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Final Prospectus Pursuant to Rule 424(b)(3)
File No. 333-06781
PROSPECTUS
TWIN LABORATORIES INC.
OFFER TO EXCHANGE
ANY AND ALL OUTSTANDING
10 1/4% SENIOR SUBORDINATED NOTES DUE 2006
($100,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR 10 1/4% SENIOR SUBORDINATED NOTES DUE 2006
GUARANTEED BY TWINLAB CORPORATION ("TLC")
AND BY ADVANCED RESEARCH PRESS, INC. ("ARP")
The Exchange Offer and withdrawal rights will expire at 5:00 p.m., New York
City time, on Friday, October 25, 1996 (as such date may be extended, the
"Expiration Date").
Twin Laboratories Inc. (the "Company") hereby offers (the "Exchange
Offer"), upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of its 10 1/4% Senior
Subordinated Notes due 2006 (the "New Notes") for each $1,000 in principal
amount of its outstanding 10 1/4% Senior Subordinated Notes due 2006 (the "Old
Notes") (the Old Notes and the New Notes are sometimes collectively referred to
herein as the "Notes") held by Eligible Holders. An aggregate principal amount
of $100,000,000 of Old Notes is outstanding. See "The Exchange Offer." For
purposes of the Exchange Offer, "Eligible Holder" shall mean the registered
owner of any Old Notes that remain Transfer Restricted Securities as reflected
on the records of Fleet National Bank, as registrar for the Old Notes (in such
capacity, the "Registrar"), or any person whose Old Notes are held of record by
the depository of the Old Notes. For purposes of the Exchange Offer, "Transfer
Restricted Securities" means each Old Note until the earliest to occur of (i)
the date on which such Old Note has been exchanged for a New Note in the
Exchange Offer, (ii) the date on which such Old Note is registered under the
Securities Act of 1933, as amended (the "Securities Act"), and disposed of in
accordance with a registration statement or (iii) the date on which such Old
Note is distributed to the public pursuant to Rule 144 under the Securities Act.
The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived by the Company, and to the terms and provisions of the Registration
Rights Agreement dated as of May 7, 1996 (the "Registration Rights Agreement")
among the Company, TLC and ARP (the Company's sole existing subsidiary), each of
which has guaranteed the Old Notes and has agreed to guarantee the New Notes
(collectively, the "Guarantors"), and Donaldson, Lufkin & Jenrette Securities
Corporation and Chase Securities Inc. (collectively, the "Initial Purchasers").
The Old Notes may be tendered only in multiples of $1,000. See "The Exchange
Offer."
(continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 18 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is September 24, 1996.
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The Old Notes were issued in a transaction (the "Offering") pursuant to
which the Company issued an aggregate of $100,000,000 principal amount of the
Old Notes to the Initial Purchasers on May 7, 1996 (the "Closing Date") pursuant
to a Purchase Agreement dated May 1, 1996 (the "Purchase Agreement") among the
Company, the Guarantors and the Initial Purchasers. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A and certain other
exemptions under the Securities Act. The Company and the Initial Purchasers also
entered into the Registration Rights Agreement, pursuant to which the Company
granted certain registration rights for the benefit of the holders of the Old
Notes. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Old
Notes. See "The Exchange Offer -- Purpose and Effect."
The Old Notes were issued under an indenture, dated as of May 7, 1996 (the
"Indenture"), among the Company, the Guarantors and Fleet National Bank as
trustee (in such capacity, the "Trustee"). The New Notes will be issued under
the Indenture as it relates to the New Notes. The form and terms of the New
Notes will be identical in all material respects to the form and terms of the
Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) holders of New Notes will not be entitled to the liquidated
damages of $0.05 per week per $1,000 principal amount of the Old Notes (up to a
maximum amount of $0.30 per week per $1,000 principal amount) otherwise payable
under the terms of the Registration Rights Agreement in respect of Old Notes
constituting Transfer Restricted Securities held by such holders during any
period in which a Registration Default (as defined) is continuing (the
"Liquidated Damages") and (iii) holders of New Notes will not be, and upon the
consummation of the Exchange Offer, Eligible Holders of Old Notes will no longer
be, entitled to certain rights under the Registration Rights Agreement intended
for the holders of unregistered securities. The Exchange Offer shall be deemed
consummated upon the delivery by the Company to the Registrar under the
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer -- Termination of
Certain Rights" and "-- Procedures for Tendering Old Notes" and "Description of
New Notes."
The New Notes will bear interest at a rate equal to 10 1/4% per annum from
and including their date of issuance. Interest on the New Notes is payable
semiannually on May 15 and November 15 of each year (each, an "Interest Payment
Date"). Eligible Holders whose Old Notes are accepted for exchange will have the
right to receive interest accrued thereon from the date of their original
issuance or the last Interest Payment Date, as applicable, to, but not
including, the date of issuance of the New Notes, such interest to be payable
with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue on the day prior to the issuance of
the New Notes. The New Notes will mature on May 15, 2006. See "Description of
New Notes."
The New Notes will not be redeemable, in whole or in part, prior to May 15,
2001. Thereafter, the New Notes will be redeemable at the redemption prices set
forth herein, plus interest accrued thereon to the redemption date.
Notwithstanding the foregoing, at any time on or before May 15, 1999, the
Company may redeem up to 35% of the original aggregate principal amount of the
New Notes, in whole or in part, with the net proceeds of one or more Equity
Offerings (as defined herein) at a redemption price equal to 109 1/2% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption. Upon the occurrence of a Change of Control (as defined herein),
the Company will be required to make an offer to repurchase all outstanding
Notes at 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. See "Description of New
Notes -- Certain Covenants -- Repurchase of Notes at the Option of the Holder
Upon a Change of Control."
The New Notes will be general unsecured obligations of the Company
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including borrowings under the New Credit
Facility (as defined herein). The payment of the principal of, premium, if any,
and interest on the New Notes will be guaranteed fully and unconditionally on an
unsecured senior subordinated basis by the Guarantors. The Guarantees will be
subordinated in right of payment to all existing and future Senior Debt of the
Guarantors. See "Description of New Notes." See also "Management's Discussion
and Analysis of
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Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Indenture permits the Company and its subsidiaries to incur
additional indebtedness, including additional Senior Debt.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to the Exchange
Offer to an Eligible Holder in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by such Eligible Holder, other than as set
forth below, without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the Eligible Holder is not an
affiliate of the Company or any Guarantor within the meaning of Rule 405 under
the Securities Act, is acquiring the New Notes in the ordinary course of
business and is not participating, and has no arrangement or understanding with
any person to participate, in the distribution of the New Notes. Eligible
Holders wishing to accept the Exchange Offer must represent to the Company, as
required by the Registration Rights Agreement, that such conditions have been
met. Each broker-dealer that acquired Old Notes directly from the Company and
that receives New Notes for its own account pursuant to the Exchange Offer must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction (unless an
exemption from registration is otherwise available). See "The Exchange Offer --
Resales of the New Notes." Each broker-dealer that receives New Notes in
exchange for Old Notes that were acquired by such broker-dealer as a result of
market-making or other trading activities must, in connection with any resale of
such New Notes, comply with the prospectus delivery requirements of the
Securities Act and must acknowledge that it will deliver a prospectus in
connection with any such resale. The Company has agreed that, for a period of
180 days after the date of this Prospectus, it will make this Prospectus, as it
may be amended or supplemented from time to time, available for use by any
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making or other trading activities.
As of September 15, 1996, Cede & Co. ("Cede"), as nominee for The
Depository Trust Company, New York, New York ("DTC"), was the registered holder
of $97.95 million aggregate principal amount of the Old Notes and held such Old
Notes for 38 of its participants. The Company believes that no such participant
is an affiliate (as such term is defined in Rule 405 of the Securities Act) of
the Company or any Guarantor. There has previously been only a limited secondary
market, and no public market, for the Old Notes. The Old Notes are eligible for
trading in the Private Offering, Resales and Trading through Automatic Linkages
("PORTAL") market. There can be no assurance as to the liquidity of the trading
market for either the New Notes or the Old Notes. The New Notes constitute
securities for which there is no established trading market, and the Company
does not currently intend to list the Notes on any securities exchange. If such
a trading market develops for the New Notes, future trading prices will depend
on many factors, including, among other things, prevailing interest rates, the
Company's results of operations and the market for similar securities. Depending
on such factors, the New Notes may trade at a discount from their face value.
See "Risk Factors -- Absence of Public Market for the New Notes."
The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear all
expenses incident to the Company's consummation of the Exchange Offer and
compliance with the Registration Rights Agreement.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
$97.95 million aggregate principal amount of the Old Notes were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, DTC, as the initial depository with respect to
the Old Notes (in such capacity, the "Depository"). The Global Old Note is
registered in the name of Cede, as nominee of DTC, and beneficial interests in
the Global Old Note are shown on, and transfers thereof are effected only
through, records maintained by the Depository and its participants. The use of
the Global Old Note to represent certain of the Old Notes permits the
Depository's participants, and anyone holding a beneficial interest in an Old
Note registered in the name of such a participant, to transfer
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interests in the Old Notes electronically in accordance with the Depository's
established procedures without the need to transfer a physical certificate.
