios, including a minimum
tangible net worth. There were no amounts outstanding under this revolving line
of credit at August 31, 1996.
8. LEASE OBLIGATIONS
The Company leases certain equipment, automobiles and warehouse and
distribution facilities under noncancelable operating leases. The leases provide
for monthly payments over terms of one to five years and certain of the leases
provide for renewal options. Total rent expense on all operating leases amounted
to approximately $651, $552 and $905 for the years ended August 31, 1994, 1995
and 1996, respectively.
F-11
32
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
8. LEASE OBLIGATIONS, CONTINUED
The future minimum lease payments under noncancelable operating leases at
August 31, 1996 are as follows:
FISCAL YEAR
-----------
1997.............................................................. $1,179
1998.............................................................. 677
1999.............................................................. 353
-----
Total................................................... $2,209
=====
9. BENEFIT PLANS
The Company offers a 401(k) employee benefit plan (the "Plan"), which
provides for voluntary contributions by employees of up to 20% of their base
compensation (as defined in the Plan), subject to a maximum annual contribution.
The Company may, at the discretion of the Board of Directors, make a
contribution to the Plan. The Company contributed approximately $128, $158 and
$159 during fiscal 1994, 1995 and 1996, respectively.
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Employee Stock Purchase Plan (the "1993 Stock Purchase Plan").
The 1993 Stock Purchase Plan enables participants to contribute cash in an
amount not to exceed 10% of salary per relevant pay period. Such funds are used
to periodically purchase shares of Common Stock for the account of each of the
participants in the 1993 Stock Purchase Plan at 90% of the market price of the
Common Stock. The Company has reserved 750,000 shares of Common Stock for
issuance under the 1993 Stock Purchase Plan and may issue such shares or
purchase additional shares of Common Stock in the open market. For the years
ended August 31, 1995 and 1996, participants purchased 11,064 and 4,431 shares
in the open market at an average purchase price of $7.40 and $18.14 per share,
respectively.
In February 1996, the Board of Directors adopted the Company's 1996 Rexall
Showcase International Distributor Stock Purchase Plan (the "1996 Distributor
Stock Purchase Plan"). The 1996 Distributor Stock Purchase Plan enables
participants to contribute cash in an amount not to exceed 10% of a
participant's monthly commission check. Such funds are used to periodically
purchase shares of Common Stock for the account of each of the participants in
the 1996 Distributor Stock Purchase Plan at either 95% or 100% of the market
price of the Common Stock, depending on a participant's level of achievement in
Rexall Showcase. The Company has reserved 750,000 shares of Common Stock for
issuance under the 1996 Distributor Stock Purchase Plan and may issue such
shares or purchase additional shares of Common Stock in the open market for
participants. For the year ended August 31, 1996, participants purchased 1,157
shares of Common Stock in the open market at an average purchase price of $32.50
per share.
10. COMMON STOCK TRANSACTIONS
On October 5, 1993, the Board of Directors declared a 2-for-1 split of the
Common Stock which was effected in the form of a stock dividend. The stock
dividend was paid on October 28, 1993 to shareholders of record as of October
18, 1993.
On March 14, 1996, the Board of Directors declared a 3-for-2 split of the
Common Stock which was effected in the form of a stock dividend. The stock
dividend was paid on April 4, 1996 to shareholders of record as of March 25,
1996.
F-12
33
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. COMMON STOCK TRANSACTIONS, CONTINUED
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 splits on a retroactive basis.
11. STOCK OPTIONS
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Stock Incentive Plan (the "1993 Plan") for executives and other
key personnel. The 1993 Plan is administered by the Compensation/Stock Option
Committee of the Board of Directors of the Company. Under the 1993 Plan, all
options are to have an exercise price equal to the fair market value at the date
of grant. In February 1995, the Board of Directors amended the 1993 Plan to
increase the number of shares of Common Stock of the Company available
thereunder to a total of 4,500,000 shares, which amendment was approved by the
Company's shareholders in February 1996. Of the stock options granted,
substantially all are for a term of five to ten years. During fiscal 1995 and
1996, the Company realized a tax benefit of $286 and $5,000, respectively,
related to the exercise of stock options.
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Non-Employee Director Stock Option Plan (the "1993 Director
Plan"). The maximum number of shares of Common Stock available for issuance
under the 1993 Director Plan is 60,000 shares.
