<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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REXALL SUNDOWN, INC.
(Exact name of Registrant as Specified in its Charter)
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<TABLE>
<S> <C>
FLORIDA 59-1688986
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
</TABLE>
851 BROKEN SOUND PARKWAY, NW
BOCA RATON, FLORIDA 33487
(561) 241-9400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
---------------------
RICHARD WERBER, ESQ.
VICE PRESIDENT-LEGAL AFFAIRS,
GENERAL COUNSEL AND SECRETARY
REXALL SUNDOWN, INC.
851 BROKEN SOUND PARKWAY, NW
BOCA RATON, FLORIDA 33487
(561) 241-9400
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
PAUL BERKOWITZ, ESQ. JEFFREY M. STEIN, ESQ.
GREENBERG, TRAURIG, HOFFMAN, KING & SPALDING
LIPOFF, ROSEN & QUENTEL, P.A. 191 PEACHTREE STREET
1221 BRICKELL AVENUE ATLANTA, GEORGIA 30303-1763
MIAMI, FLORIDA 33131 (404) 572-4600
(305) 579-0500
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF CLASS OF AMOUNT TO BE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C>
Common Stock, $.01 par value................ 4,600,000 shares $160,425,000 $48,613.64
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</TABLE>
(1) Includes 600,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act, on the basis of the
average high and low sales prices of the Company's Common Stock on October
1, 1996 as reported by the Nasdaq National Market.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION DATED OCTOBER 3, 1996
4,000,000 SHARES
[REXALL SUNDOWN, INC. LOGO]
COMMON STOCK
------------------------
Of the 4,000,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby, 2,000,000 shares are being issued and sold by
Rexall Sundown, Inc. (the "Company") and 2,000,000 shares are being sold by
certain shareholders of the Company (the "Selling Shareholders"). The Company
will not receive any of the proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders." The Common Stock
is listed on the Nasdaq National Market under the symbol "RXSD." On October 1,
1996, the last reported sale price of the Common Stock on the Nasdaq National
Market was $32.50 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND PROCEEDS TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
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Total(3)..................... $ $ $ $
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</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company and the Selling
Shareholders of $ and $ , respectively.
(3) The Company and the Selling Shareholders have granted the Underwriters a
30-day option to purchase up to 600,000 additional shares of Common Stock on
the same terms and conditions as the securities offered hereby, solely to
cover over-allotments, if any. If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions, Proceeds to
Company and Proceeds to Selling Shareholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if delivered to and accepted by
them, and subject to certain other conditions including the right of the
Underwriters to withdraw, cancel, modify or reject any order in whole or in
part. It is expected that delivery of the shares will be made on or about
, 1996, at the offices of Raymond James & Associates, Inc., St.
Petersburg, Florida.
RAYMOND JAMES & ASSOCIATES, INC.
ADAMS, HARKNESS & HILL, INC.
MONTGOMERY SECURITIES
The date of this Prospectus is , 1996
<PAGE> 3
INSIDE FRONT COVER -- PICTURES OF SUNDOWN PRODUCTS.
GATEFOLD - PART 1 -- PICTURES OF REXALL SHOWCASE PRODUCTS, A REXALL SHOWCASE
CONVENTION AND A REXALL SHOWCASE IN-HOME PRESENTATION
GATEFOLD - PART 2 -- PICTURES OF REXALL, THOMPSON, REXALL MANAGED CARE AND SDV
PRODUCTS
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and the Consolidated
Financial Statements, including notes thereto, incorporated by reference in this
Prospectus. Unless otherwise indicated, all share, per share and financial
information set forth herein assumes no exercise of the Underwriters'
over-allotment option, and reflects the two-for-one stock split effected in
October 1993 and the three-for-two stock split effected in April 1996. Investors
should carefully consider the information set forth under the heading "Risk
Factors."
THE COMPANY
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 product 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 has
experienced significant growth in recent years as net sales have grown from
$74.2 million in fiscal 1992 to $149.5 million in fiscal 1995, representing a
compound annual growth rate ("CAGR") of 26%.
The Company's recent growth has been driven significantly by sales of its
Sundown(R) brand of vitamins and nutritional supplements, which currently
represent approximately 75% of the Company's sales to retailers. The Sundown
brand offers a broad selection of approximately 290 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.
According to data from Information Resources, Inc. ("IRI"), a retail information
gathering service, in the broadline vitamin category, Sundown is currently the
number two brand in dollar and unit sales across all food, drug and mass
merchandiser retail outlets and generates the highest rate of dollar and unit
sales per share of all commodity volume ("ACV") distribution through such
outlets. The Company believes that Sundown's high dollar and unit sales velocity
is a result of its value pricing strategy and its unique, high quality products.
The Company believes that there are significant opportunities for continued
growth because Sundown products are currently available in outlets representing
only 35% of ACV sales across all food, drug and mass merchandiser retail
outlets. 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 WalMart stores and Thrifty-Payless and
Eckerd drug stores. The Company's net sales of Sundown products have increased
from $42.1 million in fiscal 1992 to $62.4 million in fiscal 1995.
Another important factor contributing to the Company's recent growth has
been the Company's direct sales subsidiary, Rexall Showcase International, Inc.
("Rexall Showcase"). Rexall Showcase markets unique health and wellness products
under the Rexall Showcase tradename 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. The Company believes that Rexall Showcase has several
competitive advantages over other direct sales organizations including: (i) the
Rexall(R) brand name under which health products have been marketed since 1903;
(ii) Rexall Showcase's commission plan which the Company believes is financially
attractive to its independent distributors; (iii) its broad product mix which
includes approximately 40 innovative products that are unique to Rexall
Showcase; and (iv) Rexall Showcase's ability to attract, support and motivate
distributors. The Company intends to further expand its direct sales business by
continuing to develop and offer innovative products, adding independent
distributors, providing sales support and educating and motivating its existing
and prospective distributors through comprehensive sales aids and regularly
scheduled regional and national conventions and local meetings. 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
3
<PAGE> 5
other countries in the future. Rexall Showcase's net sales have increased from
$10.4 million in fiscal 1992 to $52.6 million in fiscal 1995.
The Company believes that it is well-positioned to capitalize on the
expected growth and consolidation in the highly fragmented vitamin and
nutritional supplement industry. The Company believes that no company controls
more than 10% of this market. 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, representing a CAGR of 10%. The Company
believes that growth in the vitamin and nutritional supplement market is being
driven by several factors, including: (i) the general public's heightened
awareness and understanding of the connection between diet and health; (ii) the
increase in baby-boomer and senior-aged population groups, which are more likely
to consume vitamins; (iii) product introductions in response to new scientific
research; and (iv) the nationwide trend toward preventative medicine. 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.
The Company's objective is to achieve profitable sales growth and maximize
market share in its targeted domestic and international markets. To achieve its
growth objectives, the Company intends to employ the following strategies: (i)
leverage the success of the Sundown brand to increase its market share in mass
merchandisers, chain drug stores and supermarkets; (ii) continue the growth of
Rexall Showcase by further developing its product line and increasing the number
and productivity of its independent distributors that market and sell its
products; and (iii) supplement the Company's internal growth through strategic
acquisitions in health and wellness-related markets that leverage existing or
add new distribution channels. The Company intends to actively pursue
acquisition opportunities that are compatible with its business philosophy; have
a level of critical mass and infrastructure necessary to generate rates of
growth expected by the Company; and have a positive financial impact on the
Company's operations. The Company expects that such acquisitions may include
products, product lines or businesses.
The Company was incorporated in the State of Florida in 1976. The Company's
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.
THE OFFERING
Common Stock Offered by the Company......... 2,000,000 shares
Common Stock Offered by the Selling
Shareholders................................ 2,000,000 shares
Common Stock to be Outstanding after the
Offering.................................... 32,721,571 shares(1)
Use of Proceeds............................. To acquire complementary
products, product lines or
businesses; to provide working
capital; and for general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol............... RXSD
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(1) Does not include (i) an aggregate of 2,738,048 shares of Common Stock
underlying currently outstanding options and (ii) 1,355,024 additional
shares available for issuance under the Company's 1993 Stock Incentive
Plan, 1993 Non-Employee Director Stock Option Plan and 1994 Non-Employee
Director Stock Option Plan.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, MAY 31,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.................................. $93,147 $114,119 $149,473 $108,264 $136,208
Gross profit............................... 47,700 59,644 84,441 61,055 83,330
Operating income........................... 10,310 12,639 18,616 13,750 20,047
Income from continuing operations(1)....... 7,104(2) 8,572 12,338 9,203 13,764
Net income................................. 7,104(2) 6,195 4,362 6,262 13,764
Income per share from continuing
operations(1)............................ $0.31(2) $0.29 $0.42 $0.31 $0.45
Weighted average shares outstanding........ 23,168 29,269 29,497 29,467 30,388
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1996
---------------------
AS
ACTUAL ADJUSTED(3)
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<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................... $47,288 $ 109,013
Total assets............................................................. 96,858 158,583
Long-term debt, net of current portion................................... 181 181
Total shareholders' equity............................................... 76,448 138,173
</TABLE>
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(1) Does not reflect discontinued operations. See "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Discontinued Operations" and Note 14
to the Company's Consolidated Financial Statements for the year ended
August 31, 1995 incorporated by reference in this Prospectus.