Except as provided below, the New Notes will also be issued initially as a note
in global form (the "Global New Note", and together with the Global Old Note,
the "Global Notes") and deposited with, or on behalf of, the Depository.
Notwithstanding the foregoing, holders of Old Notes that are held, at any time,
by a person that is not a qualified institutional buyer under Rule 144A (a
"Qualified Institutional Buyer"), and any Eligible Holder that is not a
Qualified Institutional Buyer that exchanges Old Notes in the Exchange Offer,
will receive the New Notes in certificated form and is not, and will not be,
able to trade such securities through the Depository unless the New Notes are
resold to a Qualified Institutional Buyer. After the initial issuance of the
Global New Note, New Notes in certificated form will be issued in exchange for a
holder's proportionate interest in the Global New Note only as set forth in the
Indenture.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................................................................. 5
Prospectus Summary.................................................................... 6
Risk Factors.......................................................................... 18
The Exchange Offer.................................................................... 27
Capitalization........................................................................ 34
Unaudited Pro Forma Condensed Consolidated Financial Data............................. 35
Selected Historical Financial Data.................................................... 38
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 40
Business.............................................................................. 45
Management............................................................................ 60
Certain Relationships and Related Transactions........................................ 63
Principal Stockholders................................................................ 65
Description of New Notes.............................................................. 67
Description of New Credit Facility.................................................... 93
Description of Capital Stock of TLC................................................... 95
Certain Federal Income Tax Consequences............................................... 97
Plan of Distribution.................................................................. 99
Incorporation of Certain Documents By Reference....................................... 99
Legal Matters......................................................................... 100
Experts............................................................................... 100
Index to Consolidated Financial Statements............................................ F-1
</TABLE>
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
with respect to the securities offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Each statement made in
this Prospectus referring to a document filed as an exhibit or schedule to the
Registration Statement is not necessarily complete and is qualified in its
entirety by reference to the exhibit or schedule for a complete statement of its
terms and conditions. In addition, upon the effectiveness of the Registration
Statement filed with the Commission, the Company and the Guarantors became
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith, TLC will
file periodic reports and other information with the Commission relating to its
business, financial statements and other matters, including therein, where
applicable, summarized financial information of the Company and ARP. Any
interested parties may inspect and/or copy the Registration Statement, its
schedules and exhibits, and the periodic reports and other information filed in
connection therewith, at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Citicorp Center,
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such materials can be
obtained at prescribed rates by addressing written requests for such copies to
the Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The
Commission also maintains a site on the World Wide Web, the address of which is
http://www.sec.gov, that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. The obligations of TLC under the Exchange
Act to file periodic reports and other information with the Commission may be
suspended, under certain circumstances, if the New Notes are held of record by
fewer than 300 holders at the beginning of any fiscal year and are not listed on
a national securities exchange. The Company has agreed that, whether or not it
is required to do so by the rules and regulations of the Commission, for so long
as any of the Notes remain outstanding, it will furnish to the holders of the
Notes and file with the Commission (unless the Commission will not accept such a
filing) all annual, quarterly and current reports that the Company is or would
be required to file with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act. In addition, for so long as any of the Old Notes remain
Transfer Restricted Securities, the Company has agreed to make available to any
prospective purchaser of the Old Notes or beneficial owner of the Old Notes in
connection with any sale thereof the information required by Rule 144A(d) (4)
under the Securities Act.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE COMPANY,
INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR
BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT
CHARGE FROM TWIN LABORATORIES INC., 2120 SMITHTOWN AVENUE, RONKONKOMA, NEW YORK
11779, ATTENTION: GENERAL COUNSEL. TELEPHONE REQUESTS MAY BE DIRECTED TO THE
COMPANY AT (516) 467-3140. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS,
ANY SUCH REQUEST SHOULD BE MADE BY OCTOBER 10, 1996.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. As used in
this Prospectus, the term "Continuing Stockholders" collectively refers to
Brian, Dean, Neil, Ross and Steve Blechman and Stephen Welling, and the term
"Stockholders" collectively refers to the Continuing Stockholders together with
David and Jean Blechman. Unless the context otherwise requires, the term
"Company" refers to (a) Twin Laboratories Inc. and, unless otherwise indicated
and as applicable, each of its subsidiary, Advanced Research Press, Inc.
("ARP"), and its parent, Twinlab Corporation when used with respect to
information about events occurring upon completion of or after the Acquisition
(as defined herein) or when giving pro forma effect thereto and (b) collectively
Natur-Pharma Inc., Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export
Corp., Twinlab Specialty Corporation, B. Bros. Realty Corporation and Advanced
Research Press, Inc., all of which were affiliated entities, as such entities
existed prior to the consummation of the Acquisition, when used with respect to
historical information contained herein. The term "TLC" means Twinlab
Corporation excluding its direct and indirect subsidiaries.
THE COMPANY
The Company believes based upon its knowledge of the nutritional supplement
industry that it is one of the leading manufacturers and marketers of brand name
nutritional supplements sold through domestic health food stores. Since the
Company's founding in 1968 by David and Jean Blechman, the Company has
emphasized the development and introduction of high-quality, unique products in
response to emerging trends in the nutritional supplement industry. The Company
produces a full line of nutritional supplements and offers the broadest product
line in the industry with more than 800 products and 1,500 stockkeeping units
(SKU's). The Company's product line includes vitamins, minerals, amino acids,
fish and marine oils, sports nutrition products and special formulas marketed
under the TWINLAB(R) trademark and a full line of herbal supplements and
phytonutrients and herb teas marketed under the Nature's Herbs(R) and Alvita(R)
trademarks, respectively. None of the Company's products individually accounted
for more than 7% of total net sales in 1995. The Company's broad product line,
strong history of new product introductions and innovations, superior marketing
and advertising programs and premium product quality have established TWINLAB,
Nature's Herbs and Alvita as leading brands in the nutritional supplement
industry.
Under the management of Mr. and Mrs. Blechman's five sons, the Company has
diversified its product line through internal growth, product development and
selected acquisitions, including the acquisition in 1989 of Natur-Pharma Inc., a
leading manufacturer and marketer of herbal supplements and phytonutrients under
the Nature's Herbs brand name, and the acquisition in 1991 of Alvita Products,
Inc., a leading marketer of herb teas. The Company has achieved increased net
sales and EBITDA every year since 1990. In particular, during the three-year
period from 1993 through 1995, the Company achieved a compound annual growth
rate in net sales and EBITDA of 22.0% and 38.6%, respectively. For the fiscal
year ended December 31, 1995, the Company achieved net sales growth of 26.8% to
$148.7 million and EBITDA growth of 33.9% to $33.5 million, as compared to
fiscal year 1994. For the six months ended June 30, 1996, the Company achieved
net sales of $81.8 million and EBITDA of $20.5 million, representing an increase
of 17.2% and 41.1%, respectively, as compared to the six months ended June 30,
1995.
The Company's products target consumers who utilize nutritional supplements
in their daily diet and who demand premium quality ingredients in a broad
variety of dosages and delivery methods. The Company's products compete
primarily in the health food store market, where the dominant competitive
factors include product attributes such as quality, potency and the uniqueness
of the product formulation. The Company sells its products domestically through
a network of approximately 60 distributors, who service approximately 11,000
health food stores and other selected retail outlets. The Company believes that
its products are available in over 90% of the health food stores in the United
States. The health food store channel of distribution has expanded significantly
in recent years and is expected to grow further as national chains, including
those which sell the Company's products such as General Nutrition Companies,
Inc. ("GNC"), Whole Foods Market ("WFM"), Wild Oats Markets, Fresh Fields, and
other industry participants continue
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to add stores in new and existing markets. Certain of these chains, such as GNC
and WFM, manufacture and market their own private label products in addition to
selling brand name products manufactured by third parties such as the Company.
The health food store market differs significantly from the mass market for
vitamin and other nutritional supplements where price and convenience constitute
the primary bases of competition. The nutritional supplement products sold in
grocery stores, drug stores and mass merchandisers are typically manufactured by
large pharmaceutical companies and private label manufacturers. The Company's
products are also offered in Europe, Asia, South America and other international
markets through arrangements with overseas distributors.
The Company believes it is well positioned to capitalize on the growth of
the nutritional supplement market. Based on estimates in a 1994 market report
conducted by Packaged Facts (the "Packaged Facts Report"), an independent
research firm, the retail market for vitamins, minerals and other nutritional
supplements has grown at a compound annual rate of greater than 12% from $3.3
billion in 1991 to over $4.6 billion in 1994. Furthermore, the Company's rate of
sales growth has exceeded the industry's growth rate for each year during this
period. Packaged Facts forecasts approximately 7% annual industry growth through
the end of the decade in vitamins, minerals and other supplements, which
management believes will be fueled by (i) favorable demographic trends towards
older Americans, who are more likely to consume nutritional supplements; (ii)
product introductions in response to new scientific research findings; (iii) the
nationwide trend toward preventive medicine in response to rising health care
costs; and (iv) the heightened understanding and awareness of the connection
between diet and health. Moreover, although the industry has grown dramatically
in recent years, there is still a large untapped domestic market as only an
estimated 50% of Americans currently consume vitamins, minerals and herbal
supplements on a regular basis.