In July 1994, the Board of Directors adopted the Company's 1994
Non-Employee Director Stock Option Plan (the "1994 Director Plan"), which was
approved by the Company's shareholders in February 1995. The maximum number of
shares of Common Stock available for issuance under the 1994 Director Plan is
150,000 shares.
As of August 31, 1996, stock options to purchase 927,900 shares of Common
Stock had been granted outside of any Company plan and have an exercise price
equal to fair market value at date of grant. Substantially all of these options
are for a term of five to seven years.
In February 1996, the Board of Directors adopted the Company's 1996 Rexall
Showcase International Distributor Stock Option Plan (the "1996 Distributor
Plan"). The 1996 Distributor Plan provides for the granting of stock options to
eligible distributors upon attainment of specified conditions at an exercise
price not less than the fair market value on the date of grant. The maximum
number of shares of Common Stock available under the 1996 Distributor Plan is
750,000 shares. Options granted under the 1996 Distributor Plan will be for a
term of five years. As of August 31, 1996, no options have been granted under
the 1996 Distributor Plan.
F-13
34
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
11. STOCK OPTIONS, CONTINUED
Information with regard to the stock options is as follows:
SHARES
-----------------------------------------------------------
1993 1994
1993 DIRECTOR DIRECTOR OTHER OPTION PRICE
PLAN PLAN PLAN OPTIONS RANGE
--------- --------- --------- -------- ------------
Outstanding at August 31,
1993.......................... 1,134,000 15,000 -- 441,000
Granted....................... 595,800 -- 15,000 419,400 $5.42-$14.17
Cancelled..................... (7,200) -- -- -- $3.17-$4.67
Exercised..................... (135,000) -- -- (42,000) $3.17-$4.67
--------- -------- ------ ------
Outstanding at August 31,
1994.......................... 1,587,600 15,000 15,000 818,400
Granted....................... 1,246,875 -- 22,500 101,250 $5.67-$8.25
Cancelled..................... (352,800) (7,500) (6,000) -- $3.17-$14.17
Exercised..................... (59,250) -- (1,500) (60,000) $3.17-$6.33
--------- -------- ------ ------
Outstanding at August 31,
1995.......................... 2,422,425 7,500 30,000 859,650
Granted....................... 936,451 -- 22,500 112,500 $9.50-$30.00
Cancelled..................... (262,650) -- -- (146,250) $3.17-$14.50
Exercised..................... (722,678) (1,000) -- (520,400) $3.17-$11.42
--------- -------- ------ ------
Outstanding at August 31,
1996.......................... 2,373,548 6,500 52,500 305,500 $3.17-$30.00
========= ======== ====== ======
Options currently exercisable... 678,318 3,500 9,000 184,300
========= ======== ====== ======
Options available for grant at
August 31, 1996............... 1,206,524 52,500 96,000 --
========= ======== ====== ======
12. SALES TO A MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
The Company had sales to Phar-Mor, Inc., a national retailer, which
represented approximately 17%, 11% and 5% of net sales for the years ended
August 31, 1994, 1995 and 1996, respectively. Trade accounts receivable from
this customer amounted to approximately $63 and $975 at August 31, 1995 and
1996, respectively.
The Company sells products to a large number of customers, which are
primarily in the United States. The Company continuously evaluates the
creditworthiness of each customer's financial condition and generally does not
require collateral.
Financial instruments that potentially subject the Company to concentration
of credit risk are cash, marketable securities and trade accounts receivable.
The Company places its temporary cash investments with high credit quality
financial institutions.
Marketable securities consist primarily of United States Government
securities with high credit quality financial institutions.
13. INCOME TAXES
The Company files a consolidated United States income tax return with its
domestic subsidiaries. For state income tax purposes the Company and its
subsidiaries file on both a consolidated and separate return basis in the states
in which they do business. Rexall Showcase's subsidiaries in Mexico and South
Korea file income tax returns in their respective countries of incorporation.
F-14
35
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. INCOME TAXES, CONTINUED
Deferred income taxes as of August 31, 1996 relate primarily to the reserve
for loss on disposition of discontinued operations which is deductible when
realized, amortization of a non-compete agreement which is deductible when paid,
inventory and accounts receivable reserves and book depreciation versus tax
depreciation.