(2) 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 1993, income from continuing operations, net
income and income per share from continuing operations have been computed
as if the Company was subject to corporate income taxes for fiscal 1993,
based on tax laws in effect during such period. See Note 13 to the
Company's Consolidated Financial Statements for the year ended August 31,
1995 incorporated by reference in this Prospectus.
(3) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $32.50 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
The shares offered hereby involve a high degree of risk, including the
risks described below. Prospective investors should carefully consider the
specific factors set forth below, as well as the other information contained in
this Prospectus before deciding to invest in the Common Stock offered hereby.
This Prospectus 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, economic performance, financial condition, growth and
acquisition strategies and margins and growth in sales of the Company's
products. For this purpose, any statements contained in this Prospectus that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, words such as "may," "will,"
"expect," "believe," "anticipate," "intend," "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 those described below under this "Risk Factors"
section and elsewhere in this Prospectus.
UNCERTAINTY RELATED TO ACQUISITIONS; BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use a significant portion of the net proceeds from
this offering to pursue the acquisition of complementary products, product lines
or businesses. Acquisitions involve a number of risks that could adversely
affect the Company's operating results, including the diversion of management's
attention, the assimilation of operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. There can be no assurance that the
Company will consummate future acquisitions on satisfactory terms, if at all,
that adequate financing will be available on terms acceptable to the Company, if
at all, that any acquired products, product lines or businesses will be
successfully integrated or that such products, product lines or businesses will
ultimately have a positive impact on the Company, its financial condition or
results of operations.
At the present time, the Company has not entered into binding contracts or
other agreements and the Company will continue to have broad discretion in
identifying potential acquisitions. Accordingly, the Company will have broad
discretion in using the net proceeds of this offering. An investor will not have
the opportunity to evaluate the economic, financial and other relevant
information which will be utilized by the Company in determining the application
of such proceeds. See "Use of Proceeds" and "Business -- Growth Strategy."
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration
("FDA"), the Federal Trade Commission ("FTC"), the Consumer Product 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 and localities in which the
Company's products are sold. In particular, the FDA regulates the safety,
labeling and distribution of dietary supplements, including vitamins, minerals
and herbs, food additives, food supplements, over-the-counter ("OTC") and
prescription drugs and cosmetics. The regulations that are promulgated by the
FDA relating to the manufacturing process are known as Current Good
Manufacturing Practices ("CGMPs"), and are different for drug and food products.
In addition, the FTC has overlapping jurisdiction with the FDA to regulate the
labeling, promotion and advertising of vitamins, OTC drugs, cosmetics and foods.
6
<PAGE> 8
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 the
active ingredients in dietary supplements 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 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 a structure or function of the body. 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,
including those relating to nutritional labeling requirements. 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 vitamin and nutritional 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.
Failure to comply with applicable FDA requirements can result in sanctions being
imposed on the Company or the manufacturers of its products, including,
depending on the product category, warning letters, fines, product recalls and
seizures.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into a market or prevent or
delay the introduction, or require the reformulation, of certain of the
Company's products. Rexall Showcase is subject to regulation under various
international, state and local laws which include provisions regulating, among
other things, the operation of direct sales programs. The Company believes that
it is in material compliance with such provisions and has, in certain cases,
established procedures providing greater protection for its independent
distributors than are required by law.
In addition, the Company cannot predict whether new domestic or foreign
legislation regulating its activities will be enacted. Such new legislation
could have a material adverse effect on the Company. See "Business -- Government
Regulation."
MANAGING GROWTH
The Company is currently experiencing a period of rapid growth and
expansion which has placed, and could continue to place, a significant strain on
the Company's management, customer service and support operations, sales and
administrative personnel and other resources. In order to serve the needs of its
existing and future customers, the Company has substantially increased and will
continue to increase its workforce, which requires the Company to attract,
train, motivate and manage qualified employees. The Company's ability to manage
its planned growth requires the Company to continue to expand its operating,
management, information and financial systems, all of which may significantly
increase its operating expenses. If the Company fails to achieve its growth as
planned or is unsuccessful in managing its anticipated growth, there could be a
material adverse effect on the Company. In addition, the loss of a significant
customer or a number of customers, or a significant reduction in purchase volume
by or financial difficulty of such customers, for any reason, could have a
material adverse effect on the Company. See "Business -- Growth Strategy."
7
<PAGE> 9
EFFECT OF ADVERSE PUBLICITY
The Company's products consist of vitamins, minerals, herbs and other
ingredients that the Company regards as safe when taken as suggested by the
Company and that various scientific studies have suggested may involve health
benefits. While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies
relating to the benefits of its products. The Company is highly dependent upon
consumers' perception of the overall integrity of its business, as well as the
safety and quality of its products and similar products distributed by other
companies which may not adhere to the same quality standards as the Company. The
Company could be adversely affected if any of the Company's products or any
similar products distributed by other companies should prove or be asserted to
be harmful to consumers or should scientific studies provide unfavorable
findings regarding the effectiveness of the Company's products. Rexall
Showcase's ability to attract and retain independent distributors could be
adversely affected by negative publicity relating to it or to other direct sales
organizations. See "Business -- Industry Overview" and "Business -- Product
Liability Insurance."
CENTRALIZED LOCATION OF MANUFACTURING OPERATIONS; AVAILABILITY OF RAW MATERIALS
The Company currently manufactures approximately 60% and packages
approximately 90% of its products at its manufacturing facility in Boca Raton,
Florida, and, until the recent opening of its distribution facility in Sparks,
Nevada, distributed all of its products from its two distribution facilities in
Boca Raton. Accordingly, any event resulting in the slowdown or stoppage of the
Company's manufacturing operations or distribution facilities in Boca Raton
could have a material adverse effect on the Company. The Company maintains
business interruption insurance. 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 any losses that may be incurred from an interruption
in the Company's manufacturing and distribution operations.
Most of the raw materials in the Company's products are obtained from
third-party suppliers. Although the Company believes that all of its sources for
raw materials are reliable, any interruption of such supply could have a
material adverse effect on the Company. See "Business -- Manufacturing and
Quality Control."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
An element of the Company's future growth strategy is to increase the
distribution and sale of the Company's products into international markets. The
Company's existing and planned international operations are subject to political
and economic uncertainties, including, among other things, inflation, risk of
renegotiation or modification of existing agreements or arrangements with
governmental authorities, transportation, tariffs, export controls, government
regulation, currency exchange rate fluctuations, foreign exchange restrictions
which limit the repatriation of investments and earnings therefrom, changes in
taxation, hostilities or confiscation of property. Changes related to these
matters could have a material adverse effect on the Company. See
"Business -- Sales By Distribution Channel."
COMPETITION
The market for the sale of vitamins and nutritional supplements is highly
competitive. There are numerous companies in the vitamin and nutritional
supplement industry selling products to retailers, including mass merchandisers,
drug store chains, independent drug stores, supermarkets and health food stores.
Most of these companies are privately held and the Company is unable to
precisely assess the size of its competitors or where it ranks in comparison to
such privately held competitors with respect to sales to retailers. No company
is believed to control more than 10% of this market.
The market for OTC pharmaceuticals and health and beauty care products is
also 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 other 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.
8
<PAGE> 10
Certain of the Company's competitors are substantially larger than the
Company and have greater financial resources. See "Business -- Competition."
PRODUCT LIABILITY CLAIMS
As a marketer of vitamin and nutritional supplements and other products
that are ingested by consumers or applied to their bodies, the Company may be
subjected to various product liability claims, including, among others, that its
products contain contaminants or include inadequate instructions as to use or
inadequate warnings concerning side effects and interactions with other
substances. While such claims to date have not been material to the Company and
the Company maintains product liability insurance, there can be no assurance
that product liability claims and the resultant adverse publicity will not have
a material adverse effect on the Company. See "Business -- Product Liability
Insurance" and "Business -- Legal Proceedings."
CONCENTRATION OF OWNERSHIP; CERTAIN ANTI-TAKEOVER CONSIDERATIONS
Following this offering, the Company's directors and executive officers and
certain of their affiliates will beneficially own approximately 54% of the
outstanding Common Stock, substantially all of which will be beneficially owned
or controlled by Carl DeSantis, Dean DeSantis and Damon DeSantis. Accordingly,
these shareholders will continue to have the ability to elect all of the
directors of the Company and to thereby direct or substantially influence the
management, policies and business operations of the Company and will have the
power to control the outcome of any matters submitted to a vote of the Company's
shareholders. The Company's Board of Directors has the authority to approve the
issuance of 5,000,000 shares of preferred stock and to fix the rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the Company's shareholders. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of holders of any preferred stock that may be issued in
the future. Certain provisions of Florida law, as well as the issuance of
preferred stock, could delay or inhibit the removal of incumbent directors and
could delay, defer, make more difficult or prevent a merger, tender offer or
proxy contest, or any change in control involving the Company, as well as the
removal of management, even if such events would be beneficial to the interests
of the Company's shareholders, and may limit the price certain investors may be
willing to pay in the future for shares of Common Stock. See "Principal and
Selling Shareholders" and "Description of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of shares of Common Stock in the public market
after this offering, including sales pursuant to Rule 144 promulgated under the
Securities Act, or the perception that such sales could occur, may adversely
affect the market price of the Common Stock. Upon completion of this offering,
the Company will have 32,721,571 shares of Common Stock outstanding. All
4,000,000 shares offered hereby will be freely tradeable. The Company, certain
shareholders of the Company selling shares of Common Stock hereunder (the
"Selling Shareholders") and the Company's executive officers and directors have
agreed not to sell, contract to sell or otherwise dispose of any of such shares
for a period of 180 days after the closing of this offering without the prior
written consent of Raymond James & Associates, Inc. Notwithstanding the
foregoing, at any time on or after the date of this Prospectus, the Company may
issue shares pursuant to the exercise of employee stock options outstanding on
the date of this Prospectus, which issuances or sales may be effected any time
after the date of this Prospectus. See "Principal and Selling Shareholders" and
"Underwriting."