Twin Laboratories Inc. is incorporated under the laws of the State of Utah
and maintains its principal executive offices at 2120 Smithtown Avenue,
Ronkonkoma, New York 11779. Its telephone number is (516) 467-3140.
BUSINESS STRATEGY
The Company's strategy is to continue to enhance its leadership position in
the domestic sale of vitamins, minerals and other nutritional supplements in
health food stores and to increase its market share and sales while continuing
to improve its overall operating efficiency and financial performance. The
Company intends to capitalize on the TWINLAB brand name by growing market share
domestically, increasing penetration of the Company's other brands, continuing
to introduce new products and product extensions, and expanding internationally.
Specifically, the Company seeks to:
Capitalize on Powerful Brand Name Recognition. The Company's recognized
product quality, broad product line, strong history of new product introductions
and innovations, and superior marketing and advertising programs have
established TWINLAB, Nature's Herbs and Alvita as leading brands in the
nutritional supplement industry. Each of the Company's product categories,
including vitamins, minerals and amino acids; sports nutrition; special
formulas; herbal supplements and phytonutrients; and herb teas, have posted
double digit sales growth in each of the last three years. The Company's
extensive marketing and advertising programs have been critical components of
its products' strong brand name recognition, and management believes that the
Company offers its customers the strongest marketing and advertising support
programs in the industry. In fiscal 1995, the Company invested $11.1 million, an
increase of 27% over fiscal 1994, in marketing and advertising to promote its
products. Furthermore, since quality is a critical factor in consumer purchase
decisions, the Company believes that its premium quality ingredients, modern
manufacturing facilities and comprehensive quality control procedures have
enabled the Company to establish a competitive advantage based on the quality of
its products.
Increase Penetration in the Growing Health Food Market. Management
believes that the expansion of retail distribution channels and the strong
growth characteristics of the nutritional supplement industry provide the
Company with significant opportunities to increase sales. Management further
believes that the established brand name recognition of the Company's products
positions it to increase its penetration of shelf space as health food retailers
seek to align themselves with companies who possess strong brand names, offer a
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wide range of products, demonstrate continued marketing and advertising support
and provide consistently high levels of customer service. Since Nature's Herbs
and Alvita products currently are available in only an estimated 60% and 50%,
respectively, of domestic health food stores, compared to an estimated 90% for
TWINLAB products, the Company believes that it will be able to capitalize on
health food retailers' success with the TWINLAB product line in order to
significantly increase shelf space for the Company's herbal supplements,
phytonutrients and herb teas.
Continue to Introduce New Products and Product Innovations. A cornerstone
of the Company's success has been its ability to rapidly utilize recent
scientific and medical findings in its new product development efforts. The
Company has consistently been among the first in its industry to introduce new
products and product innovations which anticipate and meet customer demands for
newly identified nutritional supplement benefits. Furthermore, the Company's
geographically diverse network of more than 60 distributors allows the Company
to achieve immediate and broad distribution for new product launches. As part of
its ongoing research and development effort, the Company maintains an extensive
database and actively researches and monitors a wide variety of publications
containing scientific and medical research. From 1991 through 1995, the Company
introduced over 350 products, with over 90 new products introduced in 1995
alone. Gross sales during 1995 from new products introduced in 1995 were $18.4
million, or approximately 11% of gross sales. The Company intends to build upon
its historical success by continuing to introduce new and innovative products
not previously available in health food stores.
Build Upon Established Customer Relationships. The Company's established
relationships with distributors and health food store retailers are based upon
the Company's long-standing commitment to a high level of customer service. In
order to ensure that its customers receive prompt and reliable service, the
Company has designed a flexible and responsive manufacturing process and has
achieved a 98% fill rate for customer orders. In addition, the Company's sales
force consists of 30 dedicated sales professionals who operate in sales
territories which cover the entire continental United States and Alaska. The
primary functions of the Company's sales force are to gain better placement and
additional shelf space for the Company's products and to stay abreast of
customer needs. The sales force personnel work with direct accounts,
distributors and individual retailers to enhance knowledge of TWINLAB, Nature's
Herbs and Alvita products and to achieve maximum exposure for these products.
Increase Penetration of Foreign Markets. Management believes that there
are substantial opportunities for the Company to expand its presence in foreign
markets. The Company has a department, headed by a senior sales professional,
dedicated to increasing sales in such markets. The Company's foreign marketing
effort is primarily focused on establishing additional relationships with
leading overseas distributor organizations as a cost-effective method of
increasing international sales. The Company presently has distribution
agreements covering over 44 foreign countries and has agreements for another
seven countries currently in negotiation. In 1995, the Company had net sales of
$8.3 million to foreign markets.
Supplement Internal Growth Through Strategic Acquisitions. As the
nutritional supplement industry is highly fragmented with many companies
producing only a single product line or single product, the Company believes
that it is strategically positioned to participate in the consolidation of the
industry due to its established brand name, broad distribution capabilities and
proven ability to generate sales of its products through successful marketing
programs. Since 1989 the Company has acquired two businesses, Natur-Pharma Inc.
(Nature's Herbs) and Alvita Products, Inc. (Alvita), and in each case has
embarked on successful expansion programs which resulted in substantially higher
sales and EBITDA for the acquired companies. Net sales for Natur-Pharma Inc.
increased from $5.2 million in 1990 (the first full year after its acquisition)
to $17.9 million in 1995, and net sales for Alvita Products, Inc. increased from
$1.7 million in 1992 (the first full year after its acquisition) to $5.6 million
in 1995. The Company intends to actively pursue acquisition opportunities,
including product line acquisitions, that complement its existing products or
are compatible with its business philosophy and strategic goals. Some of such
acquisition opportunities may be material and some are currently under
investigation, discussion or negotiation, including opportunities in the natural
foods and natural personal care products industries. There can be no assurance
that any such opportunities will result in a completed acquisition. Future
acquisitions could be financed by internally generated funds, bank
8
<PAGE> 9
borrowings, public offerings or private placements of equity or debt securities,
or a combination of the foregoing. See "Risk Factors -- Risks of Future
Acquisitions."
ISSUANCE OF THE OLD NOTES
The outstanding $100.0 million principal amount of 10 1/4% Senior
Subordinated Notes due 2006 (the "Old Notes") were sold by the Company to
Donaldson, Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(the "Initial Purchasers"), on May 7, 1996 (the "Closing Date") pursuant to a
Purchase Agreement, dated May 1, 1996 (the "Purchase Agreement"), among the
Company, TLC and ARP (collectively the "Guarantors") and the Initial Purchasers.
The Initial Purchasers subsequently resold the Old Notes in reliance on Rule
144A under the Securities Act and other available exemptions under the
Securities Act (the "Offering"). The Company also entered into the Registration
Rights Agreement, dated as of the Closing Date (the "Registration Rights
Agreement"), among the Company, the Guarantors and the Initial Purchasers,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Old Notes. Under the Registration Rights
Agreement, the Company agreed, for the benefit of the holders of the Old Notes
that it would, at its own cost, (i) within 60 days after the Closing Date file a
registration statement (the "Exchange Offer Registration Statement") with the
Commission with respect to a registered offer to exchange the Old Notes for New
Notes, which will have terms substantially identical to the Old Notes and (ii)
use its best efforts to cause such Exchange Offer Registration Statement to be
declared effective under the Securities Act within 135 days after the Closing
Date. If the Company is unable to effect such an Exchange Offer or if for any
other reason the Exchange Offer is not consummated within 60 days after the
effective date of the Exchange Offer Registration Statement, the Company is
obligated under the Registration Rights Agreement to file a shelf registration
statement with the Commission covering resales of the Old Notes. If the Company
defaults with respect to its obligations under the Registration Rights Agreement
(as defined herein, a "Registration Default"), the Company will be obligated to
pay Liquidated Damages of $0.05 per week per $1,000 principal amount of Old
Notes outstanding (up to a maximum of $0.30 per week per $1,000 principal amount
of Old Notes). The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Old Notes. See "-- The Exchange Offer" and "The Exchange Offer -- Purpose
and Effect."