The following reflects the income tax provision (benefit) the Company
incurred for the fiscal years ended August 31, 1994, 1995 and 1996:
FISCAL YEAR ENDED AUGUST 31,
----------------------------
1994 1995 1996
------ ------- -------
Current:
Federal.......................................................... $3,588 $ 3,866 $ 8,871
State............................................................ 332 307 776
Foreign.......................................................... -- -- 60
------ ------- -------
3,920 4,173 9,707
------ ------- -------
Deferred:
Federal.......................................................... (54) (1,657) 1,921
State............................................................ (21) (132) 153
Foreign.......................................................... -- -- 17
------ ------- -------
(75) (1,789) 2,091
------ ------- -------
Total income tax provision............................... $3,845 $ 2,384 $11,798
====== ======= =======
The following summarizes the total income tax provisions for each of the
years ended August 31, 1994, 1995 and 1996:
1994 1995 1996
------- ------- -------
Continuing operations............................................. $ 5,147 $ 6,866 $11,798
Discontinued operations........................................... (1,302) (2,425) --
Loss on disposal of discontinued operations....................... -- (2,057) --
------ ------ -------
$ 3,845 $ 2,384 $11,798
====== ====== =======
The following table summarizes the differences between the Company's
effective tax rate for financial statement purposes and the Federal statutory
rate as of August 31, 1994, 1995 and 1996:
1994 1995 1996
------ ------- -------
Income tax provision, at 35%....................................... $3,514 $ 2,360 $11,288
Statutory federal surtax exemption................................. (100) (66) --
State income tax, net of federal benefit........................... 275 177 624
Non-deductible expenses............................................ 30 54 83
Other, net......................................................... 126 (141) (197)
------ ------ -------
Total income tax provision............................... $3,845 $ 2,384 $11,798
====== ====== =======
F-15
36
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. INCOME TAXES, CONTINUED
The significant components of the deferred tax assets and liabilities at
August 31, 1994, 1995 and 1996 are as follows:
1994 1995 1996
---- ------ -----
Deferred income tax assets:
Loss on disposition of discontinued operations............... $ -- $2,057 $ 185
Non-compete amortization..................................... 302 238 149
Accounts receivable reserves................................. 112 135 66
Net operating losses......................................... -- -- 269
Other........................................................ 38 11 102
Valuation allowance.......................................... -- -- (269)
----- ------ ------
- -
452 2,441 502
----- ------ ------
- -
Deferred income tax liabilities:
Depreciation................................................. -- 387 527
Foreign...................................................... -- -- 17
----- ------ ------
- -
-- 387 544
----- ------ ------
- -
$452 $2,054 $ (42)
====== ====== =======
The financial reporting bases of investments in certain foreign
subsidiaries is less than their tax bases. In accordance with SFAS No. 109, a
deferred tax liability is not recorded for the difference because the
investments are essentially permanent. A reversal of the Company's plans to
permanently invest in these operations would cause the excess to become
deductible. On August 31, 1996, these temporary differences were approximately
$161. A determination of the amount of unrecognized deferred tax asset related
to these investments is not practicable.
On August 31, 1996, the Company had state and foreign net operating losses
of $3,679 and $469, respectively, expiring in 1998 and 2006, respectively.
14. DISCONTINUED OPERATIONS
On August 31, 1995, the Company's Board of Directors approved a plan to
divest Pennex. Accordingly, the Company recorded a reserve in its fiscal 1995
fourth quarter in the amount of $3,698, net of tax benefit of $2,057, to provide
for the loss on disposition of the related assets and liabilities of Pennex and
other expenses related to the closing of the business. The $3,698 reserve
included approximately $964 (net of tax benefit), for estimated operating losses
during the phase-out period subsequent to August 31, 1995. On November 17, 1995,
Pennex ceased operations.
The consolidated financial statements and related footnotes of the Company
have been reclassified to report separately the net assets and operating results
of Pennex as discontinued operations for all periods since the Company acquired
Pennex on September 30, 1993.
