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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996)
FOR THE FISCAL YEAR ENDED AUGUST 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
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COMMISSION FILE NUMBER: 0-21884
REXALL SUNDOWN, INC.
(Exact name of Registrant as specified in its charter)
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FLORIDA 59-1688986
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
851 BROKEN SOUND PARKWAY, NW
BOCA RATON, FLORIDA 33487
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (561) 241-9400
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the Registrant held by
non-affiliates based on the closing sale price of the common stock on November
18, 1997 was $756,610,860.
As of November 18, 1997, the Registrant had 67,849,750 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on February 4, 1998 are incorporated by reference into
Part III of this Report.
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This Report may contain certain "forward-looking statements" as such term
is defined in the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases, 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, margins and
growth in sales of the Company's products. For this purpose, any statements
contained in this Report that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "will," "expect," "believe," "anticipate,"
"intend," "could," "estimate" or "continue" or the negative or other variations
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, certain of which are beyond the Company's control, and actual
results may differ materially depending on a variety of important factors,
including uncertainty related to acquisitions, government regulation, managing
and maintaining growth, the effect of adverse publicity, reliance on independent
distributors of Rexall Showcase, the centralized location of the Company's
manufacturing operations, availability of raw materials, risks associated with
international operations, competition, product liability claims, volatility of
stock price and those factors described in this and other Company filings with
the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS.
Unless otherwise indicated, all share, per share and financial information
set forth herein reflects the two-for-one stock split effected in October 1997.
GENERAL
Rexall Sundown, Inc. (the "Company") develops, manufactures, markets and
sells vitamins, nutritional supplements and consumer health products through
three channels of distribution: sales to retailers; direct sales through
independent distributors; and mail order. The Company offers a broad product
line of approximately 1,300 products consisting of approximately 1,900 stock
keeping units ("SKUs"), including vitamins in both multivitamin and
single-entity formulas, minerals, herbals, homeopathic remedies, weight
management products, skin care products and over-the-counter ("OTC")
pharmaceuticals.
The Company's principal executive offices are located at 851 Broken Sound
Parkway, NW, Boca Raton, Florida 33487 and its telephone number is (561)
241-9400. As used herein, the "Company" means Rexall Sundown, Inc. and its
subsidiaries, except where the context indicates otherwise.
INDUSTRY OVERVIEW
As reported by industry sources, the annual domestic retail market for
vitamins and nutritional supplements was $6.5 billion in 1996. In the last
several years, public awareness of the positive effects of vitamins and
nutritional supplements on health has been heightened by widely publicized
reports of scientific findings. Recent studies have indicated a correlation
between the regular consumption of selected vitamins and nutritional supplements
and reduced incidences of conditions such as heart disease, cancer, stroke,
arthritis, osteoporosis, mental fatigue and depression and neural tube birth
defects. The rise of alternative medicine and the holistic health movement has
also contributed to increased sales of nutritional supplements.
The Company expects that the aging of the United States population,
together with a corresponding increased focus on preventative health measures,
will result in increased demand for vitamins and nutritional supplement
products. According to the United States Census Bureau, through 2010, the
35-and-older age group of consumers, which represents a substantial majority 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 approximately 35% of Americans consumed vitamins
and nutritional supplements on a regular basis in 1996, the Company believes
that there is a large untapped domestic market for
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vitamins and nutritional supplements. Industry sources also report that vitamin
consumers are taking more vitamins and nutritional supplements per day than in
the past.
The primary channels of distribution in the vitamin and nutritional
supplement industry are: (i) mass market retailers which include 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, the market for national brands and broadline and other brands
of vitamins in the mass market has increased from approximately 60% in each of
1994 and 1995 to approximately 65% of total domestic vitamin dollar sales in
1996 and the market for private label vitamins has decreased from approximately
40% in each of 1994 and 1995 to approximately 35% in 1996 of such sales. The
national brand category primarily consists of multivitamin and mineral products
marketed under nationally advertised names such as Centrum(R), One-A-Day(R) and
Theragran(R). Broadline brands, such as the Company's Sundown(R) brand, offer a
complete range of products under one brand name, including multivitamins,
single-entity vitamins, minerals and nutritional supplements, including herbal
products. Private label products marketed under the retailer's store brand name
also offer a wide product assortment, albeit somewhat narrower in scope than
broadline brands, including national brand equivalent formulas positioned as
lower-priced "compare and save" products.
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.
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. Certain amounts have been reclassified to conform with
the 1997 presentation.
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FISCAL YEAR ENDED AUGUST 31,
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DISTRIBUTION CHANNEL 1997 1996 1995 1994 1993
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Sales to retailers:
Sundown............ $116,645 44.3% $ 71,387 38.2% $ 62,427 42.0% $ 54,216 47.8% $ 46,571 50.3%
Other(1)........... 24,830 9.4 22,728 12.1 17,722 11.9 14,050 12.4 12,231 13.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total sales to
retailers...... 141,475 53.7 94,115 50.3 80,149 53.9 68,266 60.2 58,802 63.6
Direct sales --
Rexall
Showcase(R)........ 105,221 40.0 76,483 40.9 52,606 35.4 29,510 26.1 20,535 22.1
Mail
order -- SDV(R).... 16,673 6.3 16,442 8.8 15,979 10.7 15,559 13.7 13,279 14.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total net sales.. $263,369 100.0% $187,040 100.0% $148,734 100.0% $113,335 100.0% $ 92,616 100.0%
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* Includes Rexall(R), Thompson(R), private label and Rexall Managed Care(R).
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 $58.8 million in fiscal 1993 to
$141.5 million in fiscal 1997.
Sundown. The Company has been selling vitamins and nutritional supplements
under the Sundown tradename since 1976. The Sundown brand offers a broad
selection of high quality products at prices lower than comparable-quality
branded vitamins, thereby creating value for consumers as well as higher rates
of shelf inventory turnover for retailers. The Company believes that its retail
customers ultimately experience
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increased profits per linear shelf foot due to the high sales velocity of the
Sundown brand. According to data from Information Resources, Inc. ("IRI"), a
retail information gathering service, for the 52 week period ended September 28,
1997, in the broadline vitamin category, Sundown was the number one brand in
dollar and unit sales, despite its availability in outlets representing only 50%
of all commodity volume ("ACV") sales and generates the highest rate of dollar
and unit sales per share of distribution across all food, drug and mass
merchandiser retail outlets.
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 in all Kmart stores and in
fiscal 1996, the Company gained nationwide distribution of Sundown products in
all Wal*Mart stores and all Thrifty-Payless and Eckerd drug stores. In fiscal
1997, the Company gained nationwide distribution of Sundown products chainwide
in Kroger and Winn-Dixie supermarkets, all Rite-Aid drug stores and in all
Shopko discount stores. Sundown's net sales have increased from $46.6 million in
fiscal 1993 to $116.6 million in fiscal 1997.
The Company sells approximately 325 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 500 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 and emerging health and nutrition trends in the past
year include the introduction of (i) Sundown's Osteo-Bi-Flex(TM) and Thompson's
Gluco-Pro 900(TM), which are patented combinations of the two dietary
ingredients, glucosamine and chondroitin sulfate, featured in the New York Times
bestseller, The Arthritis Cure, and reported in various clinical studies to
provide nutritional benefits which may help to promote healthy, mobile joint
function and connective tissue health; (ii) St. John's Wort, which promotes mood
enhancement and well-being, and has been featured in numerous articles and on
the ABC News magazine 20/20 as a natural herbal approach for responding to
depression; (iii) Zinc Lozenges, combining zinc, Vitamin C and echinacea to
promote healthy immune function, especially during the cold and flu season; (iv)
Selenium in a 200 mcg dosage, to promote cell repair in the lungs and other
organs which was introduced in rapid response to the results of a clinical study
conducted at the University of Arizona College of Medicine suggesting that daily
intake of 200 mcg of selenium dramatically reduced the incidence of certain
types of cancer and cancer mortality; and (v) five new herbal complex formulas
combining popular herbs with other bio-enhancing herbs and vitamins, including
Ginseng Complex, Gingko Biloba Complex, Echinacea Complex, Saw Palmetto Complex
and Valerian Complex. To date, the Company has not incurred material research
and development expenses but anticipates devoting greater resources to research
and development in the future. Product concepts are internally developed by the
Company's product development team, which consists of representatives of the
Company's research and development, sales and marketing and purchasing
departments and members of senior management. See "-- Product Development."
The Company markets its Sundown vitamin and nutritional supplements
internationally through a network of distributors. The Company has exclusive and
non-exclusive distribution agreements in foreign countries throughout the world,
with the majority of international revenues presently being generated from South
America. The Company believes that certain markets in South America, the Middle
East and the Far East represent the most attractive outlets for its products.
All international sales are settled in United States 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
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Thompson brand to health food stores, private label products to selected mass
merchandisers and drug stores and the Rexall Managed Care brand to HMOs,
hospitals and long-term care facilities.
In 1989, the Company purchased the Rexall tradename, under which health
products have been marketed since 1903. An independent study has shown that the
Rexall tradename is widely recognized by households in the United States. The
Company's marketing strategy with respect to both its Rexall vitamin and OTC
drug lines is to emphasize a national branded product at generic prices. The
Company markets a full line of approximately 115 moderately-priced vitamins and
nutritional supplements under the Rexall tradename, primarily to independent
drug stores and wholesalers. In addition, approximately 75 OTC pharmaceutical
products, including aspirin, cold remedies and analgesic formulas, are primarily
offered to drug stores, wholesalers and convenience stores under the Rexall
tradename in formulas comparable to nationally advertised products such as
Bayer(R), Advil(R), Nuprin(R), Tylenol(R), Contac(R), Robitussin(R), Sudafed(R),
Benadryl(R) and Mylanta(R). Recently, the Company has begun to license the
Rexall name in various international markets for vitamins and OTC
pharmaceuticals.
In 1990, the Company acquired the operating assets of Wm. T. Thompson Co.,
Inc., which was founded in 1935, including the Thompson trademark. The "Rainbow"
line of Thompson vitamins is sold through health food stores and consists of
approximately 135 products in approximately 160 SKUs, many of which have high
potencies and are unique to Thompson. The Rainbow line represents the Company's
premium line, and is priced competitively with other similar vitamin products
sold in health food stores. Because the Company's targeted customer for Thompson
products is the sophisticated vitamin consumer, the Company's strategy includes
constantly monitoring new and developing trends in health and nutrition and
adapting its product offerings accordingly.
While the Company does not emphasize private label manufacturing, in select
instances the Company offers these products to accommodate select customer
requests. For fiscal 1997 and 1996, approximately 3.4% and 3.8%, respectively,
of the Company's net sales were from private label products.
The Rexall Managed Care Division was formed in 1995 to market vitamins,
nutritional supplements and OTC pharmaceuticals to the managed care market 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 two prescription products.
Direct Sales Through Independent Distributors
In 1990, the Company formed Rexall Showcase International, Inc. ("Rexall
Showcase"), its network marketing subsidiary, to market and sell unique health
and wellness products under the Rexall tradename exclusively through a sales
force of independent distributors who are not employees of Rexall Showcase or
the Company. 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 the network marketing distribution channel and
are not available through retailers. Rexall Showcase's independent distributors
are not required to make any inventory purchases and, to become a distributor,
must only purchase a distributor kit. Rexall Showcase began its international
expansion in 1996 by commencing operations in South Korea and Mexico and, in
November 1997, commenced operations in Hong Kong. Rexall Showcase intends to
commence operations in selected other countries in the future. Rexall Showcase's
net sales have increased from $20.5 million in fiscal 1993 to $105.2 million in
fiscal 1997.
To become a Rexall Showcase distributor, a person or entity must enter into
a standard distributor agreement with Rexall Showcase which obligates that
person to abide by Rexall Showcase's policies and procedures. Additionally,
distributors are also required to purchase a distributor kit, which includes all
of the materials necessary for a distributor to commence operating his or its
Rexall Showcase distributorship including information about the Company, product
information, Rexall Showcase support functions, training materials, the
ProfitPlus(TM) compensation program, policies and procedures, order forms,
application forms and sales aids, for $49.50, which approximates the cost of
producing the distributor kit and associated costs. The number of active Rexall
Showcase distributors as of August 31, 1997 was approximately 75,000. An
"active" Rexall Showcase distributor is defined to mean any distributor who is
eligible to participate in the Rexall Showcase business, including all new
applicants whose completed distributor application and agree-
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ment has been accepted by Rexall Showcase as well as those existing distributors
who have renewed their distributorship during the last twelve months.
Rexall Showcase processes, fills and ships orders from the Company's
distribution center, usually within a 24 hour period after the order is placed
by the distributor. Rexall Showcase allows its retail customers to return any
product, for any reason, to the selling distributor within 30 days from the date
of purchase for a total refund or replacement. Rexall Showcase then reimburses
the selling distributor who has issued the 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. The Company provides for a reserve for
such returns, however, 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; and (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. The Company also
maintains a dedicated department to provide information and assistance to
distributors. The Company publishes and distributes a bi-monthly newsletter to
inform its distributors of recent developments and other relevant information
and to recognize the accomplishments of certain distributors. Rexall Showcase
also offers participation in a stock option plan and stock purchase plan to
distributors who reach certain sales targets.
Mail Order
The Company's mail order division markets products primarily under its SDV
brand directly to consumers through catalogs and direct mailings. This division
targets approximately 250,000 of the most active customers out of an approximate
585,000 household proprietary mailing list developed by the Company since its
inception in 1976. The Company's SDV division offers approximately 400 products
in approximately 490 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 $13.3 million in fiscal 1993 to
$16.7 million in fiscal 1997. As the Company has focused primarily on its
Sundown brand and Rexall Showcase, the Company has not allocated significant
resources to its mail order division.
SALES SUPPORT AND CUSTOMER SERVICES FOR RETAILERS
The Company utilizes its information systems and staff of sales and
customer support professionals to provide retailers with a comprehensive array
of services. The Company seeks to assist the retailer with sales initiatives,
sales data analyses and marketing and merchandising programs, all of which are
designed to maximize in-store awareness of the Company's products and improve
results in the retailer's vitamin and nutritional supplement category. For a
number of its retail customers, the Company serves as a category manager, at no
additional cost to the retailer, actively analyzing, monitoring and advising on
product selection, profitability, sales velocity and overall performance of the
retailer's entire vitamin and nutritional supplement category. To help optimize
the performance of its retailers' departments, as well as sales of the Company's
products, the Company develops computerized plan-o-grams designed to efficiently
utilize shelf space and direct consumers' attention to the Company's products.
In addition, the Company provides marketing support for its product lines
by developing customized marketing programs. The Company's corporate
communications and media department provides customer
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support by designing packaging displays and point of purchase material for
customers as well as informative, easy-to-read labels and packages for the
Company's products. The Company believes that its double-sided label gives it a
shelf-facing advantage appreciated by retailers. Support for retail sales is
further provided through various in-store merchandising centers, including
information pamphlets for consumers, displays featuring key and topical products
and "Nutrition News," a Company publication directed to pharmacists. The Company
employs and contracts with merchandisers who periodically visit certain
retailers to restock the shelves, place new orders and monitor and update the
presentation of the Company's product line through floor displays, side wings,
shelf-talkers, store signs, promotional packs and other individualized
promotions.
To further support sales, the Company has historically expended
approximately 2% of its sales on advertising which primarily has consisted of
cooperative support to retailers and some brand advertising on a limited basis.
During the fourth quarter of fiscal 1997, the Company launched its first ever
major national advertising campaign to support Osteo-Bi-Flex(TM), the Sundown
division's new exclusive patented formula of glucosamine and chondroitin
sulfate. The Company spent approximately $1.2 million in the fourth quarter of
1997 and intends to spend an additional $3.8 million in fiscal 1998 on this
campaign. In addition, Dick Clark serves as the Company's national spokesperson,
Sundown is the official vitamin brand of the Miami Dolphins and is the preferred
nutritional supplier of vitamins and nutritional supplements for the Florida
Panthers, and the Company sponsors various sports personalities and events. The
Company expects to continue to use various forms of mass media advertisement,
including national advertising, to build the national reputation and recognition
of its brands, primarily Sundown.
At November 1, 1997, the Company had a total sales force of approximately
40 employees responsible for accounts located throughout the United States, who
are paid on a salary and incentive bonus basis. In addition, the Company
utilizes a national brokerage alliance of approximately 50 independent
representative organizations in the United States and internationally,
substantially all of which sell the Company's brands on an exclusive basis in
their respective product categories. The Company also had a total of
approximately 90 employees devoted to customer service and support for
retailers.
PRODUCT DEVELOPMENT
The Company consistently introduces new and innovative products in a timely
manner. New product ideas are generated from a variety of sources, including
clinical studies reported in scientific and medical periodicals such as the New
England Journal of Medicine and the Journal of the American Medical Association.
The Company also responds to suggestions from vendors and consumers. Such
product ideas are developed 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. For select products, the Company's product development team
is assisted by independent consultants. The ideas are then submitted to the
Company's operations department which determines the overall feasibility of
developing and producing the product. As part of this overall feasibility
analysis, the Company's regulatory department conducts a thorough investigation
of the safety and potential regulatory issues with respect to the new product,
and reviews any patent and trademark issues. Following the regulatory
department's review, the Company's purchasing department obtains any raw
materials necessary to produce the new product and, after applicable testing,
the Company begins production of an initial pilot sample to study various
characteristics of the products. The Company's technical services department
conducts tests on the pilot sample to ensure that the new product meets all
applicable regulatory and internal quality standards. Based on these tests,
final labels and product specifications, including any substantiated statements
of nutritional support, such as structure and function claims for the new
product, are developed, along with the final costs of production which are
reviewed by the financial and marketing teams to determine that 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. During fiscal 1997, the
Company introduced 24 new products for Sundown, six new products for Rexall
Showcase and 45 new products for other divisions.
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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 expanded its
manufacturing capacity for two-piece capsules at this facility. Currently, the
Company manufactures approximately 60% of its products. The balance of the
Company's vitamins and nutritional products are purchased from independent third
parties that manufacture such products to the Company's specifications and
standards. The Company does not presently intend to manufacture softgels and,
accordingly, it will continue to purchase these products from independent
suppliers. The Company will continue to monitor the cost of manufacturing other
products in order to determine whether in-house manufacturing of such products
would be cost-effective. The Company purchases all of its OTC pharmaceuticals
from various independent suppliers. The Company's manufacturing and distribution
operations employ over 450 persons and have been enhanced by the opening of its
65,000 square foot western distribution facility in Sparks, Nevada in October
1996 and its newly acquired 157,000 square foot warehousing and packaging
facility in Deerfield Beach, Florida, which the Company anticipates will
commence operations in December 1997.