THE ACQUISITION
The Stockholders, TLC, Natur-Pharma Inc. and Green Equity Investors II,
L.P. ("GEI") entered into a Stock Purchase and Sale Agreement, dated as of March
5, 1996, as amended (the "Acquisition Agreement"), pursuant to which, among
other things, on the Closing Date (i) GEI acquired 48% of the common stock of
TLC for aggregate consideration of $4.8 million and shares of non-voting junior
redeemable preferred stock of TLC (the "Junior Preferred Stock") for aggregate
consideration of $37.0 million, (ii) certain other investors acquired 7% of the
common stock of TLC for aggregate consideration of $0.7 million and shares of
non-voting senior redeemable preferred stock of TLC (the "Senior Preferred
Stock," and, together with the Junior Preferred Stock, the "Preferred Stock")
for aggregate consideration of $30.0 million, (iii) the Continuing Stockholders
exchanged certain of their shares of common stock of Natur-Pharma Inc. for 45%
of the outstanding shares of common stock of TLC, valued at $4.5 million, (iv)
TLC purchased all of the remaining shares of common stock of Natur-Pharma Inc.
from the Stockholders for cash, resulting in Natur-Pharma Inc. becoming a wholly
owned subsidiary of TLC, (v) Twin Laboratories Inc., Alvita Products, Inc.,
Twinlab Export Corp., Twinlab Specialty Corporation and B. Bros. Realty
Corporation merged into Natur-Pharma Inc. (the "Natur-Pharma Merger"); and
Advanced Research Press, Inc. merged with Natur-Pharma II Inc., a wholly owned
subsidiary of Natur-Pharma Inc. (together with the Natur-Pharma Merger, the
"Mergers"; the surviving entity in such merger is referred to herein as "ARP")
and (vi) in connection with such mergers the Stockholders received cash in
consideration for all of their shares of capital stock of Twin Laboratories
Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab Specialty
Corporation, B. Bros. Realty Corporation and Advanced Research Press, Inc. The
total cash consideration that the Stockholders received was approximately $212.5
million, the majority of which was paid to David and Jean Blechman. Of the total
cash consideration to the Stockholders, approximately $15.3 million represented
consideration for the Non-
9
<PAGE> 10
Competition Agreements (as defined herein). See "Management -- Employment
Agreements." The transactions described above are hereinafter referred to as the
"Acquisition." Concurrently with the consummation of the Acquisition, the
Company consummated the Offering and entered into the New Credit Facility (which
provides for a term facility in the amount of $53.0 million and a revolving
credit facility in the amount of $15.0 million) (the "New Credit Facility," and,
collectively with the Acquisition and the Offering, the "Transactions"). The net
cash proceeds of the Offering were used, together with borrowings under the New
Credit Facility, the proceeds from the issuance of the common stock and
Preferred Stock of TLC and available cash of the Company, to finance the
Acquisition, to refinance approximately $7.0 million aggregate principal amount
of debt of the Company and to pay related fees and expenses. See "Description of
New Notes," "Description of New Credit Facility" and "Description of Capital
Stock of TLC." In connection with the Acquisition, Natur-Pharma Inc.'s name was
changed to Twin Laboratories Inc. Subsequent to the Transactions, the Company
repaid approximately $3.0 million of outstanding indebtedness under the term
facility contained in the New Credit Facility.
The consolidated financial statements of TLC contained in this Prospectus
include the financial statements of Twin Laboratories Inc. and TLC's indirect
wholly owned subsidiary, ARP, after giving retroactive effect, in a manner
similar to a pooling of interests, to the Mergers pursuant to the Acquisition.
The Old Notes are, and the New Notes will be, jointly and severally guaranteed
by TLC and ARP on a full and unconditional unsecured senior subordinated basis.
TLC has no separate operations and no significant assets other than TLC's
investment in Twin Laboratories Inc. and, through Twin Laboratories Inc., in
ARP. Accordingly, the Company has determined that separate financial statements
of Twin Laboratories Inc. and ARP would not be material to investors and,
therefore, are not included herein.
10
<PAGE> 11
THE EXCHANGE OFFER
The Exchange Offer......... The Company is offering, upon the terms and subject
to the conditions set forth herein and in the
accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal
amount of its 10 1/4% Senior Subordinated Notes due
2006 (the "New Notes," with the Old Notes and the
New Notes sometimes collectively referred to herein
as the "Notes") for each $1,000 in principal amount
of the outstanding Old Notes (the "Exchange
Offer"). As of the date of this Prospectus, $100.0
million in aggregate principal amount of the Old
Notes is outstanding, the maximum amount authorized
by the Indenture for all Notes. As of September 15,
1996, there were two registered holders of the Old
Notes, including Cede & Co. ("Cede") which held
$97.95 million of aggregate principal amount of the
Old Notes for 38 of its participants. See "The
Exchange Offer -- Terms of the Exchange Offer."
Expiration Date............ 5:00 p.m., New York City time, on Friday, October
25, 1996, as the same may be extended. See "The
Exchange Offer -- Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer.................... The Exchange Offer is not conditioned upon any
minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer
is subject to the condition that it does not
violate any applicable law or interpretation of the
staff of the Commission. See "The Exchange
Offer -- Conditions of the Exchange Offer."
Termination of Certain
Rights..................... Pursuant to the Registration Rights Agreement and
the Old Notes, Eligible Holders of Old Notes (i)
have rights to receive the Liquidated Damages and
(ii) have certain rights intended for the holders
of unregistered securities. "Liquidated Damages"
means damages of $0.05 per week per $1,000
principal amount of Old Notes constituting Transfer
Restricted Securities (up to a maximum of $0.30 per
week per $1,000 principal amount) during the period
in which a Registration Default is continuing
pursuant to the terms of the Registration Rights
Agreement. Holders of New Notes generally will not
be and, upon consummation of the Exchange Offer,
Eligible Holders of Old Notes will no longer be,
entitled to (i) the right to receive the Liquidated
Damages or (ii) certain other rights under the
Registration Rights Agreement intended for holders
of unregistered securities. See "The Exchange
Offer -- Termination of Certain Rights" and
"-- Procedures for Tendering Old Notes."
Accrued Interest on the Old
Notes.................... The New Notes will bear interest at a rate equal to
10 1/4% per annum from and including their date of
issuance. Eligible Holders whose Old Notes are
accepted for exchange will have the right to
receive interest accrued thereon from the date of
original issuance of the Old Notes or the last
Interest Payment Date, as applicable, to, but not
including, the date of issuance of the New Notes,
such interest to be payable with the first interest
payment on the New Notes. Interest on the Old Notes
accepted for exchange, which accrues at the rate of
10 1/4% per annum, will cease to accrue on the day
prior to the issuance of the New Notes.
11
<PAGE> 12
Procedures for Tendering
Old Notes.................. Unless a tender of Old Notes is effected pursuant
to the procedures for book-entry transfer as
provided herein, each Eligible Holder desiring to
accept the Exchange Offer must complete and sign
the Letter of Transmittal, have the signature
thereon guaranteed if required by the Letter of
Transmittal, and mail or deliver the Letter of
Transmittal, together with the Old Notes or a
Notice of Guaranteed Delivery and any other
required documents (such as evidence of authority
to act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined) at
the address set forth on the back cover page of
this Prospectus prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Beneficial Owner
(as defined) of the Old Notes whose Old Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company
and who wishes to tender Old Notes in the Exchange
Offer, should instruct such entity or person to
promptly tender on such Beneficial Owner's behalf.
See "The Exchange Offer -- Procedures for Tendering
Old Notes." By tendering Old Notes for exchange,
each registered holder will represent to the
Company that, among other things, (i) neither the
Eligible Holder nor any Beneficial Owner is an
affiliate of the Company or any Guarantor within
the meaning of Rule 405 under the Securities Act,
(ii) any New Notes to be received by the Eligible
Holder or any Beneficial Owner are being acquired
in the ordinary course of business, (iii) neither
the Eligible Holder nor any Beneficial Owner has an
arrangement or understanding with any person to
participate in the distribution of the New Notes
and (iv) if the Eligible Holder or Beneficial
Owner, as applicable, is a broker-dealer that
acquired Old Notes for its own account as a result
of market making or other trading activities, such
Eligible Holder or Beneficial Owner must comply
with the prospectus delivery requirements of the
Securities Act in connection with a secondary
resale transaction of the New Notes acquired by
such person and must agree that it will deliver a
prospectus in connection with any such resale.
Guaranteed Delivery
Procedures............... Eligible Holders of Old Notes who wish to tender
their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver
their Old Notes or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely
basis), may tender their Old Notes according to the
guaranteed delivery procedures set forth in the
Letter of Transmittal. See "The Exchange Offer --
Procedures for Tendering Old Notes -- Guaranteed
Delivery Procedures."
Acceptance of Old Notes and
Delivery of New Notes.... Upon satisfaction or waiver of all conditions of
the Exchange Offer, the Company will accept any and
all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The New Notes issued
pursuant to the Exchange Offer will be delivered
promptly after acceptance of the Old Notes. See
"The Exchange Offer -- Acceptance of Old Notes for
Exchange; Delivery of New Notes."
12
<PAGE> 13
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
Certain Federal Income Tax
Considerations........... Generally, the exchange pursuant to the Exchange
Offer will not be a taxable event for federal
income tax purposes. See "Certain Federal Income
Tax Consequences -- The Exchange Offer."
The Exchange Agent......... Fleet National Bank is the exchange agent (in such
capacity, the "Exchange Agent"). The address and
telephone number of the Exchange Agent are set
forth in "The Exchange Offer -- The Exchange Agent;
Assistance."
Fees and Expenses.......... All expenses incident to the Company's consummation
of the Exchange Offer and compliance with the
Registration Rights Agreement will be borne by the
Company. The Company will also pay certain transfer
taxes applicable to the Exchange Offer. See "The
Exchange Offer -- Fees and Expenses."