POSSIBLE VOLATILITY OF STOCK PRICE
The Company's stock price has experienced significant volatility over the
past several years. Moreover, the stock market has from time to time experienced
extreme price and volume fluctuations which may be unrelated to the operating
performance of particular companies. Market conditions in the vitamin and
nutritional supplement industry and factors such as announcements of new
products by the Company, its competitors or third parties, and changes in
earnings estimates by analysts may have a significant effect on the price of the
Common Stock. See "Price Range of Common Stock."
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company, after deducting underwriting discounts and
commissions and estimated offering expenses, assuming an offering price of
$32.50 per share, are estimated to be $61.7 million (approximately $77.2 million
if the Underwriters' over-allotment option is exercised in full). The net
proceeds from the sale of shares of Common Stock offered by the Company will be
used primarily to acquire complementary products, products lines or businesses,
to provide working capital and for general corporate purposes. The Company
currently has no specific agreements with respect to particular acquisitions and
no assurance can be given that any acquisitions will be consummated. See
"Business -- Growth Strategy." Pending such applications, the net proceeds will
be invested in investment grade, short-term, interest-bearing securities. The
Company will not receive any of the proceeds from the sale of Common Stock by
the Selling Shareholders. See "Principal and Selling Shareholders."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1996, and as adjusted to reflect the net proceeds from the sale by the
Company of 2,000,000 shares of Common Stock offered hereby and the application
of the estimated net proceeds therefrom as described under "Use of Proceeds."
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein and
the Company's Consolidated Financial Statements and notes thereto incorporated
by reference in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion............................... $ 181 $ 181
------- -------
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,
30,333,493 shares outstanding; 32,333,493 shares outstanding as
adjusted(1)..................................................... 303 323
Capital in excess of par value....................................... 49,738 111,443
Retained earnings.................................................... 26,414 26,414
Cumulative translation adjustment.................................... (7) (7)
------- -------
Total shareholders' equity................................. 76,448 138,173
------- -------
Total capitalization.................................. $76,629 $ 138,354
======= =======
</TABLE>
- ---------------
(1) Does not include (i) an aggregate of 2,738,048 shares of Common Stock
underlying currently outstanding stock options and (ii) 1,355,024 shares
available for issuance under the Company's 1995 Stock Incentive Plan, 1993
Non-Employee Director Stock Option Plan and 1994 Non-Employee Director
Stock Option Plan.
10
<PAGE> 12
PRICE RANGE OF COMMON STOCK
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.
<TABLE>
<CAPTION>
COMMON STOCK
-----------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1994:
First Quarter............................................................ $13.50 $ 7.25
Second Quarter........................................................... 14.50 6.83
Third Quarter............................................................ 14.67 5.50
Fourth Quarter........................................................... 7.33 4.83
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
FISCAL YEAR ENDED AUGUST 31, 1997:
First Quarter (through October 1, 1996).................................. 39.75 32.50
</TABLE>
On October 1, 1996, the last sale price of the Common Stock as reported by
the Nasdaq National Market was $32.50 per share. The approximate number of
record holders of the Common Stock as of October 1, 1996 was 710.
DIVIDEND POLICY
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 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.
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The selected consolidated financial data presented below is derived from
the Consolidated Financial Statements of the Company. The consolidated financial
statements as of and for the years ended August 31, 1991, 1992, 1993, 1994 and
1995 have been audited by Coopers & Lybrand L.L.P., independent accountants. The
income statement data for the nine months ended May 31, 1995 and 1996, and the
balance sheet dated as of May 31, 1996, have been derived from unaudited interim
consolidated financial statements incorporated by reference in this Prospectus
which, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. Operating results for any quarter are not
necessarily indicative of results for any future period. The following
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the Company's
Consolidated Financial Statements and related notes incorporated by reference in
this Prospectus and other consolidated financial information included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED AUGUST 31, MAY 31,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................. $52,835 $74,240 $93,147 $114,119 $149,473 $108,264 $136,208
Cost of sales......................... 30,364 40,238 45,447 54,475 65,032 47,209 52,878
------- ------- ------- -------- -------- -------- --------
Gross profit.......................... 22,471 34,002 47,700 59,644 84,441 61,055 83,330
Selling, general and administrative
expenses............................ 22,140 29,301 37,390 47,005 65,825 47,305 63,283
------- ------- ------- -------- -------- -------- --------
Operating income...................... 331 4,701 10,310 12,639 18,616 13,750 20,047
------- ------- ------- -------- -------- -------- --------
Income from continuing operations (pro
forma)(1)........................... 9 2,905 7,104 8,572 12,338 9,203 13,764
Loss from discontinued
operations(2)....................... -- -- -- (2,377) (7,976) (2,941) --
------- ------- ------- -------- -------- -------- --------
Net income (pro forma)(1)............. $ 9 $ 2,905 $ 7,104 $ 6,195 $ 4,362 $ 6,262 $ 13,764
======= ======= ======= ======== ======== ======== ========
Income (loss) per share (pro
forma)(1):
Continuing operations............... $0.13 $0.31 $0.29 $0.42 $0.31 $0.45
Discontinued operations............. -- -- (0.08) (0.27) (0.10) --
------- ------- -------- -------- -------- --------
Net income per share.................. $0.13 $0.31 $0.21 $0.15 $0.21 $0.45
======= ======= ======== ======== ======== ========
Weighted average shares outstanding... 21,942 23,168 29,269 29,497 29,467 30,388
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31, MAY 31, 1996
----------------------------------------------- ------------------------
1991 1992 1993 1994 1995 ACTUAL AS ADJUSTED(3)
------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 3,731 $ 5,289 $28,771 $21,027 $29,292 $47,288 $109,013
Total assets......................... 16,242 22,194 53,126 61,633 67,351 96,858 158,583
Long-term debt, net of current
portion............................ 2,774 4,938 1,151 776 447 181 181
Shareholders' equity................. 3,632 8,273 41,714 48,962 55,038 76,448 138,173
</TABLE>
- ---------------
(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 1991, 1992 and 1993, income from
continuing operations, net income and income per share from continuing
operations has been computed as if the Company was subject to corporate
income taxes, based on tax laws in effect during such periods. See Note 13
to the Company's Consolidated Financial Statements for the year ended
August 31, 1995 incorporated by reference in this Prospectus.
(2) Net of tax benefit.
(3) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company at an assumed offering price of $32.50 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the related notes thereto incorporated
herein by reference. Additionally, certain divisional data of the Company is set
forth in "Business -- Sales by Distribution Channel."
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 96.5% of the Company's net sales are of products sold under
one of the following brand names: Sundown, Rexall Showcase, Rexall, Thompson(R),
SDV(R) and Rexall Managed Care(R). The sale of private label products accounted
for approximately 3.5% of net sales for the nine month period ended May 31,
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 capsule or two-piece
capsule forms. In 1994, the Company began manufacturing 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 presently 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 as 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 as sales of Rexall Showcase increase as a percentage of net
sales because of the commissions paid to the Company's independent distributors.
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 Company's Consolidated Financial Statements
incorporated by reference in this Prospectus. See "-- Discontinued Operations."
RESULTS OF CONTINUING OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST NINE MONTHS
31, ENDED MAY 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 48.8 47.7 43.5 43.6 38.8
---- ---- ---- ---- ----
Gross profit............................... 51.2 52.3 56.5 56.4 61.2
Selling, general and administrative
expenses................................. 40.1 41.2 44.0 43.7 46.5
---- ---- ---- ---- ----
Operating income........................... 11.1 11.1 12.5 12.7 14.7
Interest expense........................... 0.4 0.1 0.3 0.3 --
Other income............................... 1.2 1.0 0.7 0.8 1.3
---- ---- ---- ---- ----
Income before income tax provision......... 11.9 12.0 12.9 13.2 16.0
---- ---- ---- ---- ----
Income from continuing operations.......... 7.6% 7.5% 8.3% 8.5% 10.1%
==== ==== ==== ==== ====
</TABLE>
13
<PAGE> 15
NINE MONTHS ENDED MAY 31, 1996 COMPARED TO NINE MONTHS ENDED MAY 31, 1995
Net sales for the nine months ended May 31, 1996 were $136.2 million, an
increase of $27.9 million or 25.8% over the comparable period in fiscal 1995. Of
the $27.9 million increase, sales to retailers accounted for $7.9 million, an
increase of 13.5% over the comparable period in fiscal 1995. The increase in
sales to retailers was partially attributable to approximately $4.5 million of
initial shipments of Sundown products to WalMart in the third quarter of fiscal
1996. Net sales of the Company's direct sales subsidiary, Rexall Showcase,
increased by $19.5 million, an increase of 53.1% over the comparable period in
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
$492,000 or 3.9% over the comparable period in fiscal 1995. The increase in net
sales in each division was primarily due to increased unit sales.