The Company emphasizes quality control. All of the Company's products are
manufactured in accordance with the applicable Current Good Manufacturing
Practices ("CGMPs") of the Food and Drug Administration ("FDA") and other
applicable regulatory and compendial manufacturing standards, such as the United
States Pharmacopeia ("USP"). All raw materials and finished products undergo
various testing procedures, including sample testing, weight testing, purity
testing and, where required, microbiological testing. Each year since November
1995, Shuster Laboratories, Inc., an independent quality assurance and testing
service, has awarded the Company its highest rating issued to Shuster-inspected
dietary supplement firms based on its review of the Company's manufacturing,
laboratory 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 or two-piece capsules.
The principal raw materials used in the manufacturing process are natural and
synthetic vitamins and other dietary ingredients, which are purchased by the
Company from bulk manufacturers in the United States and internationally and are
believed to be readily available from numerous sources. Although the Company
believes that all of its sources of raw materials and products are reliable, the
Company's results of operations could be adversely impacted should it be forced
to find replacement sources of supply on short notice.
GOVERNMENT REGULATION
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the Federal Trade Commission (the "FTC"),
the Consumer Products Safety Commission, the United States Department of
Agriculture, the United States Postal Service, the United States Environmental
Protection Agency and the Occupational Safety and Health Administration. These
activities are also regulated by various agencies of the states and localities,
as well as foreign countries, 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. The regulations that are
promulgated by the FDA relating to the manufacturing process are known as 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.
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
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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 and final regulations have been published with an October 23, 1997
effective date for the notification to FDA of Statements of Nutritional Support
and new dietary ingredients, and a March 23, 1999 effective date for the
labeling provisions. 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. Any statement of nutritional support beyond
traditional claims must be accompanied by disclosure that the FDA has not
evaluated such statement and that the product is not intended to cure or prevent
any disease. The Company anticipates that the FDA will finalize CGMPs which are
specific to dietary supplements and require at least some of the quality control
provisions contained in the CGMPs for drugs, which are more rigorous than CGMPs
for foods. The Company currently manufactures its vitamins and nutritional
supplement products in compliance with the applicable food CGMPs.
The Company cannot determine what effect such regulations implementing
DSHEA, which were adopted on September 23, 1997, will have on its business in
the future. Such regulations require expanded and different labeling for the
Company's vitamins and nutritional supplement products and, among other things,
require 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 Office of Dietary
Supplements ("ODS") established within the National Institutes of Health, and
the Presidential Commission on Dietary Supplements ("Commission"). The
Commission which was established for two years to provide recommendations to the
President and Congress for the regulation of supplement labeling and health
claims, including procedures for making disease-related claims, issued its final
report on November 24, 1997. Such report includes findings which are similar,
and different in material respects from the FDA regulations on DSHEA. Such
report further recommends that ODS, which is charged with coordinating research
results and advising the Secretary of Health and Human Services on supplement
regulation, safety and health claims, be funded as authorized by DSHEA. The
Company cannot determine what effect such report will have on its business in
the future, and such report could lead to legislative or regulatory changes to
the final rules promulgated by the FDA under DSHEA.
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 been statutorily
affirmed as a food and not as a drug or food additive. Therefore, the regulation
of dietary supplements is less restrictive than that imposed upon manufacturers
and distributors of drugs or food additives. Unlike food additives and new
drugs, which require regulatory approval of formulation, safety and labeling,
and for drugs, efficacy prior to marketing, dietary supplement companies are
authorized to make substantiated statements of nutritional support and to market
manufacturer-substantiated-as-safe dietary supplement products without such FDA
preclearances. Failure to comply with applicable FDA requirements can result in
sanctions being imposed on the Company or the manufacturers of its products,
including warning letters, product recalls and seizures, injunctions and
criminal prosecutions.
The OTC pharmaceutical products distributed by the Company's Rexall, Rexall
Showcase and Rexall Managed Care divisions are subject to regulation by a number
of federal and state governmental agencies. In particular, the FDA regulates the
formulation, manufacture, packaging and labeling of all OTC pharmaceutical
products. Rexall Showcase is subject to regulation under various international,
state and local laws which include provisions regulating, among other things,
the operations of direct sales programs.
9
<PAGE> 10
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
because of its competitive pricing, marketing strategies, sales support and the
quality, uniqueness and breadth of its of product line.
TRADEMARKS AND PATENTS
The Company owns trademarks registered with the United States Patent and
Trademark Office or certain other countries for its Sundown(R), Thompson(R),
Rexall Showcase International(R), Rexall(R) and other trademarks, and has rights
to use other names material to its business. In addition, the Company has
obtained trademarks for certain of its products, processes or slogans 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(R),
Bios Life 2(R), Showcase Nutritionals(R), Calmplex 2000(R), Metaba-trol(R),
Cellular Essentials(R), Cardio Basics(R), Nature Force(R), PMS Balance(R), Human
Nature(R), Mature Choices(R), Multiple Choice(R), Memory Plus(R), In-
Vigor-ol(R), Reliev-ol(R), Defend-ol(R), Intern-ol(R), Traum-ex(R) and Advanced
Release Technology(R). The Company has trademark and service mark applications
pending for Osteo-Bi-Flex(TM), Gluco-Pro 900(TM), Meta-Essent-ol(TM), Vascular
Complete(TM), Smokease(TM), Tomorrow's Nutrition Today(TM), Vision
Essentials(TM), Clear Thoughts(TM), Rexweb(SM), Rextel(SM) and The Best Vitamins
Under the Sun(TM). Federally registered trademarks have perpetual life, as long
as they are renewed on a timely basis and used properly as trademarks, subject
to the rights of third parties to seek cancellation of the marks. The Company
regards its trademarks and other proprietary rights as valuable assets and
believes they have significant value in the marketing of its products. The
Company vigorously protects its trademarks against infringement. The Company
owns certain patents in the United States 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. The Company
currently markets its Osteo-Bi-Flex(TM) glucosamine and chondroitin sulfate
dietary supplement, which has been reported in various clinical studies to
provide nutritional benefits which may help to promote healthy, mobile joint
function and connective tissue health, as the exclusive licensee in the United
States and Canada of over-the-counter dietary supplements manufactured under two
United States Patents and one Canadian Patent Application. 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 are adequate for its operations.
There can be no assurance, however, that such
10
<PAGE> 11
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
As of November 18, 1997, the Company employed approximately 820 full-time
persons. None of the Company's employees are represented by a collective
bargaining unit. The Company believes that its relationship with its employees
is good.
ITEM 2. PROPERTIES.
As of November 18, 1997, the Company owned or leased the following
facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASED OR EXPIRATION DATE
LOCATION TYPE OF FACILITY SQUARE FEET OWNED OF LEASE
- -------- --------------------------- ----------- --------- -------------------
<S> <C> <C> <C> <C>
Boca Raton,
Florida............ Administrative Offices 58,000 Owned --
Boca Raton,
Florida(1)......... Administrative Offices 92,000 Owned --
Boca Raton,
Florida............ Administrative Offices 10,400 Leased November 1998
Boca Raton, Manufacturing and
Florida............ Production 82,000 Owned --
Boca Raton,
Florida............ Warehouse and Distribution 100,000 Owned --
Deerfield Beach,
Florida(2)......... Warehouse and Packaging 157,000 Owned --
Sparks, Nevada....... Warehouse and Distribution 65,000 Leased September 1999
Boca Raton,
Florida............ Warehouse and Distribution 60,000 Leased March 1998
Hong Kong, China..... Administrative Offices 7,700 Leased July 2000
Mexico City, Administrative Offices,
Mexico(3).......... Warehouse and Distribution 5,600 Leased December 1997
Seoul, South Administrative Offices,
Korea(4)........... Distribution Service Center
and Warehouse 16,800 Leased February-April 1998
</TABLE>
- ---------------
(1) The Company acquired this facility in November 1997. The previous owner will
occupy such facility until April 1998 and the Company intends to occupy this
facility in the fourth quarter of fiscal 1998.
(2) The Company acquired this facility in May 1997, is currently retrofitting it
for use as a packaging and warehouse facility and intends to commence
operations in such facility in December 1997.
(3) The Company also leases three small distribution service centers in
Cuernavaca, Guadalajara and Mexico City, Mexico. The Company intends to
extend the lease on its administrative offices upon expiration of the
current lease.
(4) The Company leases administrative, distribution service and warehouse
facilities which leases expire in February, March and April 1998,
respectively.
ITEM 3. LEGAL PROCEEDINGS.
L-Tryptophan Litigation. Numerous unrelated manufacturers, distributors,
suppliers, importers and retailers of manufactured L-tryptophan are or were
defendants in an estimated 2,000 lawsuits brought in federal and state courts
seeking compensatory and punitive damages for alleged personal injury from
ingestion of products containing manufactured L-tryptophan. The Company has been
named in 27 lawsuits, of which 25 have been settled or discontinued through
November 1997 and additional suits may be filed. Prior to a request
11
<PAGE> 12
from the FDA in November 1989 for a national, industry-wide recall, the Company
halted sales and distribution of, and also ordered a recall of, L-tryptophan
products. Subsequently, the FDA indicated that there is a strong epidemiological
link between the ingestion of the allegedly contaminated L-tryptophan and a
blood disorder known as eosinophilia myalgia syndrome ("EMS"). Investigators at
the United States Center for Disease Control suspect that a contaminant was
introduced during the manufacture of the product in Japan. While intensive
independent investigations are continuing, there has been no indication that EMS
was caused by any formulation or manufacturing fault of the Company's supplier
or any of the other companies that manufactured tablets or capsules containing
L-tryptophan.
The Company and certain companies in the vitamin industry, including
distributors, wholesalers and retailers, have entered into an agreement (the
"Indemnification Agreement") with Showa Denko America, Inc. ("SDA"), under which
SDA, a United States subsidiary of a Japanese corporation, Showa Denko K.K.
("SDK"), which appears to be the supplier of the apparently contaminated
product, has assumed the defense of all claims 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, therefore, no provision has been
made in the Consolidated Financial Statements for any loss that may be incurred
by the Company as a result of these actions.
Hines Litigation. In April 1992, an action was commenced in the United
States District Court for the Southern District of Florida (CIV 92-6387) 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 filed a new complaint.
The allegations in Plaintiff's Second Amended Complaint were similar to the
original complaint and included additional claims of violations of various
Florida statutes, including those relating to deceptive advertising, business
opportunities, franchises and securities. On August 8, 1997, the court dismissed
those claims for relief alleging fraud in connection with the offer and sale of
securities, federal racketeering violations under RICO and state law
12
<PAGE> 13
racketeering claims, common law fraud and deceit, illegal lottery and business
opportunities state law violations. Plaintiff filed a Third Amended Complaint in
response to such order, and on October 31, 1997, the Company and Rexall Showcase
filed a motion to dismiss the Third Amended Complaint on numerous grounds,
including the failure to state a federal cause of action. Although the Company
believes that such lawsuit is without merit, no assurances can be given in this
regard. The Company will vigorously defend itself and believes any adverse
decision will not have a material adverse impact on the Company or Rexall
Showcase.
Other Litigation. The Company is also involved in litigation relating to
claims arising out of its operations in the normal course of business, none of
which are expected, individually or in the aggregate, to have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of security holders during the fourth
quarter of fiscal 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning the executive
officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Carl DeSantis.................. 58 Chairman of the Board
Christian Nast................. 66 President, Chief Executive Officer and Director
Dean DeSantis.................. 35 Senior Vice President -- Operations, Chief Operating
Officer and Director
Damon DeSantis................. 33 Executive Vice President, President of Rexall
Showcase and Director
Nickolas Palin................. 50 President -- Sundown Vitamins and Director
Gary Malloch................... 55 Executive Vice President
Geary Cotton................... 46 Vice President -- Finance, Chief Financial Officer
and Treasurer
Richard Werber................. 45 Vice President -- Legal Affairs, General Counsel and
Secretary
Gerald Holly................... 53 Executive Vice President -- Operations
</TABLE>
Carl DeSantis founded the Company in 1976 and has served as Chairman of the
Board of the Company since its inception, served as Chief Executive Officer from
the Company's inception to February 1997 and served as its President from 1976
to April 1995. Mr. DeSantis has had over 17 years of experience with retail drug
store companies, including Super-X Drug Stores and Walgreen Drug Stores. He is
the father of Dean DeSantis and Damon DeSantis.
Christian Nast has been President of the Company since April 1995, Chief
Executive Officer since February 1997 and a Director of the Company since
October 1993. He served as Chief Operating Officer of the Company from April
1995 to February 1997. From December 1989 to April 1995, Mr. Nast was employed
by Colgate Palmolive Company as its Executive Vice President -- North America.
Mr. Nast has over 40 years of experience in the consumer products industry with
companies such as Bristol-Myers Squibb Company, Chesebrough-Ponds, Inc. and the
Procter & Gamble Company.
Dean DeSantis has been Senior Vice President -- Operations of the Company
since June 1989, Chief Operating Officer since February 1997, 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.
13
<PAGE> 14
Nickolas Palin has been President -- Sundown Vitamins since September 1997,
a Director of the Company since December 1995 and joined the Company in 1984. He
served as Senior Vice President -- Sales and Marketing of the Company from
August 1989 to September 1997.
Gary Malloch has been Executive Vice President of the Company since joining
the Company in February 1997. From 1994 to 1996, Mr. Malloch served as President
and Chief Executive Officer of Kayser-Roth Corporation and from 1989 to 1994,
served as President of that company's Sheer Hosiery Division.
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.
Gerald Holly has been Executive Vice President -- Operations of the Company
since joining the Company in November 1997. For the past twenty-five years, Mr.
Holly has served in various capacities for Pharmavite Corp., a subsidiary of
Otsuka Pharmaceutical Company, Ltd. of Japan, including Executive Vice
President -- Operations since 1992.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock was first listed and began trading on the Nasdaq National
Market on June 18, 1993 under the symbol RXSD.
Set forth below are the high and low closing 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 23, 1997.
<TABLE>
<CAPTION>
COMMON STOCK
---------------
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 31, 1996:
First Quarter............................................. $ 6.50 $ 4.54
Second Quarter............................................ 9.50 5.84
Third Quarter............................................. 18.50 8.38
Fourth Quarter............................................ 18.13 10.63
FISCAL YEAR ENDED AUGUST 31, 1997:
First Quarter............................................. 19.62 11.81
Second Quarter............................................ 16.56 11.88
Third Quarter............................................. 13.81 9.63
Fourth Quarter............................................ 19.50 13.56
</TABLE>
The Company presently intends to retain all earnings for the operation and
development of its business and does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future. Any future determination as to the
payment of cash dividends will depend on a number of factors, including future
earnings, capital requirements, the financial condition and prospects of the
Company and any restrictions under credit agreements existing from time to time,
as well as such other factors as the Company's Board of Directors may deem
relevant. The Company's current line of credit prohibits the payment of any
dividends on the Company's Common Stock. The approximate number of benefical
owners and record holders of the Common Stock as of November 18, 1997 was 15,000
and 860, respectively.
14
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL 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, 1997, 1996, 1995, 1994, and
1993 have been audited by Coopers & Lybrand L.L.P., independent accountants. The
following information should be read in conjunction with Item 7 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
Consolidated Financial Statements and related notes and other consolidated
financial information included herein. Certain amounts have been reclassified to
conform with the 1997 presentation.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................................... $263,369 $187,040 $148,734 $113,335 $ 92,616
Cost of sales............................... 98,764 70,987 64,511 54,125 45,245
-------- -------- -------- -------- --------
Gross profit.............................. 164,605 116,053 84,223 59,210 47,371
Selling, general and administrative
expenses.................................. 114,318 85,166 64,512 45,668 36,598
-------- -------- -------- -------- --------
Operating income.......................... 50,287 30,887 19,711 13,542 10,773
Other income (expense), net................. 4,251 1,204 (-507) 177 347
-------- -------- -------- -------- --------
Income before income tax provision.......... 54,538 32,091 19,204 13,719 11,120
-------- -------- -------- -------- --------
Income from continuing operations (pro
forma)(1)................................. 35,061 20,293 12,338 8,572 7,104
Loss from discontinued operations(2)........ -- -- (-7,976) (-2,377) --
-------- -------- -------- -------- --------
Net income (pro forma)(1)......... $ 35,061 $ 20,293 $ 4,362 $ 6,195 $ 7,104
======== ======== ======== ======== ========
Income (loss) per common share (pro
forma)(1)
Continuing operations..................... $ 0.52 $ 0.33 $ 0.21 $ 0.15 $ 0.15
Discontinued operations................... -- -- (0.14) (0.04) --
Net income per share.............. $ 0.52 $ 0.33 $ 0.07 $ 0.11 $ 0.15
======== ======== ======== ======== ========
Weighted average shares outstanding......... 67,908 61,452 58,994 58,538 46,336
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $145,629 $ 54,133 $29,292 $21,027 $28,771
Total assets................................... 224,114 103,095 67,351 61,633 53,126
Long term debt, net of current portion......... -- 105 448 776 1,151
Shareholders' equity........................... 191,589 86,692 55,038 48,962 41,714
</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 year 1993, income from continuing operations, net income,
income per share from continuing operations and net income per share have
been computed as if the Company was subject to corporate income taxes, based
on tax laws in effect during such periods.
(2) Net of tax benefit.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and the Notes thereto included herein.
Additionally, certain divisional data of the Company is set forth in Item
1 -- "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. Initial costs associated with acquiring sales agreements with
certain retail customers are amortized over the expected term of the relevant
agreement and the amortization of such costs is recorded as a reduction in net
sales. Approximately 96.6% and 96.2% of the Company's net sales in fiscal 1997
and 1996, respectively, were of products sold under one of the following brand
names: Sundown, Rexall Showcase, Rexall, Thompson, SDV and Rexall Managed Care.
Sales of private label products accounted for approximately 3.4% and 3.8% of net
sales for fiscal 1997 and 1996, respectively.
Cost of goods sold includes the cost of raw materials and all labor and
overhead associated with the manufacturing and packaging of the products. The
majority of the Company's products are in tablet, softgel or two-piece capsule
forms. In 1994, the Company initiated manufacturing, beginning with vitamins in
tablet form, which resulted in lower costs than outsourcing such manufacturing.
Presently, the Company manufactures approximately 80% of its tablet and
two-piece formulations. The Company does not presently intend to manufacture
softgel formulations or other products. Currently, the Company's manufacturing
and packaging operations are in one 82,000 square foot facility. In May 1997,
the Company purchased a 157,000 square foot building which will serve as a new
packaging and warehouse facility, which facility is expected to commence
operations in December 1997. The new facility will allow the Company to more
than double its tablet manufacturing and packaging operations.