Resales of the New Notes... Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer to an
Eligible Holder in exchange for Old Notes may be
offered for resale, resold and otherwise
transferred by such Eligible Holder (other than (i)
a broker-dealer who purchased the Old Notes
directly from the Company for resale pursuant to
Rule 144A under the Securities Act or any other
available exemption under the Securities Act or
(ii) a person that is an affiliate of the Company
or any Guarantor within the meaning of Rule 405
under the Securities Act), without compliance with
the registration and prospectus delivery provisions
of the Securities Act, provided that the Eligible
Holder is acquiring the New Notes in the ordinary
course of business and is not participating, and
has no arrangement or understanding with any person
to participate, in a distribution of the New Notes.
Each broker-dealer that receives New Notes for its
own account in exchange for Old Notes, where such
Old Notes were acquired by such broker as a result
of market making or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See
"The Exchange Offer -- Resales of the New Notes"
and "Plan of Distribution."
DESCRIPTION OF NEW NOTES
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes will not
be entitled to Liquidated Damages and (iii) holders of the New Notes will not
be, and upon consummation of the Exchange Offer, Eligible Holders of the Old
Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for the holders of unregistered securities, except in
limited circumstances. See "Exchange Offer -- Termination of Certain Rights."
The Exchange Offer shall be deemed consummated upon the occurrence of the
delivery by the Company to the Registrar under the Indenture of the New Notes in
the same aggregate principal amount as the aggregate principal amount of Old
Notes that are tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for
Tendering Old Notes" and "Description of New Notes."
13
<PAGE> 14
Maturity................... May 15, 2006.
Interest................... 10 1/4% payable in cash semi-annually in arrears,
calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Interest Payment Dates..... May 15 and November 15, commencing on November 15,
1996.
Optional Redemption........ The New Notes will be redeemable at the option of
the Company, in whole or in part, on or after May
15, 2001, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
to the date of redemption. Notwithstanding the
foregoing, prior to May 15, 1999, the Company may
redeem from time to time up to 35% of the aggregate
principal amount of the Notes originally
outstanding at a redemption price equal to 109 1/2%
of the principal amount thereof, plus accrued and
unpaid interest, if any, to the redemption date,
with the net proceeds of one or more Equity
Offerings (as defined herein); provided, that at
least 65% of the aggregate principal amount of the
Notes originally outstanding remains outstanding
immediately after the occurrence of such
redemption. See "Description of Notes -- Optional
Redemption."
Guarantees................. The New Notes will be guaranteed (the "Guarantees")
fully and unconditionally on an unsecured senior
subordinated basis by TLC, ARP, the Company's only
existing subsidiary, and all of the Company's
future subsidiaries (other than Unrestricted
Subsidiaries) (ARP and such future subsidiaries are
collectively referred to as the "Subsidiary
Guarantors" and, together with TLC, collectively,
as the "Guarantors"). See "Description of New
Notes -- General."
Ranking.................... The New Notes and the Guarantees will be general
unsecured obligations of the Company and the
Guarantors, respectively, subordinated in right of
payment to all existing and future Senior Debt of
the Company and the Guarantors, as applicable,
including borrowings under the New Credit Facility.
As of June 30, 1996, the Company had approximately
$50.4 million of outstanding Senior Debt,
substantially all of which was secured, and
approximately $0.4 million of debt which ranks pari
passu with the Notes in right and priority of
payment.
Change of Control Offer.... Upon a Change of Control, the Company will be
required to offer to repurchase all outstanding New
Notes at 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any,
to the date of repurchase. The Company will comply
with Rules 13e-4 and 14e-1 under the Exchange Act
and any other securities laws and regulations to
the extent such laws and regulations are applicable
in the event that a Change of Control occurs and
the Company is required under the Indenture to make
a Change of Control Offer (as defined herein). See
"Description of Notes -- Certain
Covenants -- Repurchase of Notes at the Option of
the Holder Upon a Change of Control" and "Risk
Factors -- Effect of Change of Control."
Certain Covenants.......... The Indenture contains certain covenants with
respect to the Company and the Subsidiary
Guarantors that limit the ability of the Company
and the Subsidiary Guarantors to, among other
things, (i) incur additional Indebtedness (as
defined herein) and issue certain preferred stock,
(ii) pay dividends or make other distributions,
(iii) layer Indebtedness, (iv) create certain
liens, (v) sell certain assets, (vi) enter into
certain transactions with affiliates, or (vii)
enter into certain mergers or consoli-
14
<PAGE> 15
dations involving the Company. See "Description of
Notes -- Certain Covenants."
Absence of a Public Market
for the New Notes.......... The New Notes are a new issue of securities with no
established market. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the New Notes. The Initial Purchasers
have advised the Company that they currently intend
to make a market in the New Notes. However, none of
the Initial Purchasers is obligated to do so, and
any market making with respect to the New Notes may
be discontinued at any time without notice. The
Company does not intend to apply for listing of the
New Notes on a securities exchange.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK
FACTORS."
15
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary information below presents historical consolidated financial
data and unaudited pro forma condensed consolidated financial data for the
periods indicated which have been derived from the audited and unaudited
financial statements of TLC. The results for the interim periods are not
necessarily indicative of the results for the full fiscal year. The summary
unaudited pro forma condensed consolidated operating data for the year ended
December 31, 1995 and the six months ended June 30, 1995 and 1996 give effect to
the Transactions as if the Transactions had been consummated as of January 1,
1995. See "Unaudited Pro Forma Condensed Consolidated Financial Data" and the
notes thereto. The pro forma financial data set forth below are not necessarily
indicative of the results that would have been achieved had the Transactions
been consummated as of the dates indicated or that may be achieved in the
future. The summary historical and pro forma financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical Financial Data" and the
Consolidated Financial Statements of TLC and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales................. $70,165 $83,014 $99,897 $117,342 $148,735 $69,820 $81,837
Gross profit.............. 25,501 31,800 37,766 47,095 58,803 27,774 33,985
Operating expenses........ 14,570 17,463 21,125 23,022 27,191 13,779 14,816
Income from operations.... 10,931 14,337 16,641 24,073 31,612 13,995 19,169
Nonrecurring and
transaction expenses... -- -- -- -- 656 -- 15,700
Net income (loss)......... 10,162 13,435 16,676 21,693 30,224 13,729 (663)(a)
PRO FORMA RELATING TO CHANGE
IN TAX STATUS:(B)
Historical income before
provision for income
taxes.................. $10,331 $14,010 $16,906 $ 21,938 $ 30,464 $13,821 $ 1,170
Pro forma provision for
income taxes........... 4,017 5,436 6,644 9,087 12,060 5,471 6,588
------- ------- ------- -------- -------- ------- -------
Pro forma net income
(loss)................. $ 6,314 $ 8,574 $10,262 $ 12,851 $ 18,404 $ 8,350 $(5,418)(a)
======= ======= ======= ======== ======== ======= =======
OTHER DATA:
EBITDA(c)................. $11,734 $15,229 $17,446 $ 25,023 $ 33,516 $14,509 $20,470
Capital expenditures...... 1,472 1,304 4,904 1,786 2,641 2,073 483
Depreciation.............. 783 806 710 851 909 464 549
Amortization.............. 20 86 95 99 102 50 193
Ratio of earnings to fixed
charges(d)............. 13.7x 16.6x 19.8x 21.2x 24.1x 23.0x 1.4x(a)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
YEAR ENDED -------------------
DECEMBER 31, 1995 1995 1996
----------------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
PRO FORMA DATA:
Net sales........................................... $ 148,735 $69,820 $81,837
EBITDA(c)........................................... 33,516 14,509 20,470
Income from operations.............................. 31,212 13,795 19,028
Cash interest expense(e)............................ 14,735 7,369 7,376
Ratio of EBITDA to cash interest expense............ 2.3x 2.0x 2.8x
Ratio of EBITDA less capital expenditures to cash
interest expense................................. 2.1x 1.7x 2.7x
Ratio of net debt to EBITDA(f)...................... -- -- 7.0x
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities.......................... $ 8,185
Net working capital (excluding cash and cash equivalents, marketable
securities and current debt)............................................... 37,252
Total assets................................................................. 141,163
Total debt (including current debt).......................................... 150,735
Senior and junior redeemable Preferred Stock................................. 67,000
Shareholders' deficit........................................................ (94,721)
</TABLE>
- ---------------
(a) Reflects $15.3 million of nonrecurring non-competition agreement expense
and $0.4 million of transaction expenses.
(b) The Company consisted of S corporations and, accordingly, federal and state
taxes were generally paid at the shareholder level only. Upon consummation
of the Transactions, the Company eliminated its S corporation status and,
accordingly, became subject to federal and state income taxes.
(c) EBITDA represents income from operations before depreciation and
amortization expense, and certain other charges related to legal
settlements, increases in inventory reserves, a tax settlement relating to
a limited partnership interest, which interest is expected to be divested,
and the LGP Management Fee (as defined herein). While EBITDA is not
intended to represent cash flow from operations as defined by generally
accepted accounting principles ("GAAP") and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(d) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and one-third of rental expenses, representing that portion of
rental expenses attributable to interest) to income before unusual item,
provision for income taxes and extraordinary item, and dividing that sum by
such fixed charges.
(e) Represents total interest expense less amortization of deferred financing
fees.
(f) Net debt represents total debt less cash and cash equivalents and
marketable securities.