Gross profit for the nine months ended May 31, 1996 was $83.3 million, an
increase of $22.3 million or 36.5% over the comparable period in fiscal 1995. As
a percentage of net sales, gross margin increased from 56.4% for the nine months
ended May 31, 1995 to 61.2% for the nine months ended May 31, 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 the nine months ended May 31, 1995 to approximately 166 million
tablets for the comparable period in 1996.
Selling, general and administrative expenses for the nine months ended May
31, 1996 were $63.3 million, an increase of $16.0 million or 33.8% over the
comparable period in fiscal 1995. As a percentage of net sales, such expenses
increased from 43.7% for the nine months ended May 31, 1995 to 46.5% for the
comparable period in 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.
Interest income for the nine months ended May 31, 1996 was $794,000, as
compared to $98,000 for the comparable period in fiscal 1995. Such increase was
primarily a result of investment of the Company's available cash balances, which
were higher in the nine months ended May 31, 1996 than the comparable period in
fiscal 1995, and interest received in the nine months ended May 31, 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 investment
cash balances. Interest expense for the nine months ended May 31, 1996 was
$30,000 as compared to $340,000 for the comparable period in fiscal 1995 as
there were no borrowings under the Company's line of credit in the nine months
ended May 31, 1996.
Income from continuing operations before income tax provision was $21.8
million for the nine months ended May 31, 1996, an increase of $7.5 million or
52.2% over the comparable period in fiscal 1995. As a percentage of net sales,
income from continuing operations before income tax provision increased from
13.2% for the nine months ended May 31, 1995 to 16.0% for the comparable period
in fiscal 1996.
Income from continuing operations was $13.8 million for the nine months
ended May 31, 1996, an increase of $4.6 million or 49.6% over the comparable
period in fiscal 1995. As a percentage of net sales, income from continuing
operations increased from 8.5% for the nine months ended May 31, 1995 to 10.1%
for the comparable period in fiscal 1996 due to the reasons described above.
14
<PAGE> 16
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.
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.
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.
FISCAL YEAR ENDED AUGUST 31, 1994 COMPARED TO FISCAL YEAR ENDED AUGUST 31,
1993
Net sales for fiscal 1994 were $114.1 million, an increase of $21.0 million
or 22.5% over fiscal 1993. Of the $21.0 million increase, sales to retailers
accounted for $9.5 million, an increase of 16.1% over fiscal 1993. Net sales of
Rexall Showcase increased by $9.0 million, an increase of 43.7% over fiscal
1993. Net sales of SDV increased by $2.5 million or 18.3% over fiscal 1993. The
increase in net sales in each division was primarily due to increased unit
sales.
Gross profit for fiscal 1994 was $59.6 million, an increase of $11.9
million or 25.0% over fiscal 1993. As a percentage of net sales, gross margin
increased from 51.2% for fiscal 1993 to 52.3% for fiscal 1994. The increase in
gross margin as a percentage of net sales 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.
Selling, general and administrative expenses for the fiscal year ended
August 31, 1994 were $47.0 million, an increase of $9.6 million or 25.7% over
fiscal 1993. As a percentage of net sales, such expenses increased from 40.1%
for fiscal 1993 to 41.2% for fiscal 1994. The Company incurred significant
expenses, as noted below, in fiscal 1994 that were not incurred in fiscal 1993.
In January 1994, the Company moved into its new 58,000 square foot
administrative facility, and incurred expenses related to such move and
additional operating expenses related to such facility of approximately
$400,000. Additional expenses of approximately $430,000 were incurred as a
result of costs associated with being a public company that did not exist in
fiscal 1993. In addition, the Company experienced period expenses of $350,000
related to its vitamin manufacturing facility,
15
<PAGE> 17
which was purchased in June 1993, prior to commencement of manufacturing.
Additionally, in anticipation of the Company's growth, the Company added
administrative, marketing and sales personnel in fiscal 1994.
Interest income for fiscal 1994 was $361,000, which resulted primarily from
the investment of the remaining proceeds from the Company's initial public
offering, which was consummated in June 1993. Interest expense for fiscal 1994
was $109,000 as compared to $362,000 for fiscal 1993. This decrease resulted
from the reduction in long-term debt through the use of a portion of the
proceeds from the Company's initial public offering. Other income for fiscal
1994 reflects a decrease of rental income on the Company's administrative
facility, which was previously leased to a third party prior to the Company's
occupancy.
Income from continuing operations before income tax provision was $13.7
million for fiscal 1994, an increase of $2.6 million or 23.4% over fiscal 1993.
As a percentage of net sales, income from continuing operations before income
tax provision increased from 11.9% for fiscal 1993 to 12.0% for fiscal 1994.
Income from continuing operations was $8.6 million for fiscal 1994, an
increase of $1.5 million or 20.7% from fiscal 1993. As a percentage of net
sales, income from continuing operations decreased from 7.6% for fiscal 1993 to
7.5% for fiscal 1994 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 secured 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 currently 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.
As of May 31, 1996, the Company had recorded net assets of discontinued
operations of $3.8 million. Assuming full collection of the balance of the
secured note, the Company expects to record a reduction to the estimated loss on
disposition of approximately $1.2 million (net of tax) or $0.04 per share, which
would be reflected as an adjustment to discontinued operations.
16
<PAGE> 18
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth certain quarterly financial data for fiscal
1995 and the nine months ended May 31, 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.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
------------------------------------- ---------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $32,105 $37,868 $38,291 $41,209 $40,867 $40,560 $54,781
Operating income................ 4,371 5,245 4,133 4,867 5,314 5,932 8,801
Income from continuing
operations.................... 2,750 3,488 2,965 3,135 3,556 4,074 6,134
Income per share from continuing
operations.................... $0.09 $0.12 $0.10 $0.11 $0.12 $0.13 $0.20
Weighted average shares
outstanding................... 29,367 29,522 29,512 29,588 30,025 30,385 30,753
</TABLE>
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 $47.3 million as of May 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 increased sales.
Net cash provided by operating activities for the nine months ended May 31,
1996 was $15.1 million compared to net cash used in operating activities of $4.0
million for the comparable period in 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 $9.2 million for the nine months ended May 31,
1996 compared to $2.7 million for the comparable period in fiscal 1995. Net cash
used in investing activities, including $3.2 million used for capital
expenditures, increased primarily due to the purchase of marketable securities
in the nine months ended May 31, 1996. Net cash provided by financing activities
was $4.3 million for the nine months ended May 31, 1996 compared to $5.6 million
for the comparable period in fiscal 1995. The Company's cash flow from financing
activities for the nine months ended May 31, 1996 of $4.3 million reflects $4.6
million received for the exercise of options to purchase Common Stock partially
offset by debt payments, compared to net proceeds from its bank line of credit
of $5.5 million in the comparable period of fiscal 1995.
The Company presently has a line of credit with a financial institution in
the amount of $10 million. There have been no borrowings against the line of
credit in fiscal 1996. Pending the successful completion of this offering, the
Company expects to substantially increase its current line of credit. 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. 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.
17
<PAGE> 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 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.
18
<PAGE> 20
BUSINESS
GENERAL
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 product 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 has experienced
significant growth in recent years as net sales have grown from $74.2 million in
fiscal 1992 to $149.5 million in fiscal 1995, representing a compound annual
growth rate ("CAGR") of 26%.
The Company's recent growth has been driven significantly by sales of its
Sundown(R) brand of vitamins and nutritional supplements, which currently
represent approximately 75% of the Company's sales to retailers. The Sundown
brand offers a broad selection of approximately 290 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.
According to data from IRI, a retail information gathering service, in the
broadline vitamin category, Sundown is currently the number two brand in dollar
and unit sales across all food, drug and mass merchandiser retail outlets and
generates the highest rate of dollar and unit sales per share of all commodity
volume ("ACV") distribution through such outlets. The Company believes that
Sundown's high dollar and unit sales velocity is a result of its value pricing
strategy and its unique, high quality products. The Company believes that there
are significant opportunities for continued growth because Sundown products are
currently available in outlets representing only 35% of ACV sales across all
food, drug and mass merchandiser retail outlets. 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 WalMart stores and Thrifty-Payless and Eckerd drug stores. The Company's net
sales of Sundown products have increased from $42.1 million in fiscal 1992 to
$62.4 million in fiscal 1995.
Another important factor contributing to the Company's recent growth has
been the Company's direct sales subsidiary, Rexall Showcase International, Inc.
("Rexall Showcase"). Rexall Showcase markets unique health and wellness products
under the Rexall Showcase tradename 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. The Company believes that Rexall Showcase has several
competitive advantages over other direct sales organizations including: (i) the
Rexall brand name under which health products have been marketed since 1903;
(ii) Rexall Showcase's commission plan which the Company believes is financially
attractive to its independent distributors; (iii) its broad product mix which
includes approximately 40 innovative products that are unique to Rexall
Showcase; and (iv) Rexall Showcase's ability to attract, support and motivate
distributors. The Company intends to further expand its direct sales business by
continuing to develop and offer innovative products, adding independent
distributors, providing sales support and educating and motivating its existing
and prospective distributors through comprehensive sales aids and regularly
scheduled regional and national conventions and local meetings. 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
$52.6 million in fiscal 1995.