Gross margins are impacted by changes in the relative sales mix among the
Company's channels of distribution. In particular, gross margin is positively
impacted if sales of Rexall Showcase increase as a percentage of net sales
because such products command a higher gross margin. In a related manner,
selling, general and administrative expenses as a percentage of net sales are
typically higher if sales of Rexall Showcase increase as a percentage of net
sales because of the commissions paid to Rexall Showcase's independent
distributors. Historically, operating margins from sales to retailers and mail
order have been higher than operating margins from the Rexall Showcase division.
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 1995 results of Pennex have been presented as
discontinued operations in the Consolidated Financial Statements. See
"-- Discontinued Operations."
On November 5, 1996 the Company consummated a public offering (the
"Offering") of 8,000,000 shares of Common Stock. Of those shares, 4,000,000 were
sold by the Company and 4,000,000 were sold by certain shareholders of the
Company. On December 3, 1996, the underwriters' over-allotment option to
purchase an additional 1,200,000 shares was exercised. Of those 1,200,000
shares, 800,000 were sold by the Company and 400,000 were sold by a shareholder
of the Company. The Company intends to use the net proceeds received from the
Offering primarily to acquire complementary products, product lines or
businesses, to provide working capital and for general corporate purposes.
16
<PAGE> 17
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 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 37.5 38.0 43.4
----- ----- -----
Gross profit.............................................. 62.5 62.0 56.6
Selling, general and administrative expenses................ 43.4 45.5 43.4
----- ----- -----
Operating income.......................................... 19.1 16.5 13.2
Other income (expense), net................................. 1.6 .6 (0.3)
----- ----- -----
Income before income tax provision.......................... 20.7 17.1 12.9
Net income(1)............................................... 13.3% 10.8% 8.3%
</TABLE>
- ---------------
(1) From continuing operations in 1995.
Fiscal Year Ended August 31, 1997 Compared To Fiscal Year Ended August 31,
1996
Net sales for fiscal 1997 were $263.4 million, an increase of $76.3 million
or 40.8% over fiscal 1996. Of the $76.3 million increase, sales to retailers
accounted for $47.4 million, an increase of 50.3% over fiscal 1996. Net sales to
Wal*Mart increased by $30.0 million in fiscal 1997. Initial distribution to
Wal*Mart began during fiscal year 1996 and fiscal 1997 reflects the first full
year of distribution of Sundown product offerings at Wal*Mart. The remaining
increase in sales to retailers was primarily attributable to increased
distribution as well as an increase in the Company's existing customer base
business. Net sales of the Company's direct sales subsidiary, Rexall Showcase,
increased by $28.7 million, an increase of 37.6% over fiscal 1996. Net sales of
the Company's mail order division, SDV, increased by $231,000 or 1.4% over
fiscal 1996. The increase in net sales in each division was primarily due to
increased unit sales.
Gross profit for fiscal 1997 was $164.6 million, an increase of $48.6
million or 41.8% over fiscal 1996. As a percentage of net sales, gross margin
increased from 62.0% for fiscal 1996 to 62.5% for fiscal 1997. The increase in
gross margin was due, in part, to an increase in net sales of products with
higher margins and improved margins as a result of manufacturing efficiencies
achieved from higher volume at the Company's vitamin manufacturing facility. Net
sales of Rexall Showcase, whose products have higher margins, remained
relatively constant as a percent of the Company's sales representing 40.9% of
total Company net sales in fiscal 1996 compared to 40.0% in fiscal 1997.
Selling, general and administrative expenses for fiscal 1997 were $114.3
million, an increase of $29.2 million or 34.2% over fiscal 1996. As a percentage
of net sales, such expenses decreased from 45.5% for fiscal 1996 to 43.4% for
fiscal 1997, primarily as a result of increased net sales and the relatively
fixed nature of such expenses, except for the commission expense of Rexall
Showcase, which is variable and comprises the majority of Rexall Showcase's
selling, general and administrative expense. Such commission expense increased
by $14.3 million over fiscal 1996.
Other income, net, increased from $1.2 million in fiscal 1996 to $4.3
million in fiscal 1997 primarily as a result of increased interest income.
Interest income for fiscal 1997 was $4.3 million, as compared to $1.3 million
for fiscal 1996. Such increase was primarily a result of investment of the
Company's available cash balances, which were higher in fiscal 1997 than fiscal
1996, primarily due to the net proceeds of $62.3 million received from the
Offering.
Income before income tax provision was $54.5 million for fiscal 1997, an
increase of $22.4 million or 70.0% over fiscal 1996. As a percentage of net
sales, income from continuing operations before income tax provision increased
from 17.1% for fiscal 1996 to 20.7% for fiscal 1997.
Net income was $35.1 million for fiscal 1997, an increase of $14.8 million
or 72.8% over fiscal 1996. As a percentage of net sales, income from continuing
operations increased from 10.8% for fiscal 1996 to 13.3% for fiscal 1997 due to
the reasons described above and also as a result of a lower effective tax rate
of 35.7% in fiscal
17
<PAGE> 18
1997 compared to 36.8% in fiscal 1996 primarily as a result of tax-free interest
on certain of the Company's cash and cash equivalents marketable securities.
Fiscal Year Ended August 31, 1996 Compared To Fiscal Year Ended August 31, 1995
Net sales for fiscal 1996 were $187.0 million, an increase of $38.3 million
or 25.8% over fiscal 1995. Of the $38.3 million increase, sales to retailers
accounted for $14.0 million, an increase of 17.4% over fiscal 1995. The increase
in sales to retailers was partially attributable to approximately $7.0 million
of initial shipments of Sundown products to Wal*Mart and Thrifty-Payless in the
second half of fiscal 1996. Net sales of the Company's direct sales subsidiary,
Rexall Showcase, increased by $23.9 million, an increase of 45.4% over fiscal
1995. The increase in direct sales was partially due to the commencement of
Rexall Showcase's operations in Mexico in February 1996 and South Korea in April
1996. Net sales of the Company's mail order division, SDV, increased by $463,000
or 2.9% over fiscal 1995. The increase in net sales in each division was
primarily due to increased unit sales.
Gross profit for fiscal 1996 was $116.1 million, an increase of $31.8
million or 37.8% over fiscal 1995. As a percentage of net sales, gross margin
increased from 56.6% for fiscal 1995 to 62.0% for fiscal 1996. The increase in
gross margin was due primarily to an increase in net sales of products with
higher margins, related principally to the increased net sales of Rexall
Showcase as a percentage of the Company's net sales whose sales represented
40.9% of the Company's net sales in fiscal 1996 compared to 35.4% in fiscal
1995. 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.
Selling, general and administrative expenses for fiscal 1996 were $85.2
million, an increase of $20.7 million or 32.0% over fiscal 1995. As a percentage
of net sales, such expenses increased from 43.4% for fiscal 1995 to 45.5% for
fiscal 1996, primarily as a result of increased sales of Rexall Showcase as a
percentage of the Company's net sales. In addition, selling, general and
administrative expenses associated with Rexall Showcase increased due to the
commencement of international operations. This increase was partially offset by
reductions of other divisions' selling, general and administrative expenses as a
percentage of net sales. The reduction in other divisions' selling, general and
administrative expenses was due in part to new incentive and cost control
programs initiated by management in fiscal 1996.
Other income, net, increased from a net expense of $507,000 in fiscal 1995
to net income of $1.2 million in fiscal 1996 primarily as a result of increased
interest income and decreased interest expense. Interest income for fiscal 1996
was $1.3 million, as compared to $119,000 for fiscal 1995. Such increase was
primarily a result of investment of the Company's available cash balances, which
were higher in fiscal 1996 than fiscal 1995, and interest received in fiscal
1996 from the note receivable related to the sale of Pennex's assets, which
interest is at a higher rate than the Company's average rate of return on
available cash balances. Interest expense for fiscal 1996 was $40,000 as
compared to $424,000 for fiscal 1995 as there were no borrowings under the
Company's line of credit in fiscal 1996.
Income from continuing operations before income tax provision was $32.1
million for fiscal 1996, an increase of $12.9 million or 67.1% over fiscal 1995.
As a percentage of net sales, income from continuing operations before income
tax provision increased from 12.9% for fiscal 1995 to 17.1% for fiscal 1996.
Income from continuing operations was $20.3 million for fiscal 1996, an
increase of $8.0 million or 64.5% over fiscal 1995. As a percentage of net
sales, income from continuing operations increased from 8.3% for fiscal 1995 to
10.8% for fiscal 1996 due to the reasons described above.
DISCONTINUED OPERATIONS
On September 30, 1993, the Company 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 have been
18
<PAGE> 19
presented to include Pennex's results as discontinued operations. In the fourth
quarter of fiscal 1995, the Company recorded an estimated loss on the
disposition of Pennex in the amount of $3.7 million, net of the related tax
benefit of $2.1 million, for the loss on disposition of the related assets and
liabilities of Pennex and other expenses related to the closing of Pennex. This
amount included $964,000 for the estimated operating losses of Pennex during the
phase-out period. On November 17, 1995, Pennex ceased operations and on February
1, 1996, substantially all the remaining assets of Pennex were sold for
$6,495,000. The Company received a $500,000 deposit and a collateralized note
for the balance. The terms of such note provided for interest at 12%, payable
monthly through March 1996. The rate of interest increased to 18% on April 1,
1996, although interest is currently being paid at 12% with the balance accruing
until 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 September 1, 1997, the Company extended the maturity of the collateralized
note related to the sale of the assets of Pennex Laboratories, Inc. to April 15,
1998. Interest continues to accrue and is payable in accordance with the
previous terms.
As of August 31, 1997, the Company had recorded net assets of discontinued
operations of $4.1 million. Assuming full collection of the balance of the
collateralized note, the Company expects to record a reduction to the estimated
loss on disposition of approximately $1.4 million (net of tax) or $.02 per
share, which would be reflected as an adjustment to discontinued operations.
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth certain quarterly financial data for fiscal
1997 and 1996. This quarterly information is unaudited, has been prepared on the
same basis as the annual financial statements and, in the opinion of the
Company's management, reflects all normally recurring adjustments necessary for
fair presentation of the information for the periods presented. Operating
results for any quarter are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1996
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... $56,070 $58,534 $69,613 $79,152 $40,679 $40,371 $54,568 $51,422
Operating income.................. 10,936 12,079 13,114 14,158 5,540 6,246 9,197 9,904
Income from continuing
operations(1)................... 7,242 8,551 9,280 9,988 3,556 4,074 6,134 6,529
Income per share from continuing
operations(1)(2)................ $ 0.11 $ 0.12 $ 0.14 $ 0.15 $ 0.06 $ 0.07 $ 0.10 $ 0.10
</TABLE>
- ---------------
(1) Does not reflect discontinued operations. See "Selected Consolidated
Financial Data," "-- Discontinued Operations" and Notes to the Consolidated
Financial Statements.
(2) Reflects adjustment to give retroactive effect to the two-for-one stock
split effected on October 23, 1997.
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 $145.6 million as of August 31, 1997,
compared to $54.1 million as of August 31, 1996. This increase was principally
the result of increased cash and cash equivalents, and marketable securities, as
a result of the net proceeds from the Offering and inventory and trade accounts
receivable due to higher sales in fiscal 1997 compared to fiscal 1996.
19
<PAGE> 20
Net cash provided by operating activities for fiscal 1997 was $37.4 million
compared to $19.6 million for fiscal 1996. Net cash provided by operating
activities increased primarily due to increased net income. Net cash used in
investing activities was $34.1 million for fiscal 1997 compared to $13.5 million
for fiscal 1996. Net cash used in investing activities, including $13.3 million
used for capital expenditures, increased primarily due to the purchase of
marketable securities in fiscal 1997. Net cash provided by financing activities
was $65.2 million for fiscal 1997 compared to $6.2 million for fiscal 1996
reflecting $62.3 million of net proceeds received from the Offering.
The Company believes that its existing cash balances, internally generated
funds from operations and its available bank line of credit will provide the
liquidity necessary to satisfy the Company's working capital needs, including
the purchase and maintenance of inventory and the financing of the Company's
accounts receivable, and anticipated capital expenditures for the next fiscal
year.
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 include
SFAS No. 128, "Earnings Per Share," which is not required to be adopted until
fiscal 1998, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which are
not required to be adopted until fiscal 1999.
SFAS No. 128 changes the method of calculating earnings per share. The
statement requires the presentation of "basic" earnings per share ("EPS") and
"diluted" EPS on the face of the income statement. SFAS No. 128 is effective for
financial statements issued for periods ended after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company has not
yet determined the impact, if any, the adoption will have on the Company's
financial statements.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. The statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods provided for
comparative purposes. The Company has not yet determined the effects, if any,
the adoption will have on the Company's financial statements.
SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual financial statements and
requires that those companies report selected information about segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. The Company has not yet determined the
effects, if any, the adoption will have on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements and supplementary data for the Company are on the
following pages F-1 through F-18.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
20
<PAGE> 21
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Shareholders' Equity........... F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors
Rexall Sundown, Inc.
Boca Raton, Florida
We have audited the consolidated financial statements and financial
statement schedule of Rexall Sundown, Inc. and subsidiaries listed in Item 14(a)
of this Form 10-K. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Rexall Sundown, Inc. and subsidiaries as of August 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended August 31, 1997 in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
October 10, 1997
F-2
<PAGE> 23
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 81,942 $ 13,450
Restricted cash........................................... -- 278
Marketable securities..................................... 24,829 7,988
Trade accounts receivable, net of allowance for doubtful
accounts of $78 at August 31, 1997 and 1996............ 22,294 12,413
Inventory................................................. 38,623 28,179
Prepaid expenses and other current assets................. 5,941 4,015
Net current assets of discontinued operations............. 4,076 3,855
-------- --------
Total current assets.............................. 177,705 70,178
Property, plant and equipment, net.......................... 33,789 24,078
Other assets................................................ 12,620 8,839
-------- --------
Total assets...................................... $224,114 $103,095
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 11,781 $ 5,599
Accrued expenses and other current liabilities............ 20,190 10,100
Current portion of long-term debt......................... 105 346
-------- --------
Total current liabilities......................... 32,076 16,045
Long-term debt.............................................. -- 105
Other liabilities........................................... 449 253
-------- --------
Total liabilities................................. 32,525 16,403
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; authorized 5,000,000
shares, no shares outstanding.......................... -- --
Common stock, $.01 par value; authorized 100,000,000
shares, shares issued: 67,260,018 and 61,320,256,
respectively........................................... 673 307
Capital in excess of par value............................ 123,402 53,563
Retained earnings......................................... 68,004 32,943
Cumulative translation adjustment......................... (490) (121)
-------- --------
Total shareholders' equity........................ 191,589 86,692
-------- --------
Total liabilities and shareholders' equity........ $224,114 $103,095
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 24
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................................. $ 263,369 $ 187,040 $ 148,734
Cost of sales.............................................. 98,764 70,987 64,511
---------- ---------- ----------
Gross profit..................................... 164,605 116,053 84,223
Selling, general and administrative expenses............... 114,318 85,166 64,512
---------- ---------- ----------
Operating income................................. 50,287 30,887 19,711
Other income (expense):
Interest income.......................................... 4,306 1,251 119
Interest expense......................................... (95) (40) (424)
Other income (expense)................................... 40 (7) (157)
Minority interests in income of consolidated
subsidiary............................................ -- -- (45)
---------- ---------- ----------
Income before income tax provision......................... 54,538 32,091 19,204
Income tax provision....................................... 19,477 11,798 6,866
---------- ---------- ----------
Income from continuing operations.......................... 35,061 20,293 12,338
Discontinued operations:
Loss from discontinued operations (net of tax benefit of
$2,425)............................................... -- -- (4,278)
Loss on disposal of discontinued operations including a
provision of $964 for operating losses during the
phase-out period (net of tax benefit of $2,057)....... -- -- (3,698)
---------- ---------- ----------
Net income................................................. $ 35,061 $ 20,293 $ 4,362
========== ========== ==========
Income (loss) per share:
Continuing operations.................................... $ .52 $ .33 $ .21
Discontinued operations.................................. -- -- (.08)
Disposal of discontinued operations...................... -- -- (.06)
---------- ---------- ----------
Net income per share............................. $ .52 $ .33 $ .07
========== ========== ==========
Weighted average common shares outstanding................. 67,907,714 61,452,464 58,994,332
========== ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE> 25
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL IN CUMULATIVE
NUMBER OF COMMON EXCESS OF RETAINED TRANSLATION
SHARES STOCK PAR VALUE EARNINGS ADJUSTMENT
---------- ------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994................... 19,430,000 $194 $ 40,480 $ 8,288 $ --
Net income................................. -- -- -- 4,362 --
Exercise of stock options.................. 80,500 1 428 -- --
Tax benefit from exercise of options....... -- -- 285 -- --
Issuance of shares for non-compete
agreement............................... 100,200 1 999 -- --
---------- ---- -------- ------- -----
Balance at August 31, 1995................... 19,610,700 196 42,192 12,650 --
Net income................................. -- -- -- 20,293 --
Exercise of stock options.................. 1,244,078 13 6,469 -- --
Tax benefit from exercise of options....... -- -- 5,000 -- --
Three-for-two common stock split........... 9,805,350 98 (98) -- --
Cumulative translation adjustment.......... -- -- -- -- (121)
---------- ---- -------- ------- -----
Balance at August 31, 1996................... 30,660,128 307 53,563 32,943 (121)
Net income................................. -- -- -- 35,061 --
Common stock offering...................... 2,400,000 24 62,263 -- --
Exercise of stock options.................. 569,881 6 3,210 -- --
Tax benefit from exercise of options....... -- -- 4,188 -- --
Compensatory stock options issued.......... -- -- 514 -- --
Two-for-one common stock split............. 33,630,009 336 (336) -- --
Cumulative translation adjustment.......... -- -- -- -- (369)
---------- ---- -------- ------- -----
Balance at August 31, 1997................... 67,260,018 $673 $123,402 $68,004 $(490)
========== ==== ======== ======= =====
</TABLE>
See accompanying notes
F-5
<PAGE> 26
REXALL SUNDOWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows provided by (used in) operating activities:
Net income............................................... $ 35,061 $ 20,293 $ 4,362
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.......................................... 3,570 2,797 2,400
Amortization.......................................... 1,523 1,202 400
Loss (gain) on sale of property and equipment......... 6 (18) 158
Minority interest..................................... -- -- 45
Deferred income taxes................................. (429) 2,076 (1,789)
Foreign exchange translation adjustment............... (369) (121) --
Compensatory stock options issued..................... 514 -- --
Changes in assets and liabilities:
Trade accounts receivable........................... (9,881) (5,456) (1,276)
Inventory........................................... (10,444) (7,667) (3,063)
Prepaid expenses and other current assets........... 1,926 (1,543) 102
Other assets........................................ (472) (5,501) 85
Accounts payable.................................... 6,182 7 (2,523)
Accrued expenses and other current liabilities...... 14,101 9,137 2,493
Other liabilities................................... 196 253 (22)
Discontinued operations -- non cash charges and
changes in assets and liabilities................ (221) 4,153 2,923
-------- -------- --------
Net cash provided by operating activities........ 37,411 19,612 4,295
-------- -------- --------
Cash flows provided by (used in) investing activities:
Purchase of marketable securities........................ (37,828) (5,988) --
Proceeds from sale of marketable securities.............. 20,988 -- 12
Acquisition of property, plant and equipment............. (13,305) (5,391) (3,590)
Acquisition of computer software......................... (4,227) (1,835) (409)
Proceeds from sale of property and equipment............. 18 23 5
Investing activities of discontinued operations.......... -- -- (1,160)
Restricted cash.......................................... 278 (278) --
-------- -------- --------
Net cash used in investing activities............ (34,076) (13,469) (5,142)
-------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from bank line of credit........................ -- -- 10,500
Payments on bank line of credit.......................... -- -- (10,500)
Net proceeds from offering............................... 62,287 -- --
Principal payments on long-term debt..................... (346) (329) (306)
Exercise of options to purchase common stock............. 3,216 6,482 429
-------- -------- --------
Net cash provided by financing activities........ 65,157 6,153 123
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..... 68,492 12,296 (724)
Cash and cash equivalents at beginning of period......... 13,450 1,154 1,878
-------- -------- --------
Cash and cash equivalents at end of period............... $ 81,942 $ 13,450 $ 1,154
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 104 $ 42 $ 403
======== ======== ========
Income taxes............................................. $ 13,857 $ 3,725 $ 3,495
======== ======== ========
</TABLE>
See accompanying notes
F-6
<PAGE> 27
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. DESCRIPTION OF BUSINESS
BUSINESS
Rexall Sundown, Inc. (the "Company") develops, manufactures, markets and
sells vitamins, nutritional supplements and consumer health products. The
Company distributes its products using three channels of distribution: sales to
retailers; direct sales through independent distributors; and mail order sales.