F-16
37
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. DISCONTINUED OPERATIONS, CONTINUED
Net assets of Pennex, which are presented as net amounts in the Company's
consolidated balance sheets at August 31, 1995 and 1996, were as follows:
1995 1996
------- ------
Current assets.................................................... $10,570 $ 76
Property, plant and equipment, net (under contract for sale in
1996)........................................................... 4,324 3,948
Other assets...................................................... 1,005 133
-------- -------
Total assets............................................ 15,899 4,157
-------- -------
Current liabilities............................................... 2,137 39
Reserve for loss on disposition................................... 5,754 263
Other liabilities................................................. -- --
-------- -------
Total liabilities....................................... 7,891 302
-------- -------
Net assets of discontinued operations............................. $ 8,008 $3,855
======== =======
The results of discontinued operations for the fiscal year ended August 31,
1994 and 1995 were as follows:
1994 1995
------- -------
Net sales........................................................ $12,307 $18,933
======= =======
Loss from discontinued operations before income tax.............. $(3,679) $(6,704)
Income tax benefit............................................... 1,302 2,425
------- -------
Net loss from discontinued operations............................ $(2,377) $(4,279)
======= =======
Loss on disposal, net of tax benefit of $2,057................... $ -- $(3,698)
======= =======
On February 1, 1996, substantially all the remaining assets of Pennex were
sold for $6,495. The Company received a $500 deposit and a collateralized note
for the balance. The terms of such note provide for interest at 12%, payable
monthly through March 29, 1996. The rate of interest increased to 18% on April
1, 1996, although interest is being paid at 12% with the balance accruing until
February 28, 1997, when the note is due in full. The note was assigned from
Pennex to the Company as partial consideration for amounts owed to the Company
by Pennex. The Company has been recording interest income on the 12% interest
paid to the Company.
Assuming full collection of the balance of the collateralized note, the
Company expects to record 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.
15. COMMITMENTS AND CONTINGENCIES
In fiscal 1995, the Company renewed employment contracts with certain
Company executives all of which are for three-year terms and entered into an
employment contract with its new President which has a three year, four month
term. The agreements provide for current minimum annual salaries in the
aggregate of $1.6 million, adjusted annually for cost-of-living changes.
The Company has been named in 27 lawsuits, of which 25 have been settled or
discontinued, relating to the manufacture of L-tryptophan. These lawsuits seek
or have sought compensation and damages for alleged personal injury from
ingestion of products containing allegedly contaminated L-tryptophan. The
Company has entered into an agreement with the apparent supplier of all the
alleged contaminated
F-17
38
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. COMMITMENTS AND CONTINGENCIES, CONTINUED
L-tryptophan products pursuant to which such supplier has agreed to indemnify
the Company against any judgment and to fund settlements arising out of those
claims in certain circumstances, as well as to pay the legal fees and expenses
of the defense. Based upon such indemnification arrangements, the Company's
product liability insurance and the product liability insurance of the Company's
supplier, the Company does not believe that any adverse decision will have a
material adverse effect on the Company and, accordingly, no provision has been
made in the financial statements for any loss that may result to the Company as
a result of these actions.
The Company is also 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.
16. SUBSEQUENT EVENT
On October 3, 1996 the Company filed a registration statement with the
Securities and Exchange Commission in connection with a proposed public offering
of 4,000,000 shares of Common Stock. Of those shares, 2,000,000 are being
offered by the Company and 2,000,000 are being offered by certain shareholders
of the Company. The Company intends to use the net proceeds received from the
offering primarily to acquire complementary products, product lines or
businesses, to provide working capital and for general corporate purposes.
17. CONDENSED INTERIM FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
1995
Net sales................................................. $32,105 $37,868 $38,291 $41,209
Gross profit.............................................. 17,776 20,554 22,725 23,387
Income before taxes and discontinued operations........... 4,466 5,533 4,303 4,902
Income from continuing operations......................... 2,750 3,488 2,965 3,135
Loss from discontinued operations......................... (770) (1,139) (1,032) (1,337)
Loss on disposal of discontinued operations............... -- -- -- (3,698)
Net income (loss)......................................... $ 1,980 $ 2,349 $ 1,933 $(1,900)
Income (loss) per common share:
Continuing operations................................... $ .09 $ .12 $ .10 $ .11
Discontinued operations................................. (.02) (.04) (.04) (.05)
Disposal of discontinued operations..................... -- -- -- (.12)
------- ------- ------- -------
Net income per common share........................... $ .07 $ .08 $ .06 $ (.06)
======= ======= ======= =======
1996
Net sales................................................. $40,867 $40,560 $54,781 $51,636
Gross profit.............................................. 24,379 24,510 34,441 32,832
Income before taxes....................................... 5,639 6,437 9,691 10,324
Income from continuing operations......................... 3,556 4,074 6,134 6,529
Net income................................................ $ 3,556 $ 4,074 $ 6,134 $ 6,529
Net income per common share........................... $ .12 $ .13 $ .20 $ .21
======= ======= ======= =======
F-18
39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) Directors of the Company.