INDUSTRY OVERVIEW
The Company believes that it is well-positioned to capitalize on the
expected growth and consolidation in the highly fragmented vitamin and
nutritional supplement industry. 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
19
<PAGE> 21
billion in 1995, representing a CAGR of 10%. The Company believes that growth in
the vitamin and nutritional supplement market is being driven by several
factors, including: (i) the general public's heightened awareness and
understanding of the connection between diet and health; (ii) the increase in
baby-boomer and senior-aged population groups, which are more likely to consume
vitamins; (iii) product introductions in response to new scientific research
developments; and (iv) the nationwide trend toward preventative medicine.
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 with 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 been a significant
contributor 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.
The primary channels of distribution in the vitamin and nutritional
supplement industry are: (i) mass market retailers which include drug stores,
supermarkets, mass merchandisers 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 represented 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 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. The Company
believes that the larger retailers will align themselves with those companies
that offer a wide variety of high quality products at competitive prices, have a
loyal customer base, support their brands with strong marketing and provide
consistently high levels of customer service. The Company believes that
increasing standards for manufacturing and product quality, resulting in part
from a changing regulatory environment, could also result in consolidation among
vitamin and nutritional supplement companies as it becomes more difficult for
smaller companies to compete effectively. See "-- Government Regulation." The
Company believes it is well-positioned to capitalize on these industry trends.
20
<PAGE> 22
GROWTH STRATEGY
The Company's objective is to achieve profitable sales growth and maximize
market share in its targeted domestic and international markets. To achieve its
growth objectives, the Company intends to employ the following strategies: (i)
leverage the success of the Sundown brand to increase its market share in mass
merchandisers, chain drug stores and supermarkets; (ii) continue the growth of
Rexall Showcase by further developing its product line and increasing the number
and productivity of its independent distributors that market and sell its
products; and (iii) supplement the Company's internal growth through strategic
acquisitions in health and wellness-related markets that leverage existing or
add new distribution channels.
LEVERAGE SUCCESS OF SUNDOWN BRAND. The Company intends to leverage
the success of its Sundown brand by increasing its penetration of select
mass merchandisers, chain drug stores and supermarkets, while continuing to
maintain high dollar and unit sales velocity. The Sundown brand strategy is
to offer 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. In
addition, the Company intends to build upon its existing customer
relationships by continuing to provide responsive service through timely
and innovative product introductions, value-added operating information,
training support and marketing programs that are tailored to its customers'
needs. Sales of the Sundown brand of products have grown from $42.1 million
in fiscal 1992 to $62.4 million in fiscal 1995. According to data from IRI,
in the broadline vitamin category, Sundown generates the highest rate of
dollar and unit sales per share of ACV distribution across all food, drug
and mass merchandiser retail outlets and is currently the number two brand
in dollar and unit sales, despite its availability in outlets representing
only 35% of such ACV sales.
CONTINUE GROWTH OF REXALL SHOWCASE. The Company has experienced
significant growth in the sales of Rexall Showcase, with sales increasing
from $10.4 million in fiscal 1992 to $52.6 million in fiscal 1995. The
Company intends to further expand its direct sales business by continuing
to develop and offer innovative products, adding independent distributors,
providing sales support and educating and motivating its existing and
prospective distributors through comprehensive sales aids and regularly
scheduled regional and national conventions and local meetings. In
addition, Rexall Showcase intends to build on its recent international
expansion in Mexico and South Korea by commencing operations in selected
other countries in the future.
PURSUE STRATEGIC ACQUISITIONS. The Company intends to pursue
strategic acquisitions in the health and wellness-related markets, which
opportunities it believes are available because of the highly-fragmented
nature of the industry. The Company intends to actively pursue acquisition
opportunities that are compatible with its business philosophy, have a
level of critical mass and infrastructure necessary to generate rates of
growth expected by the Company and have a positive financial impact on the
Company's operations. The Company expects that such acquisitions may
include products, product lines or businesses.
21
<PAGE> 23
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31, NINE MONTHS ENDED MAY 31,
DISTRIBUTION -------------------------------------------------------------------------- ------------------------------------
CHANNEL 1992 1993 1994 1995 1995 1996
- ------------- --------------- --------------- ---------------- ---------------- ---------------- ----------------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales to
retailers:
Sundown..... $42,112 56.7% $46,571 50.0% $ 54,216 47.5% $ 62,427 41.8% $ 46,276 42.7% $ 49,720 36.5%
Other(1).... 10,293 13.9 12,231 13.2 14,050 12.3 17,722 11.8 12,745 11.8 17,243 12.7
------- ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total net
sales to
retailers.. 52,405 70.6 58,802 63.2 68,266 59.8 80,149 53.6 59,021 54.5 66,963 49.2
Direct sales
-- Rexall
Showcase.... 10,418 14.0 20,535 22.0 29,510 25.9 52,606 35.2 36,754 34.0 56,264 41.3
Mail
order -- SDV... 11,417 15.4 13,810 14.8 16,343 14.3 16,718 11.2 12,489 11.5 12,981 9.5
------- ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total net
sales... $74,240 100.0% $93,147 100.0% $114,119 100.0% $149,473 100.0% $108,264 100.0% $136,208 100.0%
======== ===== ======== ===== ========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
- ---------------
(1) Rexall, Thompson, private label and Rexall Managed Care 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
$80.1 million in fiscal 1995 and were $67.0 million for the nine months ended
May 31, 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 its retail
customers ultimately experience increased profits per linear shelf foot due to
the higher sales velocity of the Sundown brand. According to data from IRI, in
the broadline vitamin category, Sundown generates the highest rate of dollar and
unit sales per share of ACV distribution across all food, drug and mass
merchandiser retail outlets and is currently the number two brand in dollar and
unit sales, despite its availability in outlets representing only 35% of such
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 WalMart stores and Thrifty-Payless and Eckerd drug stores. Sundown's net
sales have increased from $42.1 million in fiscal 1992 to $62.4 million in
fiscal 1995.
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, 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,
liquid, chewable, two-piece capsule 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).
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
22
<PAGE> 24
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), (the Pycnogenol(R) trademark is owned by a third party) which
includes additional key antioxidants Coenzyme Q-10, Selenium and Grape Seed
Extract; (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 "Business -- 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 outlets for its products.
All international sales are settled in U.S. currency.
Other Sales to Retailers. In addition to 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, selected sales of private label products to retailers 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
pharmacies, 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 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 select customer
requests. For the nine months ended May 31, 1996, approximately 3.5% of the
Company's net sales were from private label products.
The Rexall Managed Care Division was formed in 1995 to market vitamins 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.
23
<PAGE> 25
DIRECT SALES THROUGH INDEPENDENT DISTRIBUTORS
In 1990, the Company formed Rexall Showcase, its network marketing
subsidiary, to market unique health and wellness products under the Rexall
tradename 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. The Company
believes that Rexall Showcase has several competitive advantages over other
direct sales organizations including: (i) the Rexall brand name under which
health products have been marketed since 1903; (ii) Rexall Showcase's commission
plan which the Company believes is financially attractive to its independent
distributors; (iii) its broad product mix which includes approximately 40
innovative products that are unique to Rexall Showcase; and (iv) Rexall
Showcase's ability to attract, support and motivate distributors. The Company
intends to further expand its direct sales business by continuing to develop and
offer innovative products, adding independent distributors, providing sales
support and educating and motivating its existing and prospective distributors
through comprehensive sales aids and regularly scheduled regional and national
conventions and local meetings. 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 commenced 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 $52.6 million in fiscal 1995.
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 twenty-four 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 Rex-Net(SM)
satellite network, which the Company uses to broadcast regular educational and
training programs describing Rexall Showcase products and business opportunities
to the homes of approximately 3,300 distributors, at no cost to the distributor,
for their personal use or for in-home presentations to other distributors or
prospective distributors. The Company also publishes a bi-monthly newsletter
that it distributes for the purpose of updating its distributors on recent
developments, providing other relevant information and recognizing 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.
24
<PAGE> 26
MAIL ORDER
The Company's mail order division markets 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
$16.7 million in fiscal 1995 and were $13.0 million for the nine months ended
May 31, 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
sales velocity, product selection, profitability 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.
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 Company 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 also provides periodic in-store visits to certain
accounts by its merchandisers who restock the shelves, place new orders and
monitor and update the presentation of the Company's product line, including
merchandising vehicles provided by the Company, such as floor displays, side
wings, shelf-talkers, rebates, store signs, promotional packs and other
individualized promotions.
To further support sales, the Company has historically expended
approximately 2% of its sales on advertising. To date, this spending has
primarily been in the form of cooperative support to retailers; however, the
Company has conducted some brand advertising on a limited basis. In addition,
Dick Clark is the Company's national spokesperson, Sundown is the official
vitamin 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 September 30, 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, 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 is recognized as an industry leader in the consistent and
timely introduction of 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
25
<PAGE> 27
the American Medical Association. The Company also responds to suggestions from
vendors and consumers. Such product ideas are developed conceptually 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. 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 structure and function claims
of the new product, are developed, along with the final costs of production
which are reviewed by the financial and marketing teams to determine that
adequate 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.
Management believes that the Company's introduction of new products has
enabled the Company to increase market share for both the Company and its retail
customers, and the Company intends to continue developing new products in the
future. 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. Currently, the Company manufactures
approximately 60% of its products and, with the addition of two piece capsules,
anticipates increasing that percentage to 75% by the end of fiscal 1997. 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 soft gelatin capsules 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 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 places special emphasis on 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 are
subjected to various testing procedures, including sample testing, weight
testing, purity testing and, where required, microbiological testing. In 1995,
H.V. Shuster, Inc., an independent quality assurance and testing service,
awarded the Company their highest rating for vitamin manufacturing companies for
its vitamin manufacturing facility and operations, including its manufacturing,
testing and quality control procedures.