The Company's wholly-owned operating subsidiary, Rexall Showcase
International, Inc. ("Rexall Showcase"), markets and distributes health and
wellness products under the Rexall Showcase tradename through a sales force of
independent distributors. The Company still owns the stock of Pennex
Laboratories, Inc., now known as RSL Holdings, Inc. ("Pennex"), for which
operations have been discontinued. (See Note 14).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. Certain prior period amounts have been
reclassified to conform with the 1997 presentation.
MARKETABLE SECURITIES
Marketable securities consist primarily of government debt instruments and
are classified as available-for-sale securities under Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115). At August 31, 1997 and 1996 the fair value of the
securities approximated cost.
INVENTORY
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost less accumulated
depreciation. Depreciation is charged to expense over the estimated useful lives
of the assets and is computed principally using accelerated methods. Maintenance
and repairs are charged to expense when incurred and betterments are
capitalized. Upon retirement or sale, the cost and accumulated depreciation are
eliminated from the accounts and the gain or loss, if any, is included in the
determination of net income.
INTANGIBLE ASSETS
Intangible assets, which are included in other assets (non-current), are
stated at cost less accumulated amortization. Intangible assets are amortized on
a straight-line basis over their estimated useful lives which range from three
to fourteen years.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of three months or less at the date of purchase to be cash equivalents.
F-7
<PAGE> 28
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
RESTRICTED CASH
In 1996, restricted cash consisted of funds held in South Korea by the
local government to ensure that funds are available to satisfy customer demands
for refunds. In 1997, a line of credit was issued in lieu of deposits of cash.
INCOME TAXES
The Company utilizes the liability method of accounting for deferred income
taxes. This method requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statement or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial and
tax bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. Deferred tax assets are
also established for the future tax benefits of loss and credit carryovers.
REVENUE RECOGNITION
The Company recognizes revenue upon shipment, and such revenue is recorded
net of estimated sales returns, discounts and allowances.
PREPAID CUSTOMER ALLOWANCES
Costs associated with acquiring sales agreements with certain customers are
amortized over the expected terms of the agreements. These costs consist of the
cost of inventory provided at no charge and other allowances and are included in
other assets (both current and non-current). The amortization of these costs is
recorded as a reduction of net sales.
ADVERTISING AND CATALOG COSTS
Mail order catalog costs are expensed as incurred. Advertising production
costs are expensed when the advertising first takes place and media costs are
expensed as incurred.
RESERVE FOR ESTIMATED CHARGEBACKS
The Company's Rexall Managed Care division markets and distributes
vitamins, nutritional supplements and over-the-counter (OTC) pharmaceuticals to
the managed care market. The Company enters into contracts to provide such
products to various managed care suppliers who purchase the products through
wholesalers. The difference between the Company's price to the wholesaler and
the Company's contract price to the providers is charged back to the Company by
the wholesaler. Upon sale to the wholesaler, the Company provides for a reserve
of estimated future chargebacks.
FOREIGN CURRENCY TRANSLATION
The financial statements and transactions of the Company's foreign
operations, except those located in highly inflationary economies, are
maintained in their functional currency and translated into U.S. dollars in
accordance with SFAS No. 52. Assets and liabilities are translated at current
exchange rates in effect at the balance sheet date. Translation adjustments,
which result from the process of translating financial statements into United
States dollars, are accumulated in a separate component of shareholders' equity.
Revenues and expenses are translated at the average exchange rate for each
period. Gains and losses from foreign currency transactions are included in net
income. For foreign operations in highly inflationary economies, gains and
losses from balance sheet translation adjustments are included in net income.
F-8
<PAGE> 29
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NET INCOME PER SHARE
Net income per share of common stock (the "Common Stock"), $.01 par value,
of the Company is calculated by dividing net income by weighted average shares
of Common Stock outstanding, giving effect to Common Stock equivalents (Common
Stock options). Net income per share of common stock is presented in the
accompanying consolidated statements of income on an adjusted basis, which gives
retroactive effect to a two-for-one stock split paid on October 23, 1997 to
shareholders of record on October 7, 1997. All references to the number of
shares of Common Stock, except shares authorized, and to per share data in the
consolidated financial statements have been adjusted to reflect the stock splits
on a retroactive basis.
RECENT ACCOUNTING STANDARDS
During Fiscal 1997, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (SFAS 123). (See Note 11). SFAS No 121, "Accounting for the
Impairment of long-lived Assets and for Long-Lived Assets to be Disposed of" was
also adopted during fiscal 1997. 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 did not require impairment charges on the
financial statements of the Company.
Recent pronouncements of the Financial Accounting Standards Board include
SFAS No. 128, "Earnings Per Share", which is not required to be adopted until
fiscal 1998, SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which are
not required to be adopted until fiscal 1999.
SFAS No. 128 changes the method of calculating earnings per share. The
statement requires the presentation of "basic" earnings per share ("EPS") and
"diluted" EPS on the face of the income statement. SFAS No. 128 is effective for
financial statements issued for periods ended after December 15, 1997 and
requires restatement of all prior-period EPS data presented. The Company has not
yet determined the impact, if any, the adoption will have on the Company's
financial statements.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. The statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements be for earlier periods provided for
comparative purposes. The Company has not yet determined the effects, if any,
the adoption will have on the Company's financial statements.
SFAS No. 131 establishes standards for the way that public companies report
selected information about operating segments in annual financial statements and
requires that those companies report selected information about segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. SFAS No. 131 is
F-9
<PAGE> 30
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
effective for financial statements for periods beginning after December 15,
1997. The Company has not yet determined the effects, if any, the adoption will
have on the Company's financial statements.
3. INVENTORY
The components of inventory are as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Raw materials, bulk tablets and capsules.................... $20,429 $11,609
Work in process............................................. 1,147 1,732
Finished products........................................... 17,047 14,838
------- -------
Total inventory................................... $38,623 $28,179
======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Land........................................................ $ 2,972 $ 2,022
Building and improvements................................... 19,987 14,064
Machinery and equipment..................................... 20,415 14,479
Leasehold improvements...................................... 750 506
Furniture and fixtures...................................... 1,701 1,508
Other assets................................................ 212 212
------- -------
46,037 32,791
Less accumulated depreciation and amortization............ (12,248) (8,713)
------- -------
Property, plant and equipment, net................ $33,789 $24,078
======= =======
</TABLE>
F-10
<PAGE> 31
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1997 1996 USEFUL LIVES
------- ------- ------------
<S> <C> <C> <C>
Intangible assets:
Non-compete agreement................................ $ 1,000 $ 1,000 5 years
License and registration fees........................ 170 170 5 years
Organizational costs................................. 482 450 3 years
Computer software.................................... 6,950 2,723 5 years
Trademarks........................................... 901 224 10-14 years
Patents.............................................. 1,500 1,500 10.5 years
Other securities....................................... 150 150
Prepaid customer allowances............................ 3,076 3,121
Other.................................................. 1,171 776
------- -------
15,400 10,114
Less accumulated amortization........................ (2,780) (1,275)
------- -------
Total other assets........................... $12,620 $ 8,839
======= =======
</TABLE>
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are comprised of the
following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------
1997 1996
------- -------
<S> <C> <C>
Accrued customer rebates.................................... $ 1,642 $ 2,166
Accrued commissions......................................... 5,093 2,823
Accrued salaries and bonuses................................ 2,639 2,099
Income taxes payable........................................ 2,078 823
Deposits on unshipped orders................................ 1,598 --
Loans payable............................................... 2,444 --
Other....................................................... 4,696 2,189
------- -------
Total accrued expenses and other current
liabilities..................................... $20,190 $10,100
======= =======
</TABLE>
Loans payable consist of two short-term lines of credit with South Korean
banks for the Company's foreign subsidiary in South Korea. Such lines have
combined available borrowing amounts of $3,333. The balances outstanding as of
August 31, 1997 of $556 and $1,888 are due in April and May 1998, and bear
interest at rates of 13% and 11.5%, respectively.
F-11
<PAGE> 32
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
7. LONG-TERM DEBT AND BORROWING ARRANGEMENTS
Long-term debt consists of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------
1997 1996
---- ----
<S> <C> <C>
Non-compete agreement, non-interest bearing, net of discount
imputed at 8%, of $2 and $23 at August 31, 1997 and 1996,
respectively, maturing in January 1998.................... $105 $403
$650 promissory note, interest at 9%, matured in April
1997...................................................... -- 48
---- ----
105 451
Less current portion........................................ 105 346
---- ----
Total long-term debt.............................. $ -- $105
==== ====
</TABLE>
In December 1996, the Company entered into a revolving line of credit with
a financial institution with a borrowing amount of $20 million, which line of
credit is subject to annual extensions. Borrowings under the line of credit bear
interest at LIBOR plus 1.5 percent. The line of credit is collateralized by
accounts receivable and inventory, is subject to compliance with certain
financial covenants and ratios and prohibits the payment of any dividends on the
Company's Common Stock. There were no amounts outstanding under this revolving
line of credit at August 31, 1997.
8. LEASE OBLIGATIONS
The Company leases certain equipment, automobiles and warehouse and
distribution facilities under noncancelable operating leases. The leases provide
for monthly payments over terms of one to five years and certain of the leases
provide for renewal options. Total rent expense on all operating leases amounted
to approximately $1,474, $905 and $552 for the years ended August 31, 1997, 1996
and 1995, respectively.
The future minimum lease payments under noncancelable operating leases at
August 31, 1997 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1998........................................................ $1,055
1999........................................................ 465
2000........................................................ 53
------
Total............................................. $1,573
======
</TABLE>
9. BENEFIT PLANS
The Company offers a 401(k) employee benefit plan (the "Plan"), which
provides for voluntary contributions by employees of up to 20% of their base
compensation (as defined in the Plan), subject to a maximum annual contribution.
The Company may, at the discretion of the Board of Directors, make a
contribution to the Plan. The Company contributed approximately $196, $159 and
$158 during fiscal 1997, 1996 and 1995, respectively.
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Employee Stock Purchase Plan (the "1993 Stock Purchase Plan").
The 1993 Stock Purchase Plan enables participants to contribute cash in an
amount not to exceed 10% of salary per relevant pay period. Such funds are used
to periodically purchase shares of Common Stock for the account of each of the
participants in the 1993 Stock Purchase Plan at 90% of the market price of the
Common Stock. The Company has reserved 1,500,000 shares of Common Stock for
issuance under the 1993 Stock Purchase Plan and may issue such shares or
purchase
F-12
<PAGE> 33
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
additional shares of Common Stock in the open market for participants. For the
years ended August 31, 1997 and 1996 participants purchased 7,102 and 8,862
shares in the open market at an average purchase price of $14.44 and $9.07 per
share, respectively.
In February 1996, the Board of Directors adopted the Company's 1996 Rexall
Showcase International Distributor Stock Purchase Plan (the "1996 Distributor
Stock Purchase Plan"). The 1996 Distributor Stock Purchase Plan enables
participants to contribute cash in an amount not to exceed 20% of a
participant's monthly commission check. Such funds are used to periodically
purchase shares of Common Stock for the account of each of the participants in
the 1996 Distributor Stock Purchase Plan at either 95% or 100% of the market
price of the Common Stock, depending on a participant's level of achievement in
Rexall Showcase. The Company has reserved 1,500,000 shares of Common Stock for
issuance under the 1996 Distributor Stock Purchase Plan and may issue such
shares or purchase additional shares of Common Stock in the open market for
participants. For the years ended August 31, 1997 and 1996, participants
purchased 52,176 and 2,314 shares of Common Stock in the open market at an
average purchase price of $14.60 and $16.25 per share, respectively.
10. COMMON STOCK TRANSACTIONS
On March 14, 1996, the Board of Directors declared a three-for-two split of
the Common Stock which was effected in the form of a stock dividend. The stock
dividend was paid on April 4, 1996 to shareholders of record on March 25, 1996.
On November 5, 1996, the Company consummated a public offering (the
"Offering") of 8,000,000 shares of Common Stock. Of those shares, 4,000,000 were
sold by the Company and 4,000,000 were sold by certain shareholders of the
Company. On December 3, 1996, the underwriters' over-allotment option to
purchase an additional 1,200,000 shares was exercised. Of those 1,200,000
shares, 800,000 were sold by the Company and 400,000 were sold by a shareholder
of the Company.
On September 22, 1997, the Board of Directors declared a two-for-one split
of the Common Stock which was effected in the form of a stock dividend. The
stock dividend will be paid on October 23, 1997 to shareholders of record on
October 7, 1997.
All references to the number of shares of Common Stock, except shares
authorized, and to per share data in the consolidated financial statements have
been adjusted to reflect the stock splits on a retroactive basis.
11. STOCK OPTIONS
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Stock Incentive Plan (the "1993 Plan") for executives and other
key personnel. The 1993 Plan is administered by the Compensation/Stock Option
Committee of the Board of Directors of the Company. Under the 1993 Plan, all
options are to have an exercise price equal to the fair market value at the date
of grant. In February 1995, the Board of Directors amended the 1993 Plan to
increase the number of shares of Common Stock of the Company available
thereunder to a total of 9,000,000 shares, which amendment was approved by the
Company's shareholders in February 1996. Of the stock options granted,
substantially all are for a term of five to ten years. During fiscal 1997 and
1996, the Company realized a tax benefit through shareholder's equity of $4,188
and $5,000, respectively, related to the exercise of stock options.
In March 1993, the Board of Directors and shareholders adopted the
Company's 1993 Non-Employee Director Stock Option Plan (the "1993 Director
Plan"). The maximum number of shares available for issuance under the 1993
Director Plan is 120,000 shares.
F-13
<PAGE> 34
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
In July 1994, the Board of Directors adopted the Company's 1994
Non-Employee Director Stock Option Plan (the "1994 Director Plan"), which was
approved by the Company's shareholders in February 1995. The maximum number of
shares of Common Stock available for issuance under the 1994 Director Plan is
300,000 shares.
As of August 31, 1997, non-qualified stock options to purchase 1,855,800
shares of Common Stock had been granted outside of any Company plan and have an
exercise price equal to fair market value at date of grant. Substantially all of
these options are for a term of five to seven years.
In February 1996, the Board of Directors adopted the Company's 1996 Rexall
Showcase International Distributor Stock Option Plan (the "1996 Distributor
Plan"). The 1996 Distributor Plan provides for the granting of stock options to
eligible distributors upon attainment of specified conditions at an exercise
price not less than the fair market value on the date of grant. The maximum
number of shares of Common Stock available under the 1996 Distributor Plan is
1,500,000 shares. Options granted under the 1996 Distributor Plan are for a term
of five years.
In February 1997, the Board of Directors adopted the Company's 1997 Rexall
Showcase International Distributor Stock Option Plan (the "1997 Distributor
Plan"). The 1997 Distributor Plan provides for the granting of stock options to
eligible distributors upon attainment of specified conditions at an exercise
price not less than the fair market value on the date of grant. The maximum
number of shares of Common Stock available under the 1997 Distributor Plan is
500,000 shares. Options granted under the 1997 Distributor Plan are for a term
of five years. As of August 31, 1997, no options have been granted under the
1997 Distributor Plan.
Information with regard to the stock options is as follows:
<TABLE>
<CAPTION>
SHARES
----------------------------------------------------------------
1993 DIRECTOR DISTRIBUTOR OTHER OPTION PRICE
PLAN PLANS PLANS OPTIONS RANGE
---------- -------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Outstanding at August 31, 1994.... 3,175,200 60,000 -- 1,636,800
Granted......................... 2,493,750 45,000 -- 202,500 $2.84-$4.13
Cancelled....................... (705,600) (27,000) -- -- $1.58-$7.09
Exercised....................... (118,500) (3,000) -- (120,000) $1.58-$3.17
---------- ------- --------- ----------
Outstanding at August 31, 1995.... 4,844,850 75,000 -- 1,719,300
Granted......................... 1,872,902 45,000 -- 225,000 $4.75-$15.00
Cancelled....................... (525,300) -- -- (292,500) $1.58-$7.25
Exercised....................... (1,445,356) (2,000) -- (1,040,800) $1.58-$5.71
---------- ------- --------- ----------
Outstanding at August 31, 1996.... 4,747,096 118,000 -- 611,000 $1.58-$15.00
Granted......................... 1,718,500 90,000 181,600 -- $11.88-$17.75
Cancelled....................... (208,700) -- -- -- $3.33-$13.25
Exercised....................... (724,876) (2,000) -- (413,000) $1.58-$6.31
---------- ------- --------- ----------
Outstanding at August 31, 1997.... 5,532,020 206,000 181,600 198,000
========== ======= ========= ==========
Options currently exercisable..... 1,918,978 62,000 36,320 198,000
========== ======= ========= ==========
Options available for grant at
August 31, 1997................. 903,248 207,000 1,818,400 --
========== ======= ========= ==========
</TABLE>
The weighted average fair value of options granted at fair market value
during fiscal year ended August 31, 1997 and 1996 was $14.30 and $6.77,
respectively.