See the Company's Proxy Statement, incorporated by reference in Part
III of this Form 10-K, under the heading "Election of Directors."
(b) Executive Officers of the Company.
See Part I of this Form 10-K at Page 12.
ITEM 11. EXECUTIVE COMPENSATION.
See the Company's Proxy Statement, incorporated by reference in Part III
of this Form 10-K, under the headings "Executive Compensation" and
"Certain Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the Company's Proxy Statement, incorporated by reference in Part III
of this Form 10-K, under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the Company's Proxy Statement, incorporated by reference in Part III
of this Form 10-K, under the heading "Certain Relationships and Related
Transactions."
-21-
40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
See "Item 8. Financial Statements and Supplementary Data" for Financial
Statements included with this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, not
applicable, or the information is otherwise set forth in the financial
statements or notes thereto.
(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation (1)
3.2 Amended and Restated By-Laws (1)
10.1 Redemption Agreement dated January 7, 1988 between the
Company, Carl DeSantis, Sylvia DeSantis, Lorraine Hoffman and Joseph
Greene (1)
10.2 Agreement for Employment and Consulting and Covenant Not to
Compete dated July 1, 1988 between the Company, Joseph Greene and
Carl DeSantis (1)
10.3 Agreement dated December 15, 1992 between the Company and
Herbert V. Shuster, Inc. (1)
10.4 Letter Agreement dated January 25, 1993 between the Company
and Phar-Mor, Inc. together with Agreement for Merchandising
Services and Side Letter of even date therewith (1)(2)
10.5 Amended and Restated Indemnification Agreement dated March 15,
1993 between the Company and Showa Denko America, Inc. (1)
10.6 Guaranty Agreement dated March 15, 1993 between the Company
and Showa Denko K.K. (1)
10.7 Amended and Restated 1993 Employee Stock Purchase Plan (1)
10.8 Form of Non-Qualified Stock Option Agreement (1)
10.9 Amended and Restated 1993 Stock Incentive Plan (3)
10.10 Amended and Restated 1993 Non-Employee Director Stock Option Plan (3)
10.11 Amended and Restated 1994 Non-Employee Director Stock Option Plan (3)
10.12 Employment Agreement dated April 1, 1995 between Carl DeSantis and
the Company, as amended on October 9, 1995 (4)
-22-
41
10.13 Employment Agreement dated April 1, 1995 between Dean DeSantis and
the Company, as amended on April 1, 1996 (4)
10.14 Employment Agreement dated April 1, 1995 between Damon DeSantis and
the Company, as amended on April 1, 1996 (4)
10.15 Employment Agreement dated April 1, 1995 between Nickolas Palin and
the Company, as amended on April 1, 1996 (4)
10.16 Employment Agreement dated April 1, 1995 between Geary Cotton and
the Company (5)
10.17 Employment Agreement dated April 1, 1995 between Richard Werber and the Company (5)
10.18 Employment Agreement dated April 24, 1995 between Christian Nast and the Company
and Amendment thereto dated July 21, 1995 (6)
10.19 Business Loan Agreement dated September 19, 1995 between the Company, Rexall Showcase International, Inc.,
Pennex Laboratories, Inc. (now known Bank of Broward as RSL Holdings, Inc.) and Barnett County, N.A. (7)
10.20 Agreement dated October 13, 1991 between Pennex Products Co., Inc. and The United Steel Workers of America,
the Memorandum thereto dated September 3, 1993 of Understanding with respect and Extension thereto dated
October 10, 1995 (8)
10.21 Agreement dated December 29, 1995 by and between Pennex Laboratories, Inc. (now known as RSL Holdings, Inc.)
and Oakmont Pharmaceuticals, Inc. (9)
10.22 Forbearance Agreement dated April 29, 1996 by and between Oakmont Pharmaceuticals, Inc. and the Company (9)
10.23 Second Forbearance Agreement dated September 23, 1996 by and between Oakmont Pharmaceuticals, Inc. and the
Company (9)