17
<PAGE> 18
RISK FACTORS
Holders of Notes should carefully consider the following risk factors, as
well as other information contained, and incorporated by reference, in this
Prospectus, affecting the business of the Company. Information contained or
incorporated by reference in this Prospectus contains "forward-looking
statements" which can be identified by the use of forward-looking terminology
such as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. See, e.g., "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Prospectus Summary -- Business
Strategy" and "Business -- Business Strategy." No assurance can be given that
the future results covered by the forward-looking statements will be achieved.
The following matters constitute cautionary statements identifying important
factors with respect to such forward-looking statements, including certain risks
and uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
LEVERAGE
The Company is highly leveraged. As of June 30, 1996, the Company had (i)
approximately $150.7 million of outstanding debt, of which approximately $50.4
million was Senior Debt, substantially all of which Senior Debt was secured and
(ii) shareholders' deficit of $94.7 million. See "Capitalization." This
leverage, together with restrictions in the Company's financing instruments, may
limit the Company's ability to obtain additional debt financing in the future
and to respond to changing business and economic conditions and could adversely
affect its ability to effect its business strategies. See "Description of New
Notes" and "Description of New Credit Facility." Required payments of principal
and interest on the Company's long-term debt are expected to be financed from
operating cash flow, thus limiting the availability of such cash flow for other
corporate purposes. The Company's ability to generate sufficient cash to meet
its obligations is subject to many factors, certain of which are beyond its
control, including economic conditions, regulatory factors and competition.
While the Company believes that, based on current levels of operations and
anticipated growth, its cash flow from operations, together with other sources
of liquidity, will be adequate to meet its obligations, there can be no
assurance that its actual cash flow will in fact be sufficient to service its
debt. The Company's ability to grow is dependent on prevailing economic
conditions and financial, business and other factors beyond its control. In the
event the Company's operating cash flow and working capital are not sufficient
to fund the Company's expenditures or to service its debt, including the Notes,
the Company would be required to raise additional funds through capital
contributions, the refinancing of all or part of its debt or the sale of assets.
There can be no assurance that any of these sources of funds would be available
in amounts sufficient for the Company to meet its obligations.
SUBORDINATION OF THE NOTES
The Notes are subordinated in right of payment to all Senior Debt of the
Company, including indebtedness under the New Credit Facility. Further, the New
Credit Facility is secured by substantially all of the assets of the Company and
its subsidiaries as well as by TLC's interest in the capital stock of the
Company. In addition, the Guarantees are subordinated in right of payment to all
Senior Debt of the Guarantors, including the guarantee of indebtedness under the
New Credit Facility. In the event of the bankruptcy, liquidation, dissolution,
reorganization or other winding up of the Company or the Guarantors, the assets
of the Company and the Guarantors will be available to pay obligations on the
Notes only after all Senior Debt has been paid in full, and there may not be
sufficient assets remaining to pay amounts due on any or all of the Notes then
outstanding. The aggregate principal amount of Senior Debt to which the Notes
were subordinated as of June 30, 1996 was approximately $50.4 million.
Additional Senior Debt may be incurred by the Company and the Guarantors from
time to time, subject to certain restrictions. See "Description of New Credit
Facility" and "Description of New Notes -- Subordination."
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FRAUDULENT CONVEYANCE CONSIDERATIONS
The obligations of the Company under the Notes may be subject to review
under relevant federal and state fraudulent conveyance laws if a bankruptcy case
or a lawsuit (including in circumstances where bankruptcy is not involved) is
commenced by or on behalf of any unpaid creditor of the Company or a
representative of the Company's creditors. If a court in such a lawsuit were to
find that, at the time the Company issued the Notes, or as a consequence of the
Acquisition, the Company (i) intended to hinder, delay or defraud any existing
or future creditor or contemplated insolvency with a design to prefer one or
more creditors to the exclusion in whole or in part of others or (ii) did not
receive fair consideration or reasonably equivalent value for issuing such Notes
and the Company (a) was insolvent, (b) was rendered insolvent, (c) was engaged
or about to engage in a business or transaction for which its remaining assets
constituted unreasonably small capital to carry on its business or (d) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, such court could void the Notes and the Company's
obligations thereunder, and direct the return of any amounts paid thereunder to
the Company or to a fund for the benefit of its creditors. Alternatively, in
such event, claims of the holders of such Notes could be subordinated to claims
of the other creditors of the Company. The Company's obligations under the Notes
will be guaranteed by the Guarantors, and the Guarantees may also be subject to
review under federal and state fraudulent transfer laws. If a court were to
determine that at the time a Guarantor became liable under its Guarantee, it
satisfied either of clauses (i) or (ii) in the foregoing paragraph, the court
could void the Guarantee and direct the repayment of amounts paid thereunder.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction that is being applied. Generally, however, a
company would be considered insolvent if the sum of its debts, including
contingent liabilities, is greater than all of its property at a fair valuation
or if the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and mature. The obligations of each Guarantor under its
guarantee, however, will be limited in a manner intended to avoid it being
deemed a fraudulent conveyance under applicable law. See "Description of New
Notes."
The Company believes that based upon forecasts and other financial
information, including the pro forma financial statements reflecting the
Transactions, the Company is and will continue to be solvent, that it will have
sufficient capital to carry on its business and will be and will continue to be
able to pay its debts as they mature.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture does not contain any provisions specifically intended to
protect the holders of Notes in the event of a future highly leveraged
transaction involving the Company. However, the Indenture and the New Credit
Facility impose upon the Company certain financial and operating covenants,
including, among others, requirements that the Company maintain certain
financial ratios and satisfy certain financial tests, limitations on capital
expenditures and restrictions on the ability of the Company to incur debt, pay
dividends or take certain other corporate actions, all of which may restrict the
Company's ability to expand or to pursue its business strategies. Changes in
economic or business conditions, results of operations or other factors could in
the future cause a violation of one or more covenants in the Company's debt
instruments. See "Description of New Notes -- Certain Covenants" and
"Description of New Credit Facility."
EFFECT OF CHANGE OF CONTROL
Under the Indenture, the Company is required to make an offer (a "Change of
Control Offer") to purchase all of the Notes at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase, upon the occurrence of a Change of Control. See
"Description of New Notes -- Certain Covenants -- Repurchase of Notes at the
Option of the Holder Upon a Change of Control." Any Change of Control, and any
repurchase of the Notes required under the Indenture upon a Change of Control,
would also constitute an event of default under the New Credit Facility, with
the result that the obligations of the Company thereunder could be declared due
and payable. Any acceleration of the Company's obligations under the New Credit
Facility would make it unlikely that the Company would be
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able to purchase the Notes pursuant to a Change of Control Offer. In addition,
in the event of a "change of control" (as defined), TLC will be required to make
an offer to repurchase the outstanding Preferred Stock at a price equal to 101%
of the liquidation preference thereof, plus accrued and unpaid dividends.
Under the Indenture, a Change in Control includes a sale of "all or
substantially all" of the assets of the Company or TLC. The determination of
whether an asset disposition would constitute all or substantially all of the
assets of the Company or TLC, and thereby trigger a requirement to make a Change
of Control Offer, is uncertain under New York law, which governs the
interpretation of the Indenture, and has been the subject of judicial
interpretation in few jurisdictions. Courts addressing the issue have held that
each determination is dependent on the particular facts involved in the
disposition. As a result, there may be a degree of uncertainty in ascertaining
the proportion of assets that would be necessary to constitute a sale of "all or
substantially all" of the assets of the Company or TLC for purposes of the
Indenture.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the management and other skills of Brian Blechman, Dean Blechman, Neil
Blechman, Ross Blechman and Steve Blechman (the "Blechman Brothers"), as well as
its ability to retain other key employees and to attract skilled personnel in
the future to manage the growth of the Company. The loss or unavailability of
the services of one or more of the Blechman Brothers could have a material
adverse effect on the Company. The Company has entered into long-term employment
agreements with each of the Blechman Brothers and, as of August 31, 1996, each
of the Blechman Brothers owns approximately 9% of the outstanding common stock
of TLC. See "Management" and "Prospectus Summary -- The Acquisition."
CERTAIN GOVERNMENT ACTION AND ADVERSE PUBLICITY REGARDING CERTAIN PRODUCTS
CONTAINING EPHEDRINE
Approximately 14 of the Company's products include a Chinese herb known as
"Ma Huang," which contains naturally-occurring ephedrine. Such products
accounted for approximately 11.7% of the Company's net sales for the fiscal year
ended December 31, 1995, and approximately 10.5% of the Company's net sales for
the six months ended June 30, 1996. The Company's products which contain Ma
Huang are generally marketed for bodybuilding, weight loss, sports nutrition and
for other purposes, including increased endurance and energy, generally in
conjunction with diet or exercise, and as natural alternatives to
over-the-counter medications.
Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects,
including the deaths of several individuals. The FDA has placed on public file a
list of over 600 such alleged adverse events. The death in Florida of a Long
Island college student on March 6, 1996, reportedly from over-ingestion of an
ephedrine-containing product (which was not manufactured or distributed by the
Company), received significant coverage in the press and national media. A press
release dated August 2, 1996 issued by the Massachusetts Department of Public
Health reported that a 23 year-old college student died in April 1996 of a heart
problem associated with ephedrine toxicity from the ingestion of a protein drink
containing Ma Huang. While press coverage and the deceased's death certificate
have reported that such protein drink is Ripped Fuel, one of the Company's
ephedrine-containing products, the Company does not have sufficient information
to make an assessment of this matter.
On April 10, 1996, the FDA issued a statement (the "Statement") warning
consumers not to purchase or consume dietary supplements containing ephedrine
with labels that often portray the products as apparent alternatives to illegal
street drugs. None of the Company's products which contain Ma Huang are marketed
for such purpose. The Statement explains that the products portrayed as
alternatives to illegal street drugs pose significant health risks to
consumers -- dizziness, headache, gastrointestinal distress, irregular
heartbeat, heart palpitations, heart attack, strokes, seizures, psychosis and
death -- and that the labels on such products claim or imply that they produce
such effects as euphoria, increased sexual sensations, heightened awareness,
increased energy and other effects. In August 1996, the FDA sent warning letters
to several companies marketing such products as alternatives to street drugs,
indicating that enforcement action with respect to such products may be
initiated.
In August 1996, the FDA convened a Food Advisory Committee (the
"Committee") meeting to review and make recommendations concerning the safety
and appropriate labeling of Ma Huang-containing dietary
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supplements. The FDA, after considering the differing views expressed at the
Committee meeting, may propose regulations that will require reduced dosages
coupled with strict manufacturing standards, labeling restrictions and a
prohibition against combining Ma Huang with other central nervous system
stimulants such as caffeine. There can be no assurance that such regulations
will not prohibit either the sale of dietary supplements containing Ma Huang in
combination with any other ingredients or the sale of all dietary supplements
containing any Ma Huang. The promulgation of such regulations would require the
Company to reformulate and relabel substantially all of its Ma Huang products.
There can be no assurance as to the final form or content of any FDA regulations
concerning Ma Huang-containing dietary supplements or as to the effect that any
attendant adverse publicity or resulting reformulation and relabeling of the
Company's products would have on the sales of such products. The Company has
experienced reduced sales of its Ma Huang-containing products due to the adverse
publicity described above. The Company recently introduced a line of Ma
Huang-free products as alternatives to certain of its bodybuilding, weight loss
and sports nutrition products which currently contain Ma Huang. There can be no
assurance that such products will be received favorably by the Company's
customers or that sales of such alternative products would offset any decrease
in sales attributable to any reformulation and relabeling of the Company's Ma
Huang products.
A number of states and local governmental entities have instituted bans on
sales of Ma Huang-containing products that are portrayed as apparent
alternatives to illegal street drugs; many other states and foreign
jurisdictions limit ephedrine levels and require appropriate warnings on product
labels, regulate ephedrine-containing products as controlled substances or
prohibit the sales of products which contain Ma Huang other than by licensed
pharmacists. For instance, the legislature of Nassau County, New York recently
enacted a local law prohibiting the sale of all ephedrine-containing products to
persons under 18 years of age, and prohibiting the sale or distribution of all
ephedrine-containing products claiming to produce such effects as euphoria,
increased sexual sensations, heightened awareness, increased energy, legal
"highs" and other similar effects (although the law allows the sale of
ephedrine-containing products if intended and labeled for use as weight loss
aids or sports nutrition products, such as those marketed by the Company, for
sale to and use by those 18 years or older). There are also federal, state and
local proposals to broaden the regulation of, or otherwise limit or prohibit,
the sale of products containing ephedrine, including a New York State bill which
would regulate any ephedrine-containing product, including Ma Huang, as a
controlled substance to be dispensed only by prescription, no matter what
labeling claims are made, and a recently introduced Congressional bill which
would regulate as a drug any Ma Huang dietary supplement claiming to produce
euphoria, heightened awareness or similar mental or psychological effects.
The Company's products containing Ma Huang may become subject to further
federal, state, local or foreign laws or regulations, which could require the
Company to: (i) reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or (ii) relabel its products with different warnings
or revised directions for use. Even in the absence of further laws or
regulations, the Company may elect to reformulate and/or relabel its products
which contain Ma Huang. While the Company believes that its Ma Huang products
could be reformulated and relabeled, there can be no assurance in that regard or
that reformulation and/or relabeling would not have a material adverse effect on
sales of such products. See "-- Product Liability."
PRODUCT LIABILITY
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in injury.
The Company currently has $75 million of product liability insurance (which does
not cover matters relating to L-Tryptophan) with a $25,000 self-insurance
retention per occurrence and $100,000 self-insurance retention in the aggregate.
However, there can be no assurance that such insurance will continue to be
available at a reasonable cost or if available will be adequate to cover
liabilities.
Twin Laboratories Inc. is or was a defendant in various legal actions
seeking compensatory and, in some cases, punitive damages for alleged personal
injuries from the ingestion of certain products containing allegedly
contaminated added manufactured L-Tryptophan. As of September 1, 1996, 130 of a
total of approximately 132 such lawsuits in which the Company was a named
defendant have been either dismissed or settled at no cost to the Company under
a defense and indemnification agreement (the "Indemnification Agreement") with
Showa Denko America, Inc. ("SDA"), an American subsidiary of the Japanese
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manufacturer of the allegedly contaminated L-Tryptophan. As of September 1,
1996, Twin Laboratories Inc. was a named defendant in two such actions.
To date, the amount of damages sought in each of the two remaining
L-Tryptophan actions has not been specified. The Company's available product
liability insurance coverage of $3 million for L-Tryptophan matters in respect
of claims made prior to December 31, 1993 is not available with respect to these
two actions. There can be no assurance that when damages are specified in these
actions that the total amount thereof, if fully awarded against the Company
alone and ignoring the existence of the Indemnification Agreement, would not
have a material adverse effect on the Company's results of operations and
financial condition. However, the Indemnification Agreement, the defense and
resolution to date of numerous lawsuits by SDA without cost to the Company, the
multitude of defendants and the possibility that liability could be assessed
against or paid by other parties have led management of the Company, after
consultation with outside legal counsel, to believe that the prospect for a
material adverse effect on the Company's results of operations or financial
condition is remote and no provision in the Company's financial statements has
been made for any loss that may result from these actions. Although the Company
believes that few new lawsuits concerning added manufactured L-Tryptophan are
likely to be brought because of applicable statutes of limitation, the
possibility of future such actions cannot be excluded. The Company no longer
markets any products containing added manufactured L-Tryptophan. See
"Business -- Legal Matters."
Twin Laboratories Inc. and others are named defendants in a wrongful death
action entitled Thomas Hendry v. Twin Laboratories, Inc., et al., originally
commenced in July 1995 in Fresno County (California) Superior Court (Action No.
536670-3). The plaintiff in this action alleges that his wife, Victoria Hendry,
died as a result of the ingestion of the Company's "Ripped Fuel" (a bodybuilding
product which plaintiff alleges contained Ma Huang, kola extract and chromium
picolinate) and/or "Super Dieter's Teas", a product of Laci Le Beau Tea Company,
and seeks both compensatory and punitive damages from the defendants. The
Company has answered the complaint and intends to vigorously contest the
plaintiff's claims. Discovery is not yet complete and it is premature to predict
the likely outcome of the case. However, after consultation with outside legal
counsel to the Company in this matter and after giving effect to the Company's
available product liability insurance coverage, the Company believes that the
prospect for a material adverse effect on the Company's results of operations or
financial condition is remote and no provision in the Company's financial
statements has been made for any loss that may result from this action. There
can be no assurance that the Company will not be subject to further private
civil actions with respect to its products which contain Ma Huang. See
"-- Certain Government Action and Adverse Publicity Regarding Certain Products
Containing Ephedrine."
The Company is presently engaged in various other legal actions, and,
although ultimate liability cannot be determined at the present time, the
Company is currently of the opinion that the amount of any such liability from
these other actions after taking into consideration the Company's insurance
coverage, will not have a material adverse effect on its results of operations
and financial condition.
FTC PROCEEDING
In 1989, Twin Laboratories Inc. received an informal inquiry from the New
York Regional Office of the Federal Trade Commission ("FTC") seeking
substantiation for certain advertising claims made for a segment of its "Fuel"
bodybuilding, sports nutrition and weight loss line of products. In response,
Twin Laboratories Inc. submitted scientific substantiation and financial
information to the FTC. The Company has been negotiating this matter with the
FTC staff since December 1994.
In August 1995, the FTC staff informed the Company that it intended to
recommend to the FTC Commissioners that the FTC file a civil administrative
complaint against the Company unless the Company agreed to settle the matter by
a proposed consent order (the "Consent Order"), which Consent Order has since
been the subject of negotiations between the FTC staff and the Company. In
August 1996, the Company received a revised draft of the Consent Order which
provides for, among other things: (1) injunctive relief prohibiting the Company
from making certain muscle building and fat burning claims for four of its Fuel
products and substantially similar products thereto without scientific
substantiation and (2) a payment of $200,000 to the FTC. If a consent order is
entered, violations of the terms thereof would allow the FTC to seek maximum
penalties of $10,000 per day for each violation. The Company has determined at
the current time not to settle this matter on the terms set forth in the most
recent draft of the Consent Order, which draft the
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FTC has stated is its final offer for a negotiated settlement. The Company
cannot at this time predict whether it will be able to reach a negotiated
settlement of this matter.