F-14
<PAGE> 35
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
During fiscal 1996, Financial Accounting Standards Board issued SFAS 123.
SFAS 123 encourages, but does not require, the use of a fair value based method
of accounting for stock-based compensation plans under which the fair value of
stock options is determined on the date of grant and expensed over the vesting
period of the stock options. While the Company has elected to continue to apply
the provisions of APB 25, SFAS 123 requires pro forma disclosure of net income
and income per common share as if the fair value based method under SFAS 123 had
been adopted.
The pro forma net income and income per common share amounts below have
been derived using the Black-Scholes stock option pricing model with the
following assumptions for each stock option grant during the respective fiscal
year:
<TABLE>
<CAPTION>
STOCK OPTIONS
GRANTED IN FISCAL YEAR
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Assumptions
Risk-free interest rate................................. 5.75%-6.63% 5.68%-5.75%
Expected life of stock options (years).................. 6 6
Expected volatility of common stock..................... 45% 45%
Expected annual dividends on common stock............... -- --
</TABLE>
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net income -- as reported................................. $35,061 $20,293
Net income -- pro forma................................... 32,746 19,659
Net income per share -- as reported....................... 0.52 0.33
Net income per share -- pro forma......................... 0.48 0.32
</TABLE>
The pro forma effects on net income and income per common share for fiscal
1997 and 1996 may not be representative of the pro forma effects SFAS 123 may
have in future years.
The following table summarizes information about stock options outstanding
at August 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
NUMBER REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE AT 8/31/97 EXERCISE PRICE
- ----------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.58-$5.00........... 2,657,300 3.20 $ 3.18 1,844,998 $ 3.02
$ 5.01-$10.00.......... 1,514,720 8.20 $ 6.40 310,680 $ 6.64
$10.01-$20.00.......... 1,945,600 9.30 $12.95 59,620 $16.54
</TABLE>
12. SALES TO A MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
The Company had sales to a national retailer which represented
approximately 17% of net sales for the year ended August 31, 1997, and sales to
a different national retailer which represented approximately 11% of net sales
for the year ended August 31, 1995.
The Company sells products to a large number of customers, which are
primarily in the United States. The Company continuously evaluates the credit
worthiness of each customer's financial condition and generally does not require
collateral.
Financial instruments that potentially subject the Company to concentration
of credit risk are cash, marketable securities and trade accounts receivable.
The Company places its temporary cash investments with high credit quality
financial institutions.
Marketable securities consist primarily of U.S. federal, state and local
securities with high credit quality financial institutions.
F-15
<PAGE> 36
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
13. INCOME TAXES
The Company files a consolidated United States income tax return with its
domestic subsidiaries. For state income tax purposes the Company and its
subsidiaries file on both a consolidated and separate return basis in the states
in which they do business. Rexall Showcase's foreign subsidiaries file income
tax returns in their respective countries of incorporation.
Deferred income taxes as of August 31, 1997 relate primarily to the reserve
for loss on disposition of discontinued operations which is deductible when
realized, amortization of a non compete agreement which is deductible when paid,
inventory and account receivable reserves, book depreciation versus tax
deprecation and foreign net operating losses.
The following reflects the actual income tax provision (benefits) the
Company incurred for the fiscal years ended August 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal................................................. $18,305 $ 8,886 $ 3,866
State................................................... 1,601 776 307
Foreign................................................. -- 60 --
------- ------- -------
19,906 9,722 4,173
------- ------- -------
Deferred:
Federal................................................. 176 1,906 (1,657)
State................................................... -- 153 (132)
Foreign................................................. (605) 17 --
------- ------- -------
(429) 2,076 (1,789)
------- ------- -------
Total income tax provision........................... $19,477 $11,798 $ 2,384
======= ======= =======
</TABLE>
The following summarizes the total income tax provisions for each of the
years ended August 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Continuing operations..................................... $19,477 $11,798 $ 6,866
Discontinued operations................................... -- -- (2,425)
Loss on disposal of discontinued operations............... -- -- (2,057)
------- ------- -------
$19,477 $11,798 $ 2,384
======= ======= =======
</TABLE>
The following table summarizes the differences between the Company's
effective tax rate for financial statement purposes and the Federal statutory
rate as of August 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1995 1996
------- ------- ------
<S> <C> <C> <C>
Income tax provision, at 35%............................... $19,088 $11,232 $2,360
Statutory federal surtax exemption......................... -- -- (66)
State income tax, net of federal benefit................... 1,048 624 177
Tax exempt interest........................................ (664) -- --
Non-deductible expenses.................................... 128 83 54
Other, net................................................. (123) (141) (141)
------- ------- ------
Total income tax provision............................... $19,477 $11,798 $2,384
======= ======= ======
</TABLE>
F-16
<PAGE> 37
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The significant components of the deferred tax assets and liabilities at
August 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ------
<S> <C> <C> <C>
Deferred income tax assets:
Loss on disposition of discontinued operations............ $185 $185 $2,057
Non-compete amortization.................................. 39 149 238
Accounts receivable and other reserves.................... 67 66 135
Net operating losses...................................... 605 -- --
Other..................................................... 89 102 11
---- ---- ------
985 502 2,441
---- ---- ------
Deferred income tax liabilities:
Depreciation.............................................. 598 527 387
Foreign................................................... -- 17 --
---- ---- ------
598 544 387
---- ---- ------
$387 $(42) $2,054
==== ==== ======
</TABLE>
14. DISCONTINUED OPERATIONS
On August 31, 1995, the Company's Board of Directors approved a plan to
divest Pennex. Accordingly, the Company recorded a reserve in its fiscal 1995
fourth quarter in the amount of $3,698, net of tax benefit of $2,057, to provide
for the loss on disposition of the related assets and liabilities of Pennex and
other expenses related to the closing of the business. The $3,698 reserve
included approximately $964 (net of tax benefit), for estimated operating losses
during the phase-out period subsequent to August 31, 1995. On November 17, 1995,
Pennex ceased operations.
Net assets of Pennex, which are presented as net amounts in the Company's
consolidated balance sheets at August 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Property, plant and equipment, net (under contract for
sale)..................................................... $3,948 $3,948
Other net assets (liabilities).............................. 128 (93)
------ ------
Total assets...................................... $4,076 $3,855
====== ======
</TABLE>
The results of discontinued operations for the fiscal year ended August 31,
1995 were as follows:
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Net sales................................................... $18,933
=======
Loss from discontinued operations before income tax......... $(6,704)
Income tax benefit.......................................... 2,425
-------
Net loss from discontinued operations....................... $(4,279)
=======
Loss on disposal, net of tax benefit of $2,057.............. $(3,698)
=======
</TABLE>
On February 1, 1996, substantially all the remaining assets of Pennex were
sold for $6,495. The Company received a $500 deposit and a collateralized note
for the balance. The terms of such note provide for interest at 12%, payable
monthly through March 1996. The rate of interest increased to 18% on April 1,
1996, although interest is being paid at 12% with the balance accruing until the
note is due in full. The note was assigned from
F-17
<PAGE> 38
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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 September 1, 1997, the Company extended the maturity of the
collateralized note related to the sale of the assets of Pennex Laboratories,
Inc. to April 15, 1998. Interest continues to accrue and is payable in
accordance with the previous terms.
Assuming full collection of the balance of the collateralized note, the
Company expects to record a reduction to the estimated loss on disposition of
approximately $1,400 (net of tax), or $.02 per share, which would be reflected
as an adjustment to discontinued operations.
15. COMMITMENTS AND CONTINGENCIES
The Company was named in 27 lawsuits, of which 25 have been settled or
discontinued, relating to the manufacture of L-tryptophan. These lawsuits seek
or have sought compensation and damages for alleged personal injury from
ingestion of products containing allegedly contaminated L-tryptophan. The
Company has entered into an agreement with the apparent supplier of all the
alleged contaminated L-tryptophan products pursuant to which such supplier has
agreed to indemnify the Company against any judgment and to fund settlements
arising out of those claims in certain circumstances, as well as to pay the
legal fees and expenses of the defense. Based upon such indemnification
arrangements, the Company's product liability insurance and the product
liability insurance of the Company's supplier, the Company does not believe that
any adverse decision will have a material adverse effect on the Company and,
accordingly, no provision has been made in the financial statements for any loss
that may result to the Company as a result of these actions.
The Company has employment agreements with each of its executives for a
term of three years, some of which are automatically extended for an additional
year at the expiration of each year. The agreements provide for current minimum
annual salaries in the aggregate of $2.9 million, adjusted annually for
cost-of-living changes.
The Company is also involved in litigation relating to claims arising out
of its operations in the normal course of business. The Company is not currently
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
F-18
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS OF THE COMPANY.
See the Company's Proxy Statement, incorporated by reference in Part III of
this Form 10-K, under the heading "Election of Directors."
(B) EXECUTIVE OFFICERS OF THE COMPANY.
See Part I of this Form 10-K at Page 12.
ITEM 11. EXECUTIVE COMPENSATION.
See the Company's Proxy Statement, incorporated by reference in Part III of
this Form 10-K, under the headings "Executive Compensation" and "Certain
Relationships and Related Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
See the Company's Proxy Statement, incorporated by reference in Part III of
this Form 10-K, under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the Company's Proxy Statement, incorporated by reference in Part III of
this Form 10-K, under the heading "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT
(1) FINANCIAL STATEMENTS
See "Item 8. Financial Statements and Supplementary Data" for Financial
Statements included with this Annual Report on Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, not
applicable, or the information is otherwise set forth in the financial
statements or notes thereto.
(3) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
3.1 -- Amended and Restated Articles of Incorporation(1)
3.2 -- Amended and Restated By-Laws(1)
10.1 -- Redemption Agreement dated January 7, 1988 between the
Company, Carl DeSantis, Sylvia DeSantis, Lorraine Hoffman
and Joseph Greene(1)
</TABLE>
21
<PAGE> 40
<TABLE>
<C> <C> <S>
10.2 -- Amended and Restated Indemnification Agreement dated March 15, 1993 between the Company and Showa Denko
America, Inc.(1)
10.3 -- Guaranty Agreement dated March 15, 1993 between the Company and Showa Denko K.K.(1)
10.4 -- Amended and Restated 1993 Employee Stock Purchase Plan(1)
10.5 -- Form of Non-Qualified Stock Option Agreement(1)
10.6 -- Amended and Restated 1993 Stock Incentive Plan(2)
10.7 -- Amended and Restated 1993 Non-Employee Director Stock Option Plan(2)
10.8 -- Amended and Restated 1994 Non-Employee Director Stock Option Plan(2)
10.9 -- 1996 Rexall Showcase Distributor Stock Purchase Plan(3)
10.10 -- 1996 Rexall Showcase Distributor Stock Option Plan(4)
10.11 -- Employment Agreement dated April 1, 1995 between Carl DeSantis and the Company, as amended on October 9,
1995 and on March 27, 1997(5)
10.12 -- Employment Agreement dated April 1, 1995 between Dean DeSantis and the Company, as amended on April 1,
1996 and on March 27, 1997(5)
10.13 -- Employment Agreement dated April 1, 1995 between Damon DeSantis and the Company, as amended on April 1,
1996 and on March 27, 1997(5)
10.14 -- Employment Agreement dated April 1, 1995 between Nickolas Palin and the Company, as amended on April 1,
1996 and on March 27, 1997(5)
10.15 -- Employment Agreement dated April 1, 1995 between Geary Cotton and the Company, as amended on March 27,
1997(6)
10.16 -- Employment Agreement dated April 1, 1995 between Richard Werber and the Company, as amended on March 27,
1997(6)
10.17 -- Employment Agreement dated April 24, 1995 between Christian Nast and the Company, as amended on July 21,
1995 and on March 27, 1997(7)
10.18 -- Employment Agreement dated February 3, 1997 by and between the Company and Gary N. Malloch(8)
10.19 -- Business Loan Agreement dated December 13, 1996 between the Company and Barnett Bank, N.A.(9)
10.20 -- Agreement dated December 29, 1995 by and between Pennex Laboratories, Inc. (now known as RSL Holdings,
Inc.) and Oakmont Pharmaceuticals, Inc.(10)
10.21 -- Fourth Forbearance Agreement dated September 1, 1997 by and between Oakmont Pharmaceuticals, Inc. and
the Company(11)
10.22 -- Industrial Lease dated March 3, 1995 by and between WRC Properties, Inc. and Network Marketing, L.C.
(now known as Rexall Showcase International, Inc.)(10)
10.23 -- Standard Industrial Lease dated May 16, 1996 between the Company and Dermody Properties(10)
10.24 -- Purchase and Sale Agreement dated August 26, 1997 by and between Levitz Furniture Corporation and the
Company(11)
11 -- Earnings Per Share Computation(11)
21 -- Subsidiaries of Registrant(11)
23 -- Consent of Coopers & Lybrand, L.L.P.(11)
27 -- Financial Data Schedule (for SEC use only)(11)
</TABLE>
22
<PAGE> 41
- ---------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 33-61382) and incorporated herein by reference.
(2) Plan is filed as an Exhibit to the Company's Proxy Statement dated December
30, 1996 and is incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(File No. 33-6571) and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-3
(File No. 33-7883) and incorporated herein by reference.
(5) The Employment Agreement is filed as an Exhibit to the Company's Annual
Report on Form 10-K for the Year Ended August 31, 1995, the April 1, 1996
amendment thereto is filed as an Exhibit to the Company's Annual Report on
Form 10-K for the Year Ended August 31, 1996, and the March 27, 1997
amendment thereto is filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the Quarterly Period Ended May 31, 1997, each of which is
incorporated herein by reference.
(6) The Employment Agreement is filed as an Exhibit to the Company's Annual
Report on Form 10-K for the Year Ended August 31, 1995 and the March 27,
1997 amendment thereto is filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the Quarterly Period Ended May 31, 1997, each of
which is incorporated herein by reference.
(7) The Employment Agreement is filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the Quarter Ended May 31, 1995, the July 21, 1995
amendment thereto is filed as an Exhibit to the Company's Annual Report on
Form 10-K for the Year Ended August 31, 1995, and the March 27, 1997
amendment thereto is filed as an Exhibit to the Company's Quarterly Report
on Form 10-Q for the Quarterly Period Ended May 31, 1997, each of which is
incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended February 28, 1997.
(9) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
Quarterly Period Ended November 30, 1996 and is incorporated herein by
reference.
(10) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
Year Ended August 31, 1996 and is incorporated herein by reference.
(11) Filed herewith.
(B) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the three-month period ended August
31, 1997.
(C) ITEM 601 EXHIBITS
The exhibits required by Item 601 of Regulation S-K are set forth in (a)(3)
above.
(D) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required by Regulation S-K are set forth
in (a)(2) above.
23
<PAGE> 42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REXALL SUNDOWN, INC.
<TABLE>
<S> <C>
Dated: November 26, 1997 By: /s/ CARL DESANTIS
----------------------------------------------------
Carl DeSantis,
Chairman of the Board
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CARL DESANTIS Chairman of the Board November 26, 1997
- ------------------------------------------------
Carl DeSantis
/s/ CHRISTIAN NAST Director, President and Chief November 26, 1997
- ------------------------------------------------ Executive Officer
Christian Nast
/s/ DEAN DESANTIS Director, Senior Vice November 26, 1997
- ------------------------------------------------ President -- Operations and
Dean DeSantis Chief Operating Officer
/s/ DAMON DESANTIS Director and Executive Vice November 26, 1997
- ------------------------------------------------ President
Damon DeSantis
/s/ GEARY COTTON Vice President -- Finance, Chief November 26, 1997
- ------------------------------------------------ Financial Officer, Treasurer
Geary Cotton and Chief Accounting Officer
/s/ NICKOLAS PALIN Director and President -- Sundown November 26, 1997
- ------------------------------------------------ Vitamins
Nickolas Palin
/s/ STANLEY LEEDY Director November 26, 1997
- ------------------------------------------------
Stanley Leedy
Director November 26, 1997
- ------------------------------------------------
Raymond Monteleone
/s/ MELVIN STITH Director November 26, 1997
- ------------------------------------------------
Melvin Stith
</TABLE>
24
<PAGE> 1
Exhibit 10.21
FOURTH FORBEARANCE AGREEMENT
THIS FOURTH FORBEARANCE AGREEMENT, (the "Fourth Forbearance Agreement") is
made as of September 1, 1997 by and between OAKMONT PHARMACEUTICALS, INC., a
Delaware corporation ("Oakmont"), and REXALL SUNDOWN, INC., a Florida
corporation ("Rexall Sundown"), as assignee of RSL Holdings, Inc. (formerly
known as Pennex Laboratories, Inc. and, before that, RS Acquisition, Inc.), a
Pennsylvania corporation ("RSL"), for the purpose of amending the payment terms
under that certain Forbearance Agreement dated April 29, 1996 by and between
Oakmont and Rexall Sundown, (the "First Forbearance Agreement"), that certain
Second Forbearance Agreement dated September 23, 1996 by and between Oakmont
and Rexall Sundown (the "Second Forbearance Agreement"), and that certain Third
Forbearance Agreement dated April 1, 1997 by and between Oakmont and Rexall
Sundown (the "Third Forbearance Agreement").
Pursuant to an Agreement of Purchase and Sale dated as of December 29,
1995, by and between RSL as Seller and Oakmont as Buyer (the "Purchase
Agreement"), RSL sold to Oakmont various assets formerly used in RSL's
pharmaceutical manufacturing business (collectively, the "Assets"), including
(i) certain real estate in Plum Borough, Allegheny County, Pennsylvania (the
"Real Property"), wherein RSL conducted its pharmaceutical manufacturing
operations, and (ii) various items of personal property (collectively, the
"Personal Property") including equipment used by RSL in the conduct of its
operations conducted at the Real Property and inventory located at the Real
Property. RSL retained a mortgage lien on the Real Property and a security
interest in the Personal Property to secure Oakmont's payment of the unpaid
balance of the purchase price of the Assets and various other obligations owed
by Oakmont to RSL (collectively, the "Obligations") pursuant to a promissory
note dated January 31, 1996 (the "Note") and a mortgage dated February 1, 1996
and a security agreement dated January 31, 1996 (such mortgage and security
agreement are together hereinafter referred to as the "Security Documents").