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. 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
26
<PAGE> 28
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 and localities
in which the Company's products are sold. In particular, the FDA regulates the
safety, 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 vitamins, 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 the
active ingredients in 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 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 such "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 most likely to require
expanded or different labeling for the Company's vitamins and nutritional
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, have now
27
<PAGE> 29
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 new, 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,
depending on the product category, 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. The Company believes that its OTC pharmaceutical products distributed
by the Company's Rexall, Rexall Showcase and Rexall Managed Care divisions
comply in all material respects with existing regulations.
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. The Company believes that it is in material
compliance with such provisions and has, in certain cases, established
procedures providing greater protection for its distributors than is required by
law.
COMPETITION
The market for the sale of vitamins and nutritional supplements is highly
competitive. There are numerous companies in the vitamin and nutritional
supplement industry selling products to retailers, including mass merchandisers,
drug store chains, independent drug stores and health food stores. Most
companies are privately held and the Company is unable to precisely assess the
size of its competitors or where it ranks in comparison to such privately held
competitors with respect to sales to retailers. 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 other direct
sales companies. The Company competes in the recruitment of independent sales
people with other network marketing 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 and/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.
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<PAGE> 30
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 and Canada, including
several patents relating to its Bios Life 2 and Bios Life 2 Natural weight
management products and a patent for dual-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.
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.
PROPERTIES
As of October 1, 1996, the Company owned or leased the following
facilities:
<TABLE>
<CAPTION>
APPROXIMATE EXPIRATION DATE
LOCATION TYPE OF FACILITY SQUARE FEET LEASED OR OWNED OF LEASES
- ------------------------- ----------------------------- ----------- ---------------- ------------------
<S> <C> <C> <C> <C>
Boca Raton, Florida Administrative Offices 58,000 Owned --
Boca Raton, Florida Manufacturing and Production 82,000 Owned --
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
</TABLE>
- ---------------
(1) Subject to two leases: A lease for 60,000 square feet expiring March 1998,
and a lease for 30,000 square feet expiring in April 1997.
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
September 30, 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
29
<PAGE> 31
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
and/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 U.S. 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 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 Company's 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 in the United
States District Court for the Southern District of Florida by Patrick J. Hines,
on behalf of himself and others similarly situated against the Company, Rexall
Showcase and certain of its officers. 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 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 federal civil procedural
rules. 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.
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<PAGE> 32
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------- --- ---------------------------------------
<S> <C> <C>
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........................... 45 Vice President -- Finance, Chief
Financial Officer and Treasurer
Richard Werber......................... 44 Vice President -- Legal Affairs,
General Counsel and Secretary
Stanley Leedy.......................... 62 Director
Raymond Monteleone..................... 49 Director
Howard Yenke........................... 60 Director
</TABLE>
CARL DESANTIS founded the Company in 1976, has served as Chairman of the
Board and Chief Executive Officer since its inception, and served as President
from 1976 to April 1995. Mr. DeSantis has had over 17 years of experience with
retail drug 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 38 years of
experience in the consumer products industry with companies such as
Bristol-Myers, 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 Chief Financial Officer of the Company since August
1989, Vice President -- Finance and Treasurer of the Company since March 1993
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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<PAGE> 33
STANLEY LEEDY has been a Director of the Company since March 1993. Since
January 1985, Mr. Leedy has been the president and chief executive officer of
VanSan Corporation, a consulting firm for the pharmaceutical and vitamin
industry. From July 1989 through September 1992, Mr. Leedy served as president
of I. Wolfmark, Inc., which was an affiliate of the Company. Mr. Leedy has over
thirty years of experience in the pharmaceutical and vitamin industry and has
previously served as president and chief executive officer of the Rexall Drug &
Chemical Company, a division of Dart Industries, Inc.
RAYMOND MONTELEONE has been a Director of the Company since April 1995.
Since July 1996, Mr. Monteleone has been the president and chief operating
officer of First American Railways, Inc. From May 1988 until January 1996, Mr.
Monteleone was employed by Sensormatic Electronics Corporation in various
capacities, including vice president -- corporate development, planning and
administration and acting chief financial officer. Prior to that, Mr. Monteleone
was a partner with the accounting firm of Arthur Young & Company. Mr. Monteleone
is a Certified Public Accountant.
HOWARD YENKE has been a Director of the Company since April 1995. Since
July 1996, Mr. Yenke has been the president and chief operating officer of
LANart Corp., a private local area network company. From November 1995 to June
1996, Mr. Yenke was the President of The Yenke Group, a business consulting
firm. From November 1994 to October 1995, Mr. Yenke was the president and chief
executive officer of Enterprise Development Corporation of Palm Beach County, an
economic developing consulting firm. From June 1994 to October 1994, Mr. Yenke
was president and chief executive officer of Arco Computer Products. From May
1989 to March 1994, Mr. Yenke was employed by Boca Research, Inc. in several
capacities, including its president and chief executive officer from September
1991 through March 1994. Prior thereto, Mr. Yenke was employed by IBM
Corporation in various executive management positions. Mr. Yenke is a director
of Checkmate Electronics, Inc.
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<PAGE> 34
EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Company's Chief
Executive Officer and the other four most highly paid executive officers who
were serving as executive officers at the end of fiscal 1995 and the Company's
President and Chief Operating Officer, who was elected during fiscal 1995
(collectively, the "Named Executive Officers"), for the fiscal years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION(1)
ANNUAL COMPENSATION ---------------
---------------------------------------------- NUMBER
FISCAL OTHER ANNUAL OF OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(2) GRANTED
- -------------------------------------- ------ -------- -------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Carl DeSantis(3)...................... 1995 $321,205 $ 10,000 $ 9,958 37,500
Chairman of the Board and Chief 1994 305,037 160,000 8,862 82,500
Executive Officer 1993 540,425 88,333 12,419 --
Christian Nast(3)(4).................. 1995 113,077 -- 3,950 322,500
President and Chief Operating 1994 -- -- -- --
Officer 1993 -- -- -- --
Dean DeSantis(3)...................... 1995 173,524 35,000 7,687 75,000
Senior Vice President -- Operations 1994 158,105 10,000 7,749 45,000
1993 141,702 146,286 10,899 --
Damon DeSantis(3)..................... 1995 171,351 35,000 6,376 75,000
Executive Vice President and 1994 158,148 10,000 7,070 45,000
President of Rexall Showcase 1993 140,241 143,125 4,908 --
Nickolas Palin(3)..................... 1995 190,359 35,000 3,845 60,000
Senior Vice President -- Sales and 1994 178,374 10,000 6,851 45,000
Marketing 1993 164,769 180,507 8,241 75,000
Geary Cotton(3)....................... 1995 176,593 10,000 8,400 60,000
Vice President -- Finance, Chief 1994 163,189 10,000 8,975 45,000
Financial Officer and Treasurer 1993 148,235 178,200 10,060 75,000
</TABLE>
- ---------------
(1) The columns for "Restricted Stock Awards," "LTIP Payouts" and "All Other
Compensation" have been omitted because there is no compensation required
to be reported in such columns.
(2) Represents that portion of the Company's automobile expense allowance
attributable to non-business utilization of such officer's automobile and
the Company's contributions to its 401(k) Plan for the benefit of such
officer.
(3) See "-- Employment Agreements" for information regarding current and future
compensation arrangements.
(4) Mr. Nast's employment with the Company commenced on April 24, 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Carl DeSantis,
Nickolas Palin, Dean DeSantis, Damon DeSantis and Geary Cotton for three-year
terms commencing April 1, 1995, pursuant to which they currently receive base
annual salaries of $435,000, $275,000, $195,000, $190,000 and $190,000,
respectively, and the Company entered into an employment agreement with
Christian Nast for a three-year, four-month term commencing April 24, 1995,
pursuant to which he currently receives a base annual salary of $315,000. Each
of such employment agreements provides for annual increases of base salary of
the greater of 5% or the percentage increase in the consumer price index
published by the U.S. Department of Labor. In addition, each of such officers is
entitled to receive incentive bonuses upon the attainment by the Company of
certain net sales and net income targets. Such bonuses may not exceed 100% of
base salary for Carl DeSantis;
33
<PAGE> 35
75% of base salary for Christian Nast; and 50% of base salary for Nickolas
Palin, Geary Cotton, Dean DeSantis and Damon DeSantis.