The FTC staff recently informed the Company that unless a settlement is
reached, it would proceed to recommend to the FTC Commissioners that a civil
administrative complaint seeking injunctive relief be issued against the
Company. If such a recommendation were to be made by the FTC staff, the Company
will be entitled to a hearing before the FTC Commissioners to present its
position that the administrative complaint should not be issued. Should a
complaint be issued, there can be no assurance that any injunctive relief and
other terms of any eventual litigated resolution of this matter will be limited
to those sought in the most recent draft of the Consent Order.
In addition, the FTC staff has notified the Company that if the FTC were
successful in an administrative litigation against the Company, the FTC may
thereafter sue the Company in federal court seeking redress payments to
consumers who purchased products containing claims that are subject to any
administrative order that results from such administrative litigation. It is
premature to assess whether a federal court would grant such a remedy or how any
consumer redress payments would be calculated.
The Company believes that it has adequate scientific substantiation for the
claims at issue, and intends to vigorously defend this matter if a settlement is
not reached. There can be no assurance that any injunctive relief or monetary
payment (including the potential consumer redress payments) resulting from a
negotiated or litigated resolution of this matter would not have a material
adverse effect on the Company.
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 United States Food and Drug Administration (the
"FDA"), the FTC, the Consumer Product Safety Commission (the "CPSC"), the United
States Department of Agriculture (the "USDA") and the Environmental Protection
Agency (the "EPA"). The Company's activities are also regulated by various
agencies of the states, localities and foreign countries to which the Company's
products are distributed and in which the Company's products are sold.
The composition and labeling of dietary supplements, which comprise a
significant majority of the Company's products, is most actively regulated by
the FDA under the provisions of the Federal Food, Drug, and Cosmetic Act ("FFDC
Act"). The FFDC Act has been revised in recent years by the Nutrition Labeling
and Education Act of 1990 ("NLEA") and by the Dietary Supplement Health and
Education Act of 1994 ("DSHEA"). While in the judgment of the Company these
regulatory changes are generally favorable to the dietary supplements industry,
there can be no assurance that the Company will not in the future be subject to
additional laws or regulations administered by various regulatory authorities.
In addition, there can be no assurance that existing laws and regulations will
not be repealed or be subject to more stringent or unfavorable interpretation by
applicable regulatory authorities.
The labeling requirements for dietary supplements have not been clearly
established. In December 1995, the FDA issued proposed regulations to govern the
labeling of dietary supplements. These regulations are expected to become final
later in 1996, and would require the Company to revise all of its dietary
supplement labels in 1997. The FDA has informally stated that it will, subject
to public comment, withhold enforcement of these regulations until January 1,
1998.
The Company cannot predict the nature of future laws, regulations,
interpretations or applications, nor can it determine what effect either
additional governmental regulations or administrative orders, when and if
promulgated, or disparate federal, state and local regulatory schemes would have
on its business in the future. They could, however, require the reformulation of
certain products to meet new standards, the recall or discontinuance of certain
products not able to be reformulated, additional recordkeeping, expanded
documentation of the properties of certain products, expanded or different
labeling and/or scientific substantiation. Any or all of such requirements could
have a material adverse effect on the Company's results of operations and
financial condition.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the
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responsibility of the Company's distributors for those countries. These
distributors are independent contractors over whom the Company has limited
control. See "Business -- Regulatory Matters."
RISKS OF FUTURE ACQUISITIONS
One of the Company's business strategies is to pursue acquisition
opportunities, including product line acquisitions, that complement its existing
products or are compatible with its business philosophy and strategic goals.
Future acquisitions could be financed by internally generated funds, bank
borrowings, public offerings or private placements, of equity or debt
securities, or a combination of the foregoing. There can be no assurance that
the Company will be able to make acquisitions on terms favorable to the Company
and that funds to finance an acquisition will be available or permitted under
the Company's financing instruments. See "Description of New Notes" and
"Description of New Credit Facility." If the Company completes acquisitions, it
will encounter various associated risks, including the possible inability to
integrate an acquired business into the Company's operations, potentially
increased goodwill amortization, diversion of management's attention and
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Business Strategy."
COMPETITION
The business of developing, manufacturing and selling vitamins, minerals,
sports nutrition products and other nutritional supplements is highly
competitive. Certain of the Company's competitors are substantially larger and
have greater financial resources than the Company. See
"Business -- Competition."
ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW; EFFECT OF PUBLICITY
While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies on
its products. See "Business -- Manufacturing and Product Quality." The Company's
products consist of vitamins, minerals, herbs and other ingredients that the
Company regards as safe when taken as suggested by the Company. However, because
the Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies (which may not adhere to the same quality standards as the Company),
the Company could be adversely affected in the event any of the Company's
products or any similar products distributed by other companies should prove or
be asserted to be harmful to consumers. In addition, because of the Company's
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from consumers' failure to consume the
Company's products as suggested by the Company or other misuse or abuse of the
Company's products or any similar products distributed by other companies could
have a material adverse effect on the Company's results of operations and
financial condition.
Furthermore, the Company believes the recent growth experienced by the
nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain vitamins and other nutritional products. Such
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and there
can be no assurance of future favorable scientific results and media attention
or of the absence of unfavorable or inconsistent findings.
DEPENDENCE ON DISTRIBUTORS AND SIGNIFICANT CUSTOMER
The Company's success depends in part upon its ability to attract, retain
and motivate a large base of distributors, and its ability to maintain a
satisfactory relationship with GNC. Tree of Life, the Company's largest
distributor, and GNC accounted for approximately 28% and 22%, respectively, of
the Company's net sales in 1995. The loss of Tree of Life as a distributor or
GNC as a customer, or the loss of a significant number of other distributors, or
a significant reduction in purchase volume by Tree of Life, GNC or such other
distributors, for any reason, would have a material adverse effect on the
Company's results of operations and financial condition. See "Business -- Sales
and Distribution."
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AVAILABILITY OF RAW MATERIALS
Substantially all of the Company's herbal supplements and herb teas contain
ingredients that are harvested by and obtained from third-party suppliers, and
many of those ingredients are harvested internationally and only once per year
or on a seasonal basis. An unexpected interruption of supply, such as a harvest
failure, could cause the Company's results of operations derived from such
products to be adversely affected. Although the Company has generally been able
to raise its prices in response to significant increases in the cost of such
ingredients, the Company has not always in the past been, and may not in the
future always be, able to raise prices quickly enough to offset the effects of
such increased raw material costs.
INTELLECTUAL PROPERTY PROTECTION
The Company's trademarks are valuable assets which are very important to
the marketing of its products. The Company's policy is to pursue registrations
for all of the trademarks associated with its key products. The Company has
approximately 250 trademark registrations with the United States Patent and
Trademark Office. The Company relies on common law trademark rights to protect
its unregistered trademarks. Common law trademark rights do not provide the
Company with the same level of protection as would U.S. federal registered
trademarks. In addition, common law trademark rights extend only to the
geographic area in which the trademark is actually used, while U.S. federal
registration prohibits the use of the trademark by any third party anywhere in
the United States.
CONTROL BY PRINCIPAL STOCKHOLDERS
As of August 31, 1996, GEI owned 48%, the Continuing Stockholders owned 45%
and other investors owned 7% of the common stock of TLC, which in turn owned
100% of the common stock of the Company. Although the board of directors of each
of TLC and the Company consists of the Blechman Brothers and three GEI
representatives, a majority of TLC's stockholders have the ability to effect the
election of a majority of the members of such boards of directors. However,
regardless of the composition of such boards of directors, pursuant to the terms
of the Stockholders Agreement (as defined herein), a wide range of actions to be
taken by TLC and the Company will generally require approval of a majority of
each of the GEI and the Blechman director groups. In addition, certain
fundamental corporate actions generally require an affirmative vote of holders
of at least 80% of the issued and outstanding shares of common stock of TLC.
These super majority provisions are generally only effective until the
occurrence of a Public Offering Event (as defined herein). See "Principal
Stockholders -- Terms of the Stockholders Agreement." Thus, if the
representatives of GEI and the Blechman Brothers are not able to reach consensus
on matters requiring such super majority approval, the operations and growth of
the Company could be adversely affected.
WAIVER OF DEFAULTS; AMENDMENT OF INDENTURE AND NOTES
Pursuant to the terms of the Indenture, holders of a majority in aggregate
principal amount of the Notes at the time outstanding may waive on behalf of all
of the Holders any default by the Company except a default with respect to any
provision requiring supermajority or unanimous approval to amend (which default
may only be waived by such supermajority or unanimous approval, as the case may
be) and except for a default in the payment of principal of, premium on, or
interest on any Note. Similarly, the Company, the Guarantors and the Trustee
may, with the consent of holders of not less than a majority in aggregate
principal amount of the Notes at the time outstanding, amend or supplement the
Indenture or modify the rights of holders of the Notes; provided, however, that