Thereafter, RSL transferred all of its rights in respect of the Obligations and
in and under the Note and Security Documents to Rexall Sundown.
Oakmont defaulted in the timely payment of the Obligations. Thereafter,
Rexall Sundown and Oakmont entered into the First Forbearance Agreement, the
Second Forbearance Agreement and the Third Forbearance Agreement, whereby
Rexall Sundown agreed to forbear from the enforcement of its right to payment
on the outstanding balance of the Obligations on the terms and conditions set
forth therein.
Simultaneously with the execution and delivery of the First Forbearance
Agreement, Oakmont delivered to Kirkpatrick & Lockhart LLP ("K&L"), counsel to
Rexall Sundown, at its office at 1500 Oliver Building, Pittsburgh, PA 15222,
the following items: (i) an executed and acknowledged Deed of Conveyance,
conveying the Real Property to
1
<PAGE> 2
a person or persons to be designated by Rexall Sundown; and (ii) an executed
Bill of Sale, conveying the Personal Property to a person or persons to be
designated by Rexall Sundown (the Deed and the Bill of Sale are hereinafter
collectively referred to as the "Transfer Documents"). K&L has been holding the
Transfer Documents in escrow pursuant to the terms of the First Forbearance
Agreement.
Oakmont has also defaulted in the timely payment of the amounts due under
the First Forbearance Agreement, the Second Forbearance Agreement and the Third
Forbearance Agreement (the "Modified Obligations"). Rexall Sundown is willing
to forbear from the enforcement of its rights and remedies in respect of such
default, on the terms and conditions set forth herein.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
promises herein contained, Oakmont and Rexall Sundown, each intending to be
legally bound, hereby, agree as follows:
1. Rexall Sundown waives any right to accelerate the maturity of the
outstanding balance of the Modified Obligations or to exercise any other right
or remedy under the Purchase Agreement, the Note, the Security Documents, or
the First Forbearance Agreement, the Second Forbearance Agreement or the Third
Forbearance Agreement available by reason of any payment default thereunder
occurring prior to the date of this Fourth Forbearance Agreement, and if such
acceleration shall be deemed to have occurred prior to the date hereof by
reason of any such default, such acceleration shall be deemed nullified and
rescinded. Rexall Sundown further agrees not to accelerate the maturity of the
Modified Obligations or take any other action to enforce payment of the
Modified Obligations unless an Event of Default (as defined below in paragraph
5 below) shall have occurred and be continuing.
2. Oakmont will pay Rexall Sundown the following amounts on or before the
following dates:
September 19, 1997 $ 120,000.00
September 30, 1997 $ 60,000.00
October 31, 1997 $ 60,000.00
November 15, 1997 $1,000,000.00
November 30, 1997 $ 60,000.00
December 31, 1997 $1,060,000.00
January 31, 1998 $ 60,000.00
February 28, 1998 $ 60,000.00
March 31, 1998 $ 60,000.00
If Oakmont raises more than $3,500,000.00 from the sale of bonds, Oakmont
will pay Rexall fifty percent (50%) of the net amount raised in excess of
$3,500,000.00 within two (2) business days of the closing. Payments made
pursuant to this paragraph 2 shall be applied first to accrued and unpaid
interest on the Modified Obligations, and next to the unpaid principal balance
of the Modified Obligations.
2
<PAGE> 3
3. On or before April 15, 1998, Oakmont shall pay Rexall Sundown the
outstanding balance due under the Purchase Agreement, the Note, and the
Security Documents as modified by the First Forbearance Agreement, the Second
Forbearance Agreement and the Third Forbearance Agreement (collectively, the
"Modified Documents"), as specifically set forth on EXHIBIT A attached hereto.
4. In addition to the amounts due to Rexall Sundown pursuant to Sections 2
and 3 hereof, Oakmont shall pay to Rexall Sundown an additional forbearance fee
of $100,000 not later than April 15, 1998.
5. Any of the following events shall constitute an "Event of Default" for
purposes of the Fourth Forbearance Agreement: (i) Any of the payment required
to be made pursuant to this Fourth Forbearance Agreement shall not be made in
full on or before its respective due date; or (ii) Oakmont shall have defaulted
in the payment or performance of any other duty or obligation under the
Modified Documents (other than any default waived by Rexall Sundown pursuant to
paragraph 1 above) and any applicable grace or cure period shall have expired.
6. If any Event of Default shall have occurred and be continuing, then, in
any such event, Rexall Sundown may accelerate the maturity of all the remaining
amounts payable hereunder, and, in addition, may do any or all of the
following: (a) cause K&L to deliver the Transfer Documents to Rexall Sundown;
cause such Transfer Documents to be completed by the insertion of the name of
the transferee or transferees of the Real Property and the Personal Property;
and cause any or all of the Transfer Documents to be filed or recorded in the
appropriate public records; (b) cause judgment to be entered in favor of Rexall
Sundown (or its assignee) and against Oakmont for all or any part of the
outstanding balance of such amounts pursuant to the warrant of attorney
hereinafter set forth; and (c) exercise any and all other rights and remedies
provided by law.
7. If, in accordance with this Fourth Forbearance Agreement, Rexall
Sundown elects to cause K&L to deliver to Rexall Sundown the Transfer
Documents, then Oakmont shall be released and discharged from any and all
further liability in respect of the amounts payable hereunder, provided,
however, that nothing in this Fourth Forbearance Agreement shall impair Rexall
Sundown's right to enforce its lien and security interest in the Assets.
8. If all the amounts payable to Rexall Sundown under the Modified
Documents are paid in full, then upon receipt of such payment, Rexall Sundown
shall release its lien and security interest in the Assets and shall cause K&L
to return the Transfer Documents to Oakmont.
9. This Fourth Forbearance Agreement may be executed in multiple
counterparts by different parties on different counterparts, each of which
shall be deemed an original, but all of which shall be deemed one and the same
instrument.
3
<PAGE> 4
10. OAKMONT HEREBY AUTHORIZES ANY ATTORNEY OF ANY COURT IN THE
COMMONWEALTH OF PENNSYLVANIA TO APPEAR FOR OAKMONT AT ANY TIME AFTER THE
OCCURRENCE OF AN EVENT OF DEFAULT HEREUNDER, AND CONFESS A JUDGMENT OR
JUDGMENTS AGAINST OAKMONT AND IN FAVOR OF REXALL SUNDOWN OR ITS ASSIGNS, AS
MANY TIMES AS SHALL BE NECESSARY OR EXPEDIENT, FOR ALL OR ANY PART OF THE THEN
OUTSTANDING BALANCE DUE AND PAYABLE HEREUNDER, TOGETHER WITH AN ATTORNEY'S FEE
OF 15% OF SUCH AMOUNT, WITH RELEASE OF ALL ERRORS AND WITHOUT STAY OF EXECUTION.
IN WITNESS WHEREOF, we have hereunto set our hands and seals on or as of
the day and year first above written.
OAKMONT PHARMACEUTICALS, INC.
By: /s/ Arthur F. Michaelis
---------------------------------
Name: Arthur F. Michaelis
Title: CEO
REXALL SUNDOWN, INC.
By: /s/ Richard Werber
---------------------------------
Name: Richard Werber
Title: VP
4
<PAGE> 5
EXHIBIT A
PAGE 1
OAKMONT PHARMACEUTICALS
BALANCES DUE AS OF AUGUST 31, 1997
Interest Calculation
<TABLE>
<CAPTION>
Int @ 12% Int @ 6% Total
-----------------------------------------------------------
<S> <C> <C> <C>
April '96 29,975.00 29,975.00
May 30,974.17 30,974.17
June 29,975.00 29,975.00
July 30,974.17 30,974.17
Aug 30,974.17 30,974.17
Sept 29,975.00 29,975.00
Oct 30,974.17 30,974.17
Nov 29,975.00 29,975.00
Dec 30,974.17 30,974.17
Jan 30,974.17 30,974.17
Feb 27,976.67 27,976.67
March 61,948.33 30,974.17 92,922.50
April 59,950.00 29,975.00 89,925.00
May 61,948.33 30,974.17 92,922.50
June 59,950.00 29,975.00 89,925.00
July 59,950.00 29,975.00 89,925.00
August 61,948.33 30,974.17 92,922.50
September 59,950.00 29,975.00 89,925.00
October 61,948.33 30,974.17 92,922.50
November 57,875.56 28,937.78 86,813.34
December 57,661.15 28,830.58 86,491.73
January 47,327.82 23,663.91 70,991.73
Feb 42,747.71 21,373.85 64,121.56
March 47,327.82 23,663.91 70,991.73
April 22,900.56 11,450.28 34,350.84
----------------------------------------------------------------
763,433.95 715,438.64 1,478,872.60
Payment 6/97 (180,000.00) (180,000.00)
Payment 8/97 (60,000.00) (60,000.00)
----------------------------------------------------------------
Balance due 523,433.95 715,438.64 1,238,872.60
----------------------------------------------------------------
Above Interest due 1,238,872.60
Principal Balance 5,995,000.00
First forbearance fee 100,000.00
Second forbearance fee 100,000.00
Third forbearance fee 250,000.00
Fourth forbearance fee 100,000.00
--------------
Total Balance Due as of 8/31/97 7,783,872.60
Payment due September 19, 1997 (120,000.00)
Payments due monthly 9/30/97 - 3/31/98 (420,000.00)
Payment due 11/15/97 (1,000,000.00)
Payment due 12/31/97 (1,000,000.00)
--------------
Balance due April 15, 1998 5,243,872.60
==============
</TABLE>
<PAGE> 6
EXHIBIT A
PAGE 2
<TABLE>
<CAPTION>
INTEREST @ 12% INTEREST @ 6% TOTAL INTEREST PRINCIPAL TOTAL PAYMENT
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest due thru 10/31/97 487,593.33 577,518.33 1,065,111.67
Interest due 11/1-11/15/97 - - -
------------------------------------------------
Interest thru 11/15/97 487,593.33 577,518.33 1,065,111.67
Payment 6/97 (180,000.00) (180,000.00) 180,000.00
Payment 8/97 (60,000.00) (60,000.00) 60,000.00
Payment due 9/19/97 (120,000.00) (120,000.00) 120,000.00
Payment due 9/30 (60,000.00) (60,000.00) 60,000.00
Payment due 10/31 (60,000.00) (60,000.00) 60,000.00
Payment due 11/15/97 (7,593.33) (577,518.33) (585,111.57) 414,888.33 1,000,000.00
------------------------------------------------
Interest balances - - (0.00)
Interest due 11/1-11/15/97 29,975.00 14,987.50 44,962.50
Interest 11/16-11/30 27,900.56 13,950.28 41,850.84
------------------------------------------------
Interest November 57,875.56 28,937.78 86,813.34
Payment due 11/30 (57,875.56) (2,124.44) (60,000.00) 60,000.00
Interest December 57,661.15 28,830.58 86,491.73
Payment due 12/31/97 (57,661.15) (2,338.85) (60,000.00) 60,000.00
Payment due 12/31/97 - - - 1,000,000.00 1,000,000.00
Interest January 47,327.82 23,663.91 70,991.73
Payment due 1/31/98 (47,327.82) (12,672.18) (60,000.00) 60,000.00
Interest February 42,747.71 21,373.85 64,121.56
Payment due 2/28/98 (42,747.71) (17,262.29) (60,000.00) 60,000.00
Interest March 47,327.82 23,663.91 70,991.73
Payment due 3/31/98 (47,327.82) (12,672.18) (60,000.00) 60,000.00
Interest April 22,900.56 11,450.28 34,350.84
------------------------------------------------
Interest balances due 22,900.56 90,860.37 113,760.93
------------------------------------------------
Total interest due 113,760.93
Forbearance fees 550,000.00
Principal due 5,995,000.00
Payment applied (414,888.33)
Payment applied (1,000,000.00) 4,580,111.67
------------- --------------
Total due at 4/15/98 5,243,872.60
==============
</TABLE>
The parties agree that if payments are not made on their due dates, the amounts
due as set forth above will be adjusted accordingly.
Rexall Sundown, Inc. Oakmont Pharmaceuticals, Inc.
by: /s/ Richard Werber, VP by: /s/ Arthur F. Michaelis, CEO
------------------------- --------------------------
<PAGE> 1
EXHIBIT 10.24
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT is made and entered into as of the 26th day of August 1997,
by and between Levitz Furniture Corporation, a Florida corporation. ("Seller"),
and Rexall Sundown, Inc., a Florida corporation and/or assigns ("Purchaser"). In
consideration of the mutual covenants and promises set forth in this Agreement
and other good and valuable consideration, the receipt and sufficiency of which
are acknowledged by the parties to this Agreement, the parties agree to the
following terms and conditions:
1. PURCHASE AND SALE. Subject to the terms of this Agreement, Seller
agrees to sell to Purchaser and Purchaser agrees to purchase from Seller the
following property (collectively, the "Property"):
1.1 That certain parcel of property located in Palm Beach County,
Florida, having a street address of 6111 Broken Sound Parkway, Boca Raton,
Florida, as more particularly described in Schedule "A" (the "Realty");
1.2 The land and all buildings, structures and other improvements
situated on the Realty (the "Improvements");
1.3 All fixtures, equipment, furnishings and other items of property
(other than furniture and files and similar personal property used by
Seller in its ordinary business) whatsoever used or useful in the
operation, repair and maintenance of the Realty, situated on the Realty,
and owned by Seller (the "Personalty");
1.4 All licenses, permits, and contracts rights pertaining to
ownership and/or operation of the Realty, Improvements or Personalty;
1.5 All general intangible rights pertaining to the ownership and/or
operation of the Realty; and
1.6 All strips, gores, easements, privileges, rights-of-way, riparian
and other water rights, rights to lands underlying any adjacent streets or
roads, and other tenements, hereditaments and appurtenances, if any,
pertaining to or accruing to the benefit of the Realty and Improvements.
2. EFFECTIVE DATE. If this Agreement is not executed and delivered, by
each party to it, to all parties on or before August 27th, 1997, at 5:00 p.m.,
this Agreement shall, after that time, be null and void and of no further force
and effect. The date of this Agreement, for purposes of performance, shall be
the date when the last one of Seller or Purchaser has signed this Agreement, as
stated on the signature page (the "Effective Date").
3. CLOSING DATE. Subject to other provisions of this Agreement for
extension, closing on the transaction described in this Agreement (the
"Closing") shall be held at the offices of the attorneys for Purchaser, Gunster,
Yoakley, Valdes-Fauli and Stewart, P.A., in Fort Lauderdale, Florida on the
business day which is forty-five (45) days after the Effective Date (the
"Closing Date"). The parties understand that, if all documents are prepared and
agreed upon in advance, the parties will cooperate with each other to close by
mail.
4. DEPOSIT.
4.1 To secure the performance of Purchaser of Purchaser's obligations
under this Agreement, Purchaser has delivered to the law firm of Gunster,
Yoakley, Valdes-Fauli and Stewart, P.A., as escrow agent ("Escrow Agent"),
the sum of Five Hundred Thousand and No/100 Dollars ($500,000.00) by check,
the proceeds of which shall be held in trust as an earnest money deposit
(the "Initial Deposit") by Escrow Agent, and disbursed only in accordance
with the terms of this Agreement. If Purchaser elects not to cancel this
Agreement during the Investigation Period, as more particularly described
in Section 10 of this Agreement, then within one (1) business day following
the expiration of said Investigation Period, Purchaser shall deliver to
Escrow Agent a check in the sum of Five Hundred Thousand and No/100 Dollars
($500,000.00) (the "Additional Deposit") to be held together with, and on
the same terms and
<PAGE> 2
conditions as, the Initial Deposit. Once the Additional Deposit is paid to
Escrow Agent, the term "Deposit" shall mean the Initial Deposit plus the
Additional Deposit; prior to such payment, whenever used in this Agreement,
the term "Deposit" shall mean only the Initial Deposit.
4.2 Provided Purchaser executes the appropriate tax forms, Escrow
Agent shall use its good efforts to invest the Deposit in an interest
bearing account or certificate of deposit maintained at Republic Security
Bank, 777 South Flagler, Suite 148, West Palm Beach, FL (561) 655 5424
Attn: Nancy Mecerra, Branch Manager. All interest accrued or earned on the
Deposit shall be paid or credited to Purchaser except in the event of a
default by Purchaser and not by Seller.
4.3 Purchaser and Seller acknowledge that if the Deposit is at any
time in excess of $100,000 then the amount over $100,000.00 shall not be
insured, and both parties hold Escrow Agent harmless from all losses and
costs and liabilities which may accrue or be incurred related to such lack
of insurance.
5. PURCHASE PRICE.
5.1 The total purchase price (the "Purchase Price") to be paid by
Purchaser to Seller for the Property is Eight Million One Hundred Thousand
and No/100 Dollars ($8,100,000.00).
5.2 The Purchase price shall be paid to Seller as follows:
<TABLE>
<S> <C>
$1,000,000.00 the Deposit described in Section 4 of this Agreement, which
shall be paid to Seller at Closing;
$7,100,000.00 approximately, in cash at Closing, subject to prorations and
adjustment as provided in this Agreement, to be paid by wire
transfer of federal funds.
$8,100,000.00 Total Purchase Price
</TABLE>
6. EXISTING MORTGAGE. Seller acknowledges that the Property is subject to
a blanket mortgage ("Existing Mortgage") and any note it secures (the "Existing
Note"), both as described in Schedule "B". Seller represents and warrants to
Purchaser that:
6.0.1 There are no amendments, modifications, or other agreements
or understandings affecting the Property with respect to the Existing
Note and Existing Mortgage except as set forth in Schedule "B";
6.0.2 The Existing Note and Existing Mortgage do not require the
consent of the holder of them for the timely consummation of this
transaction.
6.1 At least twenty (20) days prior to Closing, Seller shall deliver
to Purchaser an appropriate estoppel and instruction letter from the holder
of the Existing Note and Existing Mortgage providing for payment(if
applicable) and release or satisfaction of the Existing Note and Existing
Mortgage at Closing. At Closing, Seller shall deliver to Purchaser an
updated estoppel and instruction letter and, if required by Purchaser's
title underwriter to be delivered at Closing, a duly executed Release of
Mortgage, in form acceptable to Purchaser's title insurer.