The employment agreements each provide that, if the employee terminates his
employment without good reason or is terminated for cause, such employee is
subject to a non-competition provision for a period of 18 months. In the event
of a change of control of the Company, the employee is entitled to terminate his
employment and receive a lump sum distribution of compensation in an amount
equal to three times such employee's then current effective yearly compensation,
including, but not limited to, salary and bonuses. If the employee elects to so
terminate, the non-competition provisions contained in the employment agreement
will terminate. Similar provisions apply in the event an employee is terminated
without cause upon a change of control of the Company. Payments under the
agreements by the Company after a change of control are, however, limited to the
amount which would be deductible by the Company under the Internal Revenue Code
of 1986, as amended therein. A "change of control" is deemed to occur upon (i)
the acquisition of 30% or more of the Company's voting power by anyone other
than a current Director, executive officer of the Company or an affiliate
thereof, without approval of a majority of the Board of Directors or (ii) the
Incumbent Directors, as defined, becoming less than a majority of the Board of
Directors of the Company or its successor. A change of control, as to any
employee, may not result from a voluntary action of such employee.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
From November 1994 to January 1996, Stanley Leedy, a director of the
Company, performed consulting services for Pennex, a discontinued operation of
the Company. Mr. Leedy was paid $91,000 and $110,000 in consulting fees in
fiscal 1995 and fiscal 1996, respectively, pursuant to such consulting
arrangement. Mr Leedy was also reimbursed for his out-of-pocket expenses
incurred in connection therewith.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the Common Stock as of September 30, 1996 and as
adjusted to reflect the sale of 2,000,000 shares of Common Stock by the Company
and the sale of 2,000,000 shares of Common Stock by the Selling Shareholders, by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock, (ii) each of the Selling Shareholders, (iii)
each director of the Company, (iv) each of the Named Executive Officers and (v)
all executive officers and directors of the Company as a group.
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
BEFORE THE OFFERING AFTER THE OFFERING
-------------------------- NUMBER OF SHARES --------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------ ---------- ------- ---------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Carl DeSantis(1).................... 13,415,581(2)(3) 43.6% 1,500,000 11,915,581(2)(3) 36.4%
Dean DeSantis(1).................... 2,745,481(3)(4) 8.9 500,000 2,245,481(3)(4) 6.9
Damon DeSantis(1)................... 3,123,231(3)(5) 10.1 -- 3,123,231(3)(5) 9.5
Christian Nast...................... 25,350(3) * -- 25,350(3) *
Nickolas Palin...................... 51,581(3) * -- 51,581(3) *
Geary Cotton........................ 314,926(3)(6) 1.0 -- 314,926(3)(7) *
Stanley Leedy....................... 12,500(3) * -- 12,500(3) *
Raymond Monteleone.................. 1,500(3) * -- 1,500(3) *
Howard Yenke........................ 1,500(3) * -- 1,500(3) *
CDD Partners, Ltd.(1)............... 12,098,736(3) 39.4 (1) 10,098,736(3) 30.9
Sylvia DeSantis..................... 6,915,932(7) 22.5 -- 6,915,932(7) 21.1
All Executive Officers and Directors
as a group (10 persons)........... 19,798,650(8) 63.6 2,000,000 17,798,650(8) 53.7
</TABLE>
- ---------------
* Less than 1%.
(1) The shares of Common Stock being offered by Carl DeSantis and Dean DeSantis
(the "Borrowing Shareholders") will be borrowed from CDD Partners, Ltd.
("CDD"), a Texas limited partnership of which Carl DeSantis, Dean DeSantis
and Damon DeSantis are limited partners and share control of
34
<PAGE> 36
CDD Management, Inc. ("CDDM"), a Texas corporation and the general partner
of CDD. In each case, the Borrowing Shareholders will be obligated to repay
the borrowing by delivering to CDD shares equal in number to the borrowed
shares ("Identical Shares") five days after demand by CDD; and, upon
demand, CDD will receive from the Borrowing Shareholders amounts equal to
dividends and other distributions on the Identical Shares. CDD may from
time to time demand a pledge of collateral by the Borrowing Shareholders to
secure the Borrowing Shareholders' obligations to repay Identical Shares to
CDD. CDD's address is 324 Harbor Landing Drive, Rockwall, Texas 75087. In
June 1993, each of Carl DeSantis, Dean DeSantis and Damon DeSantis
contributed all shares of Common Stock then owned by them to CDD and CDDM.
See "Management" for information regarding the positions of the Borrowing
Shareholders with the Company. Each of Carl DeSantis, Dean DeSantis and
Damon DeSantis has shared beneficial ownership and voting power with
respect to all such shares.
(2) Includes 6,915,932 shares owned by Sylvia DeSantis as to which Carl DeSantis
has sole voting power and 5,687,212 shares (5,187,212 shares after this
offering) held by Dean DeSantis and Damon DeSantis indirectly through CDD.
(3) For each person includes shares beneficially owned pursuant to currently
exercisable stock options or options which will become exercisable within
60 days: Carl DeSantis -- 58,125 shares; Dean DeSantis -- 73,125 shares;
Damon DeSantis -- 73,125 shares; Christian Nast -- 7,685 shares; Nickolas
Palin -- 31,500 shares; Geary Cotton -- 79,500 shares; Stanley
Leedy -- 12,500 shares; Raymond Monteleone -- 1,500 shares; and Howard
Yenke -- 1,500 shares.
(4) Does not include 9,456,380 shares (7,956,380 shares after this offering)
held by Carl DeSantis and Damon DeSantis indirectly through CDD and 8,000
shares beneficially owned by the wife of Dean DeSantis, as to which shares
Mr. DeSantis disclaims beneficial ownership.
(5) Does not include 9,113,880 shares (7,113,880 shares after this offering)
held by Carl DeSantis and Dean DeSantis indirectly through CDD and 4,500
shares owned by the wife of Damon DeSantis, as to which shares Mr. DeSantis
disclaims beneficial ownership.
(6) Does not include 4,500 shares owned by the wife of Geary Cotton, as to which
shares Mr. Cotton disclaims beneficial ownership.
(7) Ms. DeSantis' address is 851 Broken Sound Parkway, NW, Boca Raton, Florida
33487. All of such shares are subject to an irrevocable proxy granted to
Carl DeSantis, and 6,579,021 of such shares are further subject to a stock
purchase agreement with an irrevocable life insurance trust for the benefit
of her children. Such stock purchase agreement provides for significant
restrictions on sales or transfers of such shares during her life, and
requires the sale of such shares to such trust upon her death.
(8) Includes 424,560 shares beneficially owned by directors and executive
officers as a group pursuant to stock options under which such persons have
the right to acquire such shares within 60 days. See "Executive
Compensation."
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of common stock, par value $0.01 per share (the "Common Stock"), and 5,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock").
COMMON STOCK
The Common Stock possesses ordinary voting rights, and the holders thereof
vote together as a single class for the election of Directors and in respect of
other corporate matters. Holders of shares of Common Stock are entitled to one
vote per share. In the event of the voluntary or involuntary liquidation,
distribution or sale of assets, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive and share ratably in all net
assets available for distribution to shareholders after distribution in full of
the preferential amount, if any, to be distributed to the holders of the
Preferred Stock. Cumulative voting of shares is not permitted. The Common Stock
carries no preemptive rights and is not convertible, redeemable or
35
<PAGE> 37
assessable, or entitled to the benefits of any sinking fund. After the
requirements with respect to preferential dividends on Preferred Stock, if any,
have been met, the holders of Common Stock are entitled to such dividends as may
be declared by the Company's Board of Directors and paid out of funds legally
available therefor.
PREFERRED STOCK
The Board of Directors of the Company, without further action by the
shareholders, is authorized to issue Preferred Stock in one or more series and
to fix and determine as to any series all the relative rights and preferences of
shares in such series, including, without limitation, preferences, limitations
or relative rights with respect to redemption rights, conversion rights, if any,
voting rights, if any, dividend rights and preferences on liquidation. Although
the Company has no present intention to issue shares of Preferred Stock, the
issuance of shares of Preferred Stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal
that some, or a majority, of the shareholders might believe to be in the best
interests of the Company or in which shareholders might receive a premium for
their stock over the then market price of such stock. In addition, under certain
circumstances, the issuance of Preferred Stock could adversely affect the voting
power of the holders of the Common Stock.
CERTAIN PROVISIONS OF FLORIDA LAW
The Company is subject to several anti-takeover provisions under Florida
law that apply to a public corporation organized under Florida law unless the
corporation has elected to opt out of such provisions in the Articles of
Incorporation or, depending on the provision in question, its By-Laws. The
Company has not elected to opt out of these provisions. The Common Stock is
subject to the "affiliated transaction" and "control-share acquisition"
provisions of the Florida Business Corporation Act, Sections 607.0901 and
607.0902, Florida Statutes, respectively. These provide that, subject to certain
exceptions, an "affiliated transaction" must be approved by the holders of
two-thirds of the voting shares other than those beneficially owned by an
"interested shareholder" and that "control shares" acquired in specified
control-share acquisitions have voting rights only to the extent conferred by
resolution approved by shareholders, excluding holders of shares defined as
"interested shares."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
36
<PAGE> 38
UNDERWRITING
The Underwriters named below, acting through their representatives, Raymond
James & Associates, Inc., Adams, Harkness & Hill, Inc. and Montgomery Securities
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the underwriting agreement (the "Underwriting Agreement"), by and
among the Company, the Selling Shareholders and the Underwriters to purchase
from the Company and the Selling Shareholders the number of shares of Common
Stock set forth below opposite their respective names, at the public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
Raymond James & Associates, Inc. .........................................
Adams, Harkness & Hill, Inc. .............................................
Montgomery Securities.....................................................