10.24 Industrial Lease dated March 3, 1995 by and between WRC Properties, Inc. and Network Marketing, L.C.
(now known as Rexall Showcase International, Inc.) (9)
10.25 Industrial Lease dated April 17, 1996 by and between WRC Properties, Inc. and the Company (9)
10.26 Standard Industrial Lease dated May 16, 1996 between the Company and Dermody Properties (9)
11 Earnings Per Share Computation (9)
21 Subsidiaries of Registrant (9)
23 Consent of Coopers & Lybrand L.L.P. (9)
27 Financial Data Schedule (for SEC use only) (9)
____________________
-23-
42
(1) Filed as an Exhibit to the Company's Registration Statement
on Form S-1 (File No. 33-61382) and incorporated herein by
reference.
(2) Confidential treatment has been granted by the Securities and
Exchange Commission for the redacted portions of these exhibits, and
such confidential portions have been filed with the Securities and
Exchange Commission.
(3) Plan is filed as an Exhibit to the Company's Proxy Statement
dated January 2, 1996 and is incorporated herein by reference.
(4) Employment Agreement is filed as an Exhibit to the Company's Annual
Report on Form 10-K for the Year Ended August 31, 1995 and is
incorporated herein by reference and the amendment thereto is filed
herewith.
(5) Employment Agreement is filed as an Exhibit to the Company's Annual
Report on Form 10-K for the Year Ended August 31, 1995 and is
incorporated herein by reference.
(6) Employment Agreement is filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the Quarter Ended May 31, 1995 and
is incorporated herein by reference and the Amendment thereto is
filed as an Exhibit to the Company's Annual Report on Form 10-K for
the Year Ended August 31, 1995 and is incorporated herein by
reference.
(7) Filed as an Exhibit to the Company's Annual Report on Form
10-K for the Year Ended August 31, 1994 and is incorporated herein
by reference.
(8) Agreement and Memorandum of Understanding are filed as an
Exhibit to the Company's Annual Report on Form 10-K for the Year
Ended August 31, 1993 and are incorporated herein by reference and
the Extension is filed as an Exhibit to the Company's Annual Report
on Form 10-K for the Year Ended August 31, 1995.
(9) Filed herewith.
(B) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the three-month period ended
August 31, 1996.
(C) ITEM 601 EXHIBITS
The exhibits required by Item 601 of Regulation S-K are set forth in
(a)(3) above.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by Regulation S-K are set
forth in (a)(2) above.
-24-
43
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.
Dated: October 10, 1996 By: /s/ Carl DeSantis
-------------------
Carl DeSantis,
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Carl Desantis Chairman of the Board and October 10, 1996
- -----------------------
Carl DeSantis Chief Executive Officer
/s/ Christian Nast Director, President and Chief October 10, 1996
- -----------------------
Christian Nast Operating Officer
/s/ Dean DeSantis Director and Senior Vice President-- October 10, 1996
- -----------------------
Dean DeSantis Operations
/s/Damon DeSantis Director and Executive Vice President October 10, 1996
- -----------------------
Damon DeSantis
/s/ Geary Cotton Vice President - Finance, Chief October 10, 1996
- -----------------------
Geary Cotton Financial Officer, Treasurer and
Chief Accounting Officer
/s/ Nickolas Palin Director and Senior Vice President October 10, 1996
- -----------------------
Nickolas Palin Sales and Marketing
/s/ Stanley Leedy Director October 10, 1996
- -----------------------
Stanley Leedy
/s/ Raymond Monteleone Director October 10, 1996
- -----------------------
Raymond Monteleone
/s/ Howard Yenke Director October 10, 1996
- -----------------------
Howard Yenke
-25-
44
SCHEDULE II
REXALL SUNDOWN, INC.
VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Charged to
Beginning Costs and Other Balance at
Description of Year Expenses Accounts Deductions End of Year
----------- ---------- ---------- ---------- ---------- -----------
Year ended August 31, 1994
Allowance for doubtful accounts.............. $78,000 $ 44,446 $ -- $ 44,446 $78,000
Year ended August 31, 1995
Allowance for doubtful accounts.............. $78,000 $154,280 $ -- $154,280 $78,000
Year ended August 31, 1996
Allowance for doubtful accounts.............. $78,000 $112,990 $ -- $112,990 $78,000