6.2 The provisions of this section shall survive the Closing.
7. TITLE EVIDENCE. Within three (3) days following the Effective Date,
Seller, at Seller's expense, shall deliver to Purchaser's attorneys, Gunster,
Yoakley, Valdes-Fauli & Stewart, P.A., Attention: Julie A.S. Williamson a title
insurance commitment (the "Title Commitment") written on First American Title
Insurance Company (together with hard copies of all exceptions to title shown on
them), and any abstract of title for the Property which it may have or have
access to (together, the "Title Evidence"). At Seller's expense, a computer
title update shall be obtained, within ten (10) days before Closing. The title
evidence shall show Seller to be vested with good and marketable and insurable
fee simple title to the Realty,
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free and clear of all liens, encumbrances, leases, tenancies, covenants,
conditions, restrictions, rights-of-way, easements and other matters affecting
title, except the following matters (the "Permitted Exceptions"):
7.1 Ad valorem real estate taxes for 1997 and subsequent years;
7.2 All applicable zoning ordinances and regulations;
7.3 All matters shown on Schedule "C".
Title shall be deemed good, marketable and insurable only if Purchaser can
obtain an Owner's ALTA Form B Marketability Policy from Forst American Title
Insurance Company, at standard rates, containing no exceptions other than those
specifically permitted above. The cost of title evidence shall be paid by
Seller. The cost of the title insurance shall be paid by Seller.
8. SURVEY.
8.1 Within five (5) days from the Effective Date, Seller shall also
deliver to Purchaser, at Seller's expense, a survey (the "Survey") of the
Realty, current to at least July 31, 1996. If the Survey does not include
the following matters, Purchaser may have it modified to include them:
8.1.1 meet the minimum technical standards of the Florida Board of
Land Surveyors;
8.1.2 set forth the total number of square feet and acres in the
Realty and the number and type of parking spaces;
8.1.3 show the location of all improvements, parcels (if any) in
the legal descriptions of the Realty, utility and other lines,
easements, either visible or recorded, and recording references of them;
8.1.4 include elevation and flood zone information;
8.1.5 show all setback lines established by law and regulation, and
the actual setbacks of the Improvements;
8.1.6 show all of the exceptions which are reflected in the Title
Commitment which Seller shall have delivered to Purchaser; and
8.1.7 include the accurate legal description.
The cost of including these matters, and of updating the Survey, and of
certifying it to the Purchaser, Purchaser's attorney, Seller, Seller's attorney,
and the title underwriter, shall be reimbursed to Purchaser by Seller, up to a
maximum of $1000.
8.2 If the Survey (including any additional matters which Purchaser or
its title insurer may require), as updated, shall reflect any
encroachments, overlaps, unrecorded easements or similar rights in third
parties, or any other adverse matters not specifically provided for in this
Agreement, then the same shall be deemed "title defects" as set forth in
Section 9.
9. TITLE DEFECTS.
9.1 Purchaser shall have twenty (20) days from receipt of the Title
Evidence and the Survey (updated and modified, if applicable, to meet the
requirements of Section 8), respectively, within which to examine each of
them. If Purchaser finds title to be defective, Purchaser shall, no later
than the end of each such twenty (20) day examination period, notify Seller
in writing specifying the title defect(s). If Purchaser fails to give
Seller written notice of any title defect(s) before the expiration of each
such twenty (20) day period, the defects shown in the Title Evidence or
Survey shall be deemed to be waived as title objections to closing this
transaction.
9.2 If Purchaser has given Seller timely written notice of defect(s)
and the defect(s) render the title other than as represented in this
Agreement, Seller shall use Seller's best efforts to cause such defects to
be cured by the Closing Date. Seller agrees to remove by payment, bonding,
or otherwise any lien against the Property capable of removal by the
payment of money or bonding. Seller shall not be obligated to
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bring suit, if necessary, to cure any other defect; Purchaser, however,
shall then have the options described in Section 9.3. At either party's
option, the Closing Date may be extended for a period not to exceed sixty
(60) days for purposes of eliminating any title defects.
9.3 If Seller does not eliminate such defects as of the Closing Date
as the same may be extended under the preceding sentence, or if any new
"title defects" appear from the date of the Title Evidence through the
Closing Date, which Seller does not eliminate as of the Closing Date,
Purchaser shall have the option to:
9.3.1 Close and accept the title "as is", without reduction in the
Purchase Price and without claim against Seller for such title defects
(except for any lien or other matter that can be removed by the payment
of money or bonding, for which credit shall be given Purchaser at the
Closing); in such event the Closing shall take place ten (10) days after
notice of such election, or on the Closing Date, whichever is later; or
9.3.2 Cancel this Agreement, in which event Escrow Agent shall
return the Deposit together with all interest earned on it to Purchaser;
upon such return of the Deposit, both parties shall be released from all
further obligations under this Agreement, unless such defects were
caused by Seller's willful act or willful omission, in which event
Seller shall remain liable to Purchaser for damages caused by the
defects.
10. INVESTIGATION PERIOD.
10.1 During the Investigation Period, as defined below, Purchaser
shall have the right to conduct, at Purchaser's expense, whatever
investigations, analyses and studies of the Property that Purchaser may
deem appropriate to satisfy Purchaser with regard to:
10.1.1 the physical condition of the building(s) and other
improvements included in the Property, including their structure, roofs,
air conditioning, heating, electrical, plumbing and other mechanical
systems;
10.1.2 the physical condition of all fixtures, equipment,
furnishings and other items of property referred to in Section 1 above,
an inventory of which shall be furnished by Seller at Seller's expense
within ten (10) days following the execution of this Agreement;
10.1.3 the permitted uses of and improvements to the Property under
applicable building and zoning ordinances and the present compliance or
non-compliance with the same;
10.1.4 evidence of any hazardous waste or similar materials, and of
Radon, in, on, under or about the Property;
10.1.5 all existing contracts and agreements affecting the
Property, if any; and
10.1.6 Seller's operating statements for the last three (3) years
(but not separate business records of Seller's ongoing business) for the
Property for the period of Seller's ownership, which statements and
related books and records Seller shall make available to Purchaser at
all reasonable times at the Property.
10.2 If Purchaser for any reason and in Purchaser's exclusive judgment
and sole discretion, elects to terminate this Agreement, then Purchaser may
cancel this Agreement by notifying Seller of such cancellation on or before
5:00 p.m. on the thirtieth (30th) day (assuming it is a business day,
otherwise on the next ensuring business day) following the Effective Date
(the "Investigation Period"), whereupon Escrow Agent shall return the
Deposit together with all interest earned on it to Purchaser and both
parties shall be released from all further obligations under this
Agreement. No inquiry, examination, or analysis made by Purchaser (or the
results of them) shall reduce, limit or otherwise affect the
representations and warranties made by Seller in this Agreement.
10.3 Seller shall cooperate with Purchaser in Purchaser's
investigations and review of all records related to the Property.
Notwithstanding any provisions in this Agreement to the contrary, Seller
agrees,
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covenants, represents and warrants that Seller will not enter into any new
agreements with any tenants or occupants on or after the Effective Date.
10.4 The provisions of this section shall survive the Closing.
11. SELLER'S AND PURCHASER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.
11.1 Seller represents and warrants to Purchaser and covenants and
agrees with Purchaser as follows:
11.1.1 Seller has not entered into any contracts, subcontracts,
arrangements, licenses, concessions, easements, or other agreements,
either recorded or unrecorded, written or oral, affecting all or any
portion of the Property, or the use of it, other than those agreements
set forth in Schedule "D"; each instrument in Schedule "D" may be
canceled by Purchaser upon not more than thirty (30) days' notice and
without payment of premium or penalty for such cancellation except as
otherwise set forth in Schedule "D"; Seller shall not modify any of the
instruments identified in Schedule "D", nor enter into any new contact
or other agreement affecting all or any portion of the Property, or the
use of it, without the prior written consent of Purchaser, which consent
will not be unreasonably withheld or delayed;
11.1.2 To the best of Seller's knowledge and as shown by the Title
Commitment, there are no (i) existing or pending improvement liens
affecting the Property; (ii) violations of building codes and/or zoning
ordinances or other governmental or regulatory laws, ordinances,
regulations, orders or requirements affecting the Property; (iii)
existing, pending or threatened lawsuits or appeals of prior lawsuits
affecting the Property; (iv) existing, pending or threatened
condemnation proceedings affecting the Property; or (v) existing,
pending or threatened zoning, building or other moratoria, downzoning
petitions, proceedings, restrictive allocations or similar matters that
could affect Purchaser's use of the Property;
11.1.3 Seller is vested with good and marketable and insurable fee
simple title to the Property subject only to the Permitted Exceptions;
Seller is vested with good and marketable title to all fixtures,
equipment, furnishings and other items of property referred to in
Section 1, free of all financing and other liens or encumbrances other
than the Existing Mortgage;
11.1.4 Seller shall comply prior to Closing with all laws, rules,
regulations and ordinances of all governmental authorities having
jurisdiction over the Property;
11.1.5 Seller has not received notice of the existence of
violations of law or regulations in regard to radon or other hazardous
materials or waste in the Improvements which are above government
approved levels for radon, hazardous materials or waste on, in, under or
about the Property, except as may be described in the reports prepared
by Law Engineering Services, Inc., prepared July and August 1997, copies
of which Seller is immediately delivering to Purchaser.
11.1.6 Seller shall provide, and keep in force through the Closing,
its present policies of fire, flood, windstorm, hazard and other
casualty insurance;
11.1.7 Seller has not received notices of violations of law or
regulations in regard to zoning, permits, or similar matters; except for
the provisions of any agreements specified in Schedule B-2 of the Title
Commitment, Seller does not know of any zoning resolution, ordinance,
covenant, agreement, or the like that could prohibit or frustrate any
use of the Property now being made or otherwise permissible under the
current zoning classification in the absence of such conditions or
restrictions;
11.1.8 There are no agreements currently in effect which restrict
the sale of the Property;
11.1.9 Seller has the right, power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
by it; neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated by it nor the fulfillment
of nor
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the compliance with the terms, conditions and provisions of this
Agreement will conflict with or result in a violation or breach of any
other instrument or agreement of any nature to which Seller is a party
or by which it is bound or may be affected, or constitute (with or
without the giving of notice or the passage of time) a default under
such an instrument or agreement; no consent, approval, authorization or
order of any person is required with respect to the consummation of the
transactions contemplated by this Agreement;
11.1.10 To the best of Seller's knowledge and belief, no
commitments or agreements have been or will be made to any governmental
authority, utility company, school board, church or other religious
body, any homeowners or homeowners' association, or any other
organization, group or individual, relating to the Property which would
impose an obligation upon Purchaser to make any contributions or
dedications of money or land to construct, install or maintain any
improvements of a public or private nature on or off the Realty, or
otherwise impose liability on Purchaser; Purchaser acknowledges,
however, that there are ongoing assessments to be made to the Arvida
Park of Commerce West Association, Inc. for maintenance, security
guards, and similar matters (for which Seller shall obtain an estoppel
letter prior to Closing);
11.1.11 At all times during the term of this Agreement and as of
Closing, all of Seller's representations, warranties and covenants in
this Agreement, including but not limited to those in Sections 10.3 and
11, shall be true and correct; no representation or warranty by Seller
contained in this Agreement and no statement delivered or information
supplied to Purchaser pursuant to this Agreement contains any untrue
statement of a material fact or omits to state a material fact necessary
in order to make the statements or information contained in them or in
this Agreement not misleading.
11.2 Purchaser represents and warrants to Seller that Purchaser has
the right, power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated by it; neither the execution and
delivery of this Agreement nor the consummation of the transactions
contemplated by it nor the fulfillment of nor the compliance with the
terms, conditions and provisions of this Agreement will conflict with or
result in a violation or breach of any other instrument or agreement of any
nature to which Purchaser is a party or by which it is bound or may be
affected, or constitute (with or without the giving of notice or the
passage of time) a default under such an instrument or agreement; no
consent, approval, authorization or order of any person is required with
respect to the consummation of the transactions contemplated by this
Agreement;
11.3 The provisions of this section and all other representations,
warranties and covenants of Seller or Purchaser otherwise specified in this
Agreement shall survive the Closing.
12. CONDITIONS PRECEDENT.
12.1 An express condition precedent to Purchaser's and Seller's
respective obligations to close this transaction is the truth and
correctness of all of the other party's representations and warranties and
the fulfillment of all of the other party's covenants at all times during
the term of this Agreement and as of Closing, and no inquiry, analysis or
examination made by Purchaser or Seller (or the results of them), as
applicable, shall reduce, limit or otherwise affect said representations,
warranties and covenants of the other.
12.2 Purchaser is in the process of applying for grants from Palm
Beach County's and the State of Florida's job incentive and tax incentive
programs, in regard to Purchaser's intended use of the Property. An express
condition precedent to Purchaser's obligation to close this transaction is
Purchaser's receipt of approval from Palm Beach County and from the State
of Florida with respect to these job incentive and tax incentive programs.
If Purchaser does not duly terminate this Agreement before the end of the
Investigation Period, then Purchaser shall be deemed to have waived this
condition precedent.
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13. DEFAULT BY SELLER.
13.1 If any of Seller's representations and warranties are not true
and correct or Seller's covenants are not fulfilled or all other conditions
precedent are not met as of Closing (or earlier specified date, if any), or
Seller fails to perform any of the terms and conditions of this Agreement
or is otherwise in default under this Agreement, then Purchaser, at
Purchaser's sole option, may elect to:
13.1.1 Waive the default or failure and close "as is"; or
13.1.2 Cancel this Agreement by written notice to Seller given on
or before the Closing Date, in which event Escrow Agent shall return the
Deposit together with all interest earned on it to Purchaser and Seller
shall reimburse Purchaser its actual out of pocket expenses incurred in
its investigations of, and contracting in regard to, the Property (up to
a maximum of $50,000); upon such return, both parties shall be released
from all further obligations under this Agreement (except for those
which are specified to or which by their nature survive the Closing or
earlier termination of this Agreement); or
13.1.3 Seek specific performance of Seller's obligations under this
Agreement.
13.2 The provisions of this section shall survive the Closing.
14. DEFAULT BY PURCHASER. In the event of the failure or refusal of
Purchaser to close this transaction, without fault on Seller's part and without
failure of title or any conditions precedent to Purchaser's obligations under
this Agreement, Seller at Seller's option shall as its sole remedies (i) have
the right to receive Three Hundred Fifty Thousand and No/100 Dollars
($350,000.00) of the Deposit together with all interest earned on it as agreed
and liquidated damages for said breach, and as Seller's sole and exclusive
remedy for default of Purchaser (except for those matters which are specified to
or which by their nature shall survive the Closing or the earlier termination of
this Agreement), and the remainder of the Deposit shall be returned to
Purchaser, whereupon the parties shall be relieved of all further obligations
under this Agreement except for those matters which are specified to or which by
their nature shall survive the Closing or the earlier termination of this
Agreement; or, alternatively, (ii) Seller shall have the right to seek specific
performance of Purchaser's obligations under this Agreement.
15. PRORATIONS.
15.1 Real estate and personal property taxes, insurance, rents,
interest, cost and revenues and all other proratable items shall be
prorated as of the Closing Date. In the event the taxes for the year of
Closing are unknown, the tax proration will be based upon the mileage rate
as announced at day of Closing, and the then-latest tax appraiser's
assessment of the Property; at the request of either party, such taxes for
the year of Closing shall be reprorated and adjusted when the tax bill for
the year of Closing is received and the actual amount of taxes is known.
15.2 The provisions of this section shall survive the Closing.
16. IMPROVEMENT LIENS.
16.1 Certified, confirmed or ratified liens for governmental
improvements or special assessments as of the Closing Date, if any, shall
be paid in full by Seller, and pending liens for governmental improvements
or special assessments as of the Closing Date shall be assumed by
Purchaser, provided that where the improvement has been substantially
completed as of the Closing Date, such pending lien shall be considered
certified.
16.2 The provisions of this section shall survive the Closing.
17. DOCUMENTARY STAMPS AND INTANGIBLE TAXES. At the Closing, Seller shall
pay the documentary stamps and surtax, if any, due on the warranty deed of
conveyance, the recording cost of any items necessary to clear title, the cost
of title evidence and updates and the premium for the owner's title policy, the
cost of delivery of a copy of the existing Survey and the cost of any work
required for the Survey to meet the standards of this Agreement, and its own
attorney's fees. Purchaser shall pay the recording cost of
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the deed and its own attorney's fees, the cost of updating the Survey and of
certifying it to the Purchaser, its attorneys and its title underwriter.
18. CLOSING.
18.1 Seller shall convey title to the Property by good and sufficient
Special Warranty Deed subject only to the Permitted Exceptions (which, if
Purchaser requests, shall not be specifically enumerated). Seller shall
also deliver to Purchaser at the Closing:
18.1.1 a mechanic's lien affidavit, to the title insurer and
Purchaser, in form acceptable to Purchaser's title insurer to delete the
standard exception relating to such liens in Purchaser's owner's title
insurance policy;
18.1.2 an affidavit, to the title insurer and Purchaser, that there
are no unrecorded easements and that Seller has exclusive possession of
the Property and that Seller has done nothing to change the state of
facts shown on the Survey, in form acceptable to Purchaser's title
insurance to delete the standard exceptions relating to such matters in
Purchaser's owner's title insurance policy;
18.1.3 a gap affidavit and indemnification sufficient for
Purchaser's title underwriter to delete the "gap" at Closing;
18.1.4 instruments necessary to clear title, if any, including
those required to remove standard exceptions from the title policy;
18.1.5 an appropriate bill of sale with warranty of title for the
Personalty;
18.1.6 appropriate assignments of all licenses, easements,
rights-of-way, contract rights, intangible rights and other property and
rights included in this transaction;
18.1.7 appropriate restatements of Seller's covenants,
representations and warranties which are to survive Closing;
18.1.8 an affidavit that the Property does not constitute all or
substantially all of the assets of Seller and is not essential to its
business, or satisfactory evidence that the shareholders of Seller have
ratified this transaction and otherwise conformed with applicable
statutes;
18.1.9 appropriate evidence of Seller's corporate or partnership
existence and authority to sell and convey the Property, including
without limitation a certificate from the Secretary of State of Florida
of qualification to transact business in Florida together with certified
copies of any document filed with such articles; a certificate of due
incorporation and good standing from the appropriate governmental
authorities; and a certified copy of the resolution of Seller's board of
directors identifying Seller's officers and authorizing this transaction
and authorizing its officer(s) to execute all requisite documents,
including the Special Warranty Deed;
18.1.10 an assignment of all rights under any guarantees and
warranties, to the extent assignable;
18.1.11 a non-foreign certificate and other documentation as may be
appropriate and satisfactory to Purchaser to meet the non-withholding
requirements under FIRPTA and any other federal statute or regulations
(or, in the alternative, Seller shall cooperate with Purchaser in the
withholding of funds pursuant to FIRPTA regulations);
18.1.12 an appropriate reporting form to be submitted with the deed
at time of recordation.