---------
Total........................................................... 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by their counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain dealers, including the Underwriters, at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. The Representatives have informed the Company
and the Selling Shareholders that the Underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
Certain of the Underwriters and the selling group members that currently
act as market makers for the Common Stock may engage in "passive market making"
in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Rule
10b-6A permits, upon satisfaction of certain conditions, underwriters and
selling group members participating in a distribution that are also Nasdaq
market makers in the security being distributed to engage in limited market
making activity when Rule 10b-6A would otherwise prohibit such activity. Rule
10b-6A prohibits underwriters and selling group members engaged in passive
market making generally from entering a bid or affecting a purchase at a price
that exceeds the highest bid for those securities displayed on Nasdaq by a
market maker that is not participating in the distribution of the Common Stock.
Each underwriter or selling group member engaged in passive market making is
subject to a daily net purchase limitation equal to 30% of such entity's average
daily trading volume during the two full consecutive calendar months immediately
preceding the date of the filing of the Registration Statement of which this
Prospectus forms a part.
37
<PAGE> 39
The Company and the Selling Shareholders have granted to the Underwriters
an option, exercisable not later than 30 days after the date of this Prospectus,
to purchase up to an aggregate of 600,000 additional shares of Common Stock, at
the public offering price, less the underwriting discounts and commissions, set
forth on the cover page of this Prospectus. Of the shares subject to this
option, the Selling Shareholders will, at their sole discretion, sell up to
100,000 shares and the Company will sell 500,000 shares plus any shares that the
Selling Shareholders elect not to sell. To the extent that the Underwriters
exercise such option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares of
Common Stock to be purchased by it shown in the above table bears to the total
shown, and the Company will be obligated, pursuant to the option, to sell such
shares to the Underwriters. The Underwriter may exercise this option only to
cover such over-allotments, if any, made in connection with the sale of the
shares of Common Stock offered hereby. If purchased, the Underwriters will sell
such additional shares on the same terms as those on which the shares are being
offered.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against, and to contribute to losses arising out of, certain civil
liabilities in connection with this offering, including liabilities under the
Securities Act.
The Company, its officers and directors and the Selling Shareholders have
agreed that for a period of 180 days following the date of this Prospectus, they
will not, except with the prior written consent of Raymond James & Associates,
Inc., acting for the Underwriters, sell, contract to sell or otherwise dispose
of any shares of Common Stock. This restriction does not apply to shares sold by
Selling Shareholders hereunder or certain issuances of Common Stock by the
Company pursuant to its stock option plans. See "Risk Factors -- Shares Eligible
for Future Sale."
The foregoing includes a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus forms a part.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the Company and for the Selling Shareholders by Greenberg,
Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A., Miami, Florida, for the Selling
Shareholders by Tescher Chaves Rubin Forman & Muller, P.A., Miami, Florida, and
for the Underwriters by King & Spalding, Atlanta, Georgia.
EXPERTS
The financial statements of the Company incorporated in this Prospectus by
reference to the Company's Annual Report on Form 10-K for the year ended August
31, 1995, have been incorporated herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information filed by the Company may be
inspected and copied (at prescribed rates) at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the following regional offices of the Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In
addition, such reports, proxy statements and other information can be obtained
from the Commission's web site at http://www.sec.gov. Quotations relating to the
Company's Common Stock appear on the Nasdaq National Market. Such reports,
38
<PAGE> 40
proxy statements and other information concerning the Company can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-3 (the "Registration Statement") under the Securities Act, with respect to the
shares of Common Stock offered hereby. This Prospectus, which is a part of the
Registration Statement, does not contain all the information set forth in, or
annexed as exhibits to, such Registration Statement, certain portions of which
have been omitted pursuant to rules and regulations of the Commission. For
further information with respect to the Company and the shares of Common Stock
offered hereby, reference is hereby made to such Registration Statement,
including the exhibits thereto. Copies of such Registration Statement, including
exhibits, may be obtained from the aforementioned public reference facilities of
the Commission upon payment of the prescribed fees, or may be examined without
charge at such facilities. Statements contained herein concerning any document
filed as an exhibit are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement. Each such statement is qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated in and made a part of this Prospectus by
reference:
(a) the Company's Annual Reports on Form 10-K and Form 10-K/A for the
fiscal year ended August 31, 1995;
(b) the Company's Quarterly Reports on Form 10-Q for the fiscal
quarters ended November 30, 1995, February 29, 1996 and May 31, 1996; and
(c) the description of the Common Stock contained in the Company's
Registration Statement on Form 8-A dated June 7, 1993 (Registration No.
0-21884).
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of this offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein, or in any other
subsequently filed documents, which also are incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. The Company hereby undertakes to provide, without
charge, to each person, including any beneficial owner, to whom a copy of this
Prospectus is delivered, on the written or oral request of such person, a copy
of any or all of the information incorporated herein by reference. Exhibits to
any of such documents, however, will not be provided unless such exhibits are
specifically incorporated by reference into such documents. The requests should
be addressed to the Company's principal executive offices: Attn: Secretary, 851
Broken Sound Parkway, NW, Boca Raton, Florida 33487, telephone number (561)
241-9400.
39
<PAGE> 41
INSIDE BACK COVER -- THE COMPANY'S PRODUCTION, LABORATORY AND OTHER FACILITIES.
<PAGE> 42
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY,
THE SELLING SHAREHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES, OR AN OFFER TO SELL OR
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY JURISDICTION WHERE, OR TO
ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 10
Capitalization........................ 10
Price Range of Common Stock........... 11
Dividend Policy....................... 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 13
Business.............................. 19
Management............................ 31
Certain Relationships and Related
Transactions........................ 34
Principal and Selling Shareholders.... 34
Description of Capital Stock.......... 35
Underwriting.......................... 37
Legal Matters......................... 38
Experts............................... 38
Available Information................. 38
Incorporation of Certain Documents by
Reference........................... 39
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
4,000,000 SHARES
[REXALL SUNDOWN, INC. LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
RAYMOND JAMES & ASSOCIATES, INC.
ADAMS, HARKNESS & HILL, INC.
MONTGOMERY SECURITIES
, 1996
------------------------------------------------------
------------------------------------------------------
<PAGE> 43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company will pay all of the expenses incurred in connection with the
offering described in this registration statement. Such expenses are estimated
to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee..................... $ 48,613.64
Nasdaq National Market listing fee...................................... 17,500.00
Legal fees and expenses................................................. 75,000.00
Printing expenses....................................................... 90,000.00
Fees and expenses (including legal fees for qualification under state
securities laws)...................................................... 10,000.00
Accounting fees and expenses............................................ 35,000.00
Miscellaneous........................................................... 73,886.36
-----------
Total......................................................... $350,000.00
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has authority under the Florida Business Corporation Act to
indemnify its Directors and officers to the extent provided for in such statute.
The Company's Amended and Restated Articles of Incorporation require the Company
to indemnify the Company's Directors, officers, employees and agents. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling the Company, pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. The Company also maintains directors' and officers' liability
insurance.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <C> <S>
*1.1 -- Underwriting Agreement
*5.1 -- Opinion of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A.
*23.1 -- Consent of Greenberg, Traurig, Hoffman, Lipoff, Rosen & Quentel, P.A. (contained in
Exhibit 5.1 hereto)
23.2 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (Reference is made to page II-3 of this Registration Statement).
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise,
II-1
<PAGE> 44
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boca Raton, State of Florida, on this 2nd day of
October, 1996.
REXALL SUNDOWN, INC.
By: /s/ CHRISTIAN NAST
------------------------------------
Christian Nast,
President, Chief Operating Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl DeSantis, Christian Nast and Geary Cotton,
and each of them, his true and lawful attorney-in-fact and agents, each with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments, including
post-effective amendments, to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that each said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ CARL DESANTIS Chairman of the Board and October 2, 1996
- --------------------------------------------- Chief Executive Officer
Carl DeSantis
/s/ CHRISTIAN NAST Director, President and Chief October 2, 1996
- --------------------------------------------- Operating Officer
Christian Nast
/s/ DEAN DESANTIS Director and Senior Vice October 2, 1996
- --------------------------------------------- President -- Operations
Dean DeSantis
/s/ DAMON DESANTIS Director and Executive Vice October 2, 1996
- --------------------------------------------- President
Damon DeSantis
/s/ GEARY COTTON Vice President -- Finance, October 2, 1996
- --------------------------------------------- Chief Financial Officer,
Geary Cotton Treasurer and Chief
Accounting Officer
</TABLE>
II-3
<PAGE> 46
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ NICKOLAS PALIN Director and Senior Vice October 2, 1996
- --------------------------------------------- President -- Sales and
Nickolas Palin Marketing
/s/ STANLEY LEEDY Director October 2, 1996
- ---------------------------------------------
Stanley Leedy
/s/ RAYMOND MONTELEONE Director October 2, 1996
- ---------------------------------------------
Raymond Monteleone
/s/ HOWARD YENKE Director October 2, 1996
- ---------------------------------------------
Howard Yenke
</TABLE>
II-4
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------ ----------------------------------------------------------------------
<C> <C> <S> <C>
23.2 -- Consent of Coopers & Lybrand L.L.P.
24.1 -- Power of Attorney (Reference is made to page II-3 of the Registration
Statement).
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Rexall Sundown, Inc. on Form S-3 of our report dated October 19, 1995, on our
audits of the consolidated financial statements as of August 31, 1995 and 1994,
and for each of the three years in the period ended August 31, 1995 which
report is included in the Annual Report on Form 10-K. We also consent to the
reference to our firm under the captions "Selected Financial Data" and
"Experts."
COOPERS & LYBRAND L.L.P.
Ft. Lauderdale, Florida
October 3, 1996