18.2 Seller and Purchaser shall each execute such other documents,
including a closing statement, as are reasonably necessary to consummate
this transaction.
19. BROKERS. The parties each represent and warrant to the other that the
only real estate brokers, salesman or finders involved in this transaction are
Keller Williams Realty and Lancore Realty who represent Purchaser (together,
"Purchaser's Brokers"), and Grubb & Ellis Realty ("Seller's Broker"); Seller
shall pay all real estate commissions owing to said brokers, with payment 50% to
Purchaser's Brokers and 50% to
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Seller's Broker). If a claim for brokerage or similar fees in connection with
this transaction is made by any broker, salesman or finder other than the
above-named broker claiming to have dealt through or on behalf of one of the
parties to this Agreement, then that party shall indemnify, defend and hold the
other party under this Agreement harmless from all liabilities, damages, claims,
costs, fees and expenses whatsoever (including reasonable attorneys' fees and
court costs, including those for appellate matters) with respect to said claim
for brokerage. The provisions of this section shall survive the Closing.
20. ASSIGNABILITY. Purchaser shall be entitled to assign Purchaser's
rights and obligations under this Agreement to any entity related to Purchaser
or its principals, upon the assumption thereof by the assignee, Purchaser shall
be released from its obligations under this Agreement as of the time of Closing.
21. ESCROW AGENT.
21.1 Escrow Agent undertakes to perform only such duties as are
expressly set forth in this Agreement. Escrow Agent shall not be deemed to
have any implied duties or obligations under or related to this Agreement.
Escrow Agent is the law firm representing Purchaser. In the event of a
dispute between the parties, the parties consent to Escrow Agent continuing
to represent Purchaser, notwithstanding that Escrow Agent shall continue to
have the duties provided for in this Agreement.
21.2 Escrow Agent may (a) act in reliance upon any writing or
instrument or signature which it, in good faith, believes to be genuine;
(b) assume the validity and accuracy of any statement or assertion
contained in such a writing or instrument; and (c) assume that any person
purporting to give any writing, notice, advice or instructions in
connection with the provisions of this Agreement has been duly authorized
to do so. Escrow Agent shall not be liable in any manner for the
sufficiency or correctness as to form, manner of execution, or validity of
any instrument deposited in escrow, nor as to the identify, authority, or
right of any person executing any instrument; Escrow Agent's duties under
this Agreement are and shall be limited to those duties specifically
provided in this Agreement.
21.3 The parties to this Agreement do and shall indemnify Escrow Agent
and hold it harmless from any and all claims, liabilities, losses, actions,
suits or proceedings at law or in equity, or other expenses, fees, or
charges of any character or nature, including attorneys' fees and costs,
which it may incur or with which it may be threatened by reason of its
action as Escrow Agent under this Agreement, except for such matters which
are the result of Escrow Agent's gross negligence or willful malfeasance.
Escrow Agent shall be vested with a lien on all property deposited under
this Agreement for the purpose of such indemnification, and for any other
expense, fees or charges of any character or nature, which may be incurred
by Escrow Agent in its capacity as escrow agent. Escrow Agent has and shall
have the right, regardless of any instructions, to hold the property
deposited in escrow until and unless said additional expenses, fees and
charges shall be fully paid.
21.4 If the parties (including Escrow Agent) shall be in disagreement
about the interpretation of this Agreement, or about their respective
rights and obligations, or about the propriety of any action contemplated
by Escrow Agent, Escrow Agent may, but shall not be required to, file an
action in interpleader to resolve the disagreement; upon filing such
action, Escrow Agent shall be released from all obligations under this
Agreement. Escrow Agent shall be indemnified for all costs and reasonable
attorneys' fees, including those for appellate matters and for paralegals
and similar persons, incurred in its capacity as escrow agent in connection
with any such interpleader action; Escrow Agent may represent itself in any
such interpleader action and charge its usual and customary legal fees for
such representation, and the court shall award such attorneys' fees,
including those for appellate matters and for paralegals and similar
persons, to Escrow Agent from the losing party. Escrow Agent shall be fully
protected in suspending all or part of its activities under this Agreement
until a final judgment in the interpleader action is received.
21.5 Escrow Agent may consult with counsel of its own choice,
including counsel within its own firm, and shall have full and complete
authorization and protection in accordance with the opinion of such
counsel. Escrow Agent shall otherwise not be liable for any mistakes of
fact or errors of judgment, or for any acts or omissions of any kind unless
caused by its gross negligence or willful misconduct.
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21.6 Escrow Agent may resign upon five (5) days' written notice to
Seller and Purchaser. If a successor escrow agent is not appointed jointly
by Seller and Purchaser within the five (5) day period, Escrow Agent may
petition a court of competent jurisdiction to name a successor.
21.7 The provisions of this section shall survive the Closing and also
the cancellation of this Agreement.
22. NOTICES. Any notices required or permitted to be given under this
Agreement shall be delivered by hand, mailed by certified or registered mail,
return receipt requested, in a postage prepaid envelope, or delivered by a
nationally recognized overnight delivery service, and addressed as described
below; notices shall be deemed effective only upon receipt or refusal of
delivery.
Notices to Purchaser: 851 Broken Sound Parkway NW
Boca Raton, FL 33487-3693
Attn: Richard Werber, Esq.
(tel) 561-241-9400
(fax) 561-995-0085
With a copy to: Gunster, Yoakley, Valdes-Fauli & Stewart, P.A.
One Biscayne Tower, Suite 3400
Two South Biscayne Blvd.
Attn: Julie A.S. Williamson, Esq.
(tel) 305-376-6002
(fax) 305-376-6010
Notices to Seller: Levitz Furniture Corporation
6111 Broken Sound Parkway N.W.
Boca Raton, FL 33487
Attn: Edward P. Zimmer, Esq.
(tel) 561-994-6006
(fax) 561-998-5615
With a copy to: Proskauer Rose LLP
2255 Glades Road, Suite 340 West
Boca Raton, FL 33431-7383
Attn: Christopher Wheeler, Esq.
(tel) 561-241-7400
(fax) 561-241-7145/8153
Notices to Escrow Agent: Gunster, Yoakley, Valdes-Fauli & Stewart, P.A.
One Biscayne Tower, Suite 3400
Two South Biscayne Blvd.
Attn: Julie A.S. Williamson, Esq.
23. RISK OF LOSS.
23.1 The Property shall be conveyed to Purchaser in the same condition
as on the date of this Agreement, ordinary wear and tear excepted, free of
all tenancies or occupancies except for Seller's continued occupancy as
provided in this Agreement. Seller shall not remove anything from the
Property between the date of this Agreement and Closing.
23.2 Upon receipt of an offer or any notice or communications from any
governmental or quasi-governmental body seeking to take under its power of
eminent domain all or any portion of the subject property, Seller shall
promptly notify Purchaser of the receipt of same and shall send such
communication, or a copy of it, to Purchaser. Upon receipt of such notice,
Purchaser shall have the right to rescind this Agreement by delivery of
written notice to Seller within thirty (30) days of Purchaser's receipt of
the communication from Seller. In the event Purchaser elects to rescind,
then Purchaser shall receive a refund of the Deposit [together with all
interest earned on it], in which case both parties shall be relieved
10
<PAGE> 11
of all further obligations under this Agreement. In the event Purchaser
elects not to rescind, then Purchaser shall be entitled to all condemnation
awards and settlements. Seller and Purchaser agree to cooperate with each
other to obtain the highest and best price for the condemned property.
23.3 In the event that the Property is damaged or destroyed by fire or
other casualty prior to Closing, Seller shall repair and restore the
Property to the same condition as before the fire or casualty, and the
Closing shall be deferred for up to sixty (60) days to permit such repair
and restoration. If Seller is unable to repair and restore within such 60
day period, then Purchaser shall have the option of: extending the 60 day
period for up to one hundred twenty (120) additional days, or canceling
this Agreement and receiving a refund of the Deposit together with all
interest earned on it, in which case both parties shall be released from
all further obligations under this Agreement, or proceeding with the
Closing, in which case Purchaser shall be entitled to all insurance
proceeds and to a credit equal to the insurance deductibles (or, in the
alternative, Purchaser may cancel this Agreement).
24. INDEMNITY.
24.1 Seller shall and does indemnify and hold Purchaser harmless from
any and all liability, including costs and attorneys' fees, including those
for appellate proceedings:
24.1.1 for services rendered prior to Closing under any contracts
for services to the Property existing now or at any time prior to
Closing;
24.1.2 for any personal property taxes remaining unpaid for
calendar years prior to the year of Closing.
24.2 The provisions of this section shall survive the Closing.
25. RADON GAS NOTICE. Pursuant to Florida Statutes Section 404.056(8),
Seller hereby makes, and Purchaser hereby acknowledges, the following
notification:
RADON GAS: Radon is a naturally occurring radioactive gas that, when
it has accumulated in a building in sufficient quantities, may present
health risks to persons who are exposed to it over time. Levels of radon
that exceed federal and state guidelines have been found in buildings in
Florida. Additional information regarding radon and radon testing may be
obtained from your county public health unit.
26. MISCELLANEOUS.
26.1 This Agreement has been negotiated and executed in Florida; it
shall be construed and governed in accordance with the laws of the State of
Florida, without application of conflicts of laws principles.
26.2 In the event any term or provision of this Agreement is
determined by appropriate judicial authority to be illegal or otherwise
invalid, such provision shall be given its nearest legal meaning or be
construed as deleted as such authority determines, and the remainder of
this Agreement shall be construed to be in full force and effect.
26.3 In the event of any litigation between the parties under this
Agreement, the prevailing party shall be entitled to reasonable attorneys'
fees. Wherever provision is made in this Agreement for "attorneys' fees,"
such term shall be deemed to include accountants' and attorneys' fees and
court costs, whether or not litigation is commenced, including those for
appellate proceedings and for paralegals and similar persons.
26.4 Each party has participated fully in the negotiation and
preparation of this Agreement with full benefit of counsel. Accordingly,
this Agreement shall not be more strictly construed against either party.
26.5 Whenever used in this Agreement, the singular shall include the
plural, the plural shall include the singular, any gender shall include
every other and all genders, and captions and paragraph headings shall be
disregarded.
11
<PAGE> 12
26.6 The captions in this Agreement are for the convenience of
reference only and shall not be deemed to alter any provision of this
Agreement.
26.7 Any reference in this Agreement to time periods less than six (6)
days shall, in the computation thereof, exclude Saturdays, Sundays, and
legal holidays; any time period provided for in this Agreement which shall
end on a Saturday, Sunday or legal holiday shall extend to 5:00 p.m. of the
next full business day.
26.8 This Agreement constitutes the entire agreement between the
parties and may not be changed, altered or modified except by an instrument
in writing signed by the party against whom enforcement of such change
would be sought.
26.9 All references in this Agreement to exhibits, schedules,
paragraphs, subparagraphs and sections refer to the respective subdivisions
of this Agreement, unless the reference expressly identifies another
document.
26.10 All of the terms of this Agreement, including but not limited to
the representations, warranties and covenants of Seller, shall be binding
upon and shall inure to the benefit of the parties to this Agreement and
their respective successors and assigns.
26.11 Typewritten or handwritten provisions which are inserted in or
attached to this Agreement as addenda or riders shall control all printed
or pretyped provisions of this Agreement with which they may be in
conflict.
26.12 All covenants, representations and warranties of Seller in this
Agreement, all remedies related to them, and the provisions of this section
shall survive the Closing.
27. WAIVER OF JURY TRIAL. Seller and Purchaser mutually agree at that they
waive all rights to a trial by jury in the event of any dispute or court action
arising from, growing out of, or related to, this Agreement. The parties
acknowledge that this waiver is a significant consideration to each of them to
enter into this Agreement.
28. SELLER OCCUPANCY. Purchaser shall allow Seller to lease the Building
(and parking areas) for one hundred twenty (120) days after Closing, at the rent
of $10 per day, payable in advance, pursuant to Lease to be agreed upon between
Seller and Purchaser during the Investigation Period. If Seller is not then in
default under the Lease, Seller may by notice duly given to Purchaser no later
than the ninetieth (90th) day after Closing, extend the Lease for up to an
additional sixty (60) days, at a rent of $10.00 per square foot (based on 91,081
square feet) annually, prorated for the 60 days, payable at time of exercise of
the option. During its occupancy pursuant to this paragraph, Seller shall
maintain the Building (including repair of the Building and its equipment, if
such becomes necessary, e.g. repair of leaking roof or replacement of broken air
conditioning equipment), and pay all costs associated with the use of the
Building except that Purchaser shall pay the ad valorem taxes, and Seller shall
vacate the Building in good repair and broom-clean condition. Purchaser shall
maintain any landscaping in the parking area. If Seller does not timely and duly
vacate the Premises, or damages the Premises, then Seller shall be responsible
for Purchaser's costs and fees, including attorneys', paralegals' and similar
persons' fees related to or arising from such matters.
12
<PAGE> 13
EXECUTED as of the date first written above in several counterparts, each
of which shall be deemed an original, but all of which constitute only one
agreement.
<TABLE>
<S> <C>
Signed, sealed and delivered in the presence of: SELLER:
Levitz Furniture Corporation, a Florida corporation
By: /s/ EDWARD P. ZIMMER
-------------------------------------------------
Its: Vice President
[Corporate Seal]
Date: August 26, 1997
PURCHASER:
Rexall Sundown, Inc., a Florida corporation
By: /s/ DEAN DESANTIS
-------------------------------------------------
Its: Senior Vice President
[Corporate Seal]
Date: August 26, 1997
</TABLE>
13
<PAGE> 14
RECEIPT
The undersigned Escrow Agent acknowledges receipt of a check, subject to
clearance, in the amount of Five Hundred Thousand and No/100 Dollars
($500,000.00) to be held as the Initial Deposit pursuant to the foregoing
Agreement.
ESCROW AGENT:
Gunster, Yoakley, Valdes-Fauli
& Stewart, P.A.
One Biscayne Tower, Suite 3400
Two South Biscayne Boulevard
Miami, Florida 33131
(305) 376-6002
By: /s/ JULIE WILLIAMSON
------------------------------------
SCHEDULE "A": Legal Description
SCHEDULE "B": Existing Mortgage
SCHEDULE "C": Permitted Exceptions
SCHEDULE "D": Other Contracts
14
<PAGE> 15
SCHEDULE II
REXALL SUNDOWN, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR
- ----------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended August 31, 1997
Allowance for doubtful accounts.......... $78,000 $ 70,757 $ -- $ 70,757 $78,000
Year ended August 31, 1996
Allowance for doubtful accounts.......... 78,000 112,990 -- 112,990 78,000
Year ended August 31, 1995
Allowance for doubtful accounts.......... 78,000 154,280 -- 154,280 78,000
</TABLE>
<PAGE> 1
EXHIBIT 11
REXALL SUNDOWN, INC. AND SUBSIDIARIES
NET INCOME PER COMMON SHARE CALCULATION
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net income.............................................. $35,061,596 $20,292,781 $ 4,361,596
=========== =========== ===========
PRIMARY
Weighted average common shares outstanding(1)........... 65,686,910 61,023,150 58,673,020
Common stock equivalents(2)............................. 2,220,804 429,314 321,312
----------- ----------- -----------
Primary weighted average common shares outstanding...... 67,907,714 61,452,464 58,994,332
=========== =========== ===========
Primary net income per common share..................... $ 0.52 $ 0.33 $ 0.07
=========== =========== ===========
FULLY DILUTED
Weighted average common shares outstanding(1)........... 65,686,910 61,023,150 58,673,020
Common stock equivalents(2)............................. 2,195,530 539,024 414,528
----------- ----------- -----------
Fully diluted weighted average common shares
outstanding........................................... 67,882,440 61,562,174 59,087,548
=========== =========== ===========
Fully diluted net income per common share............... $ 0.52 $ 0.33 $ 0.07
=========== =========== ===========
</TABLE>
Above reflects the calculation of pro forma net income per common share
retroactivley adjusted for the two-for-one stock split effected on October 23,
1997.
- ---------------
(1) Represents weighted average common shares outstanding for the periods
indicated.
(2) Common stock equivalents associated with stock options calculated pursuant
to the treasury stock method taking into consideration the tax benefit
available to the Company upon the assumed exercise of qualified options.
(3) All share data in the financial statements are stated using the primary
earnings per share calculation as the above fully diluted calculation is
anti-dilutive.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES
1. Rexall Showcase International, Inc.
2. Rexall Showcase International de Mexico, S.A. de C.V.
3. Importadora Rexall Showcase International de Mexico, S.A. de C.V.
4. Servicios Rexall Showcase International de Mexico, S.A. de C.V.
5. Asociacion de Vendedores Independientes en Rexall, A.C.
6. Rexall Korea Limited
7. RSL Holdings, Inc.
8. Rexall Hong Kong Limited
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Rexall Sundown, Inc. on Form S-8 (Registration Statement Nos. 33-66282, 33-96906
and 333-34684) and on Form S-3 (Registration Statement Nos. 33-6571 and 33-7883)
of our reports dated October 10, 1997, on our audits of Sundown, Inc. as of
August 31, 1997 and 1996, and for the three years in the period ended August 31,
1997 appearing in the Form 10-K of Rexall Sundown, Inc. filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1934.
COOPERS & LYBRAND L.L.P.
Fort Lauderdale, Florida
December 1, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
OF REXALL SUNDOWN AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<CASH> 81,942,305
<SECURITIES> 24,826,323
<RECEIVABLES> 21,373,073<F1>
<ALLOWANCES> 0
<INVENTORY> 38,623,335
<CURRENT-ASSETS> 177,705,609
<PP&E> 33,788,825<F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 224,114,170
<CURRENT-LIABILITIES> 32,076,005
<BONDS> 0<F3>
0
0
<COMMON> 672,600
<OTHER-SE> 190,916,757
<TOTAL-LIABILITY-AND-EQUITY> 224,114,170
<SALES> 263,369,670
<TOTAL-REVENUES> 263,369,670
<CGS> 98,764,920
<TOTAL-COSTS> 98,764,920
<OTHER-EXPENSES> 114,317,979
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,226
<INCOME-PRETAX> 54,538,406
<INCOME-TAX> 19,476,810
<INCOME-CONTINUING> 35,061,596
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,061,596
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0
<FN>
<F1>Net of allowance.
<F2>Net of depreciation.
<F3>Includes Long-term obligations.
</FN>
</TABLE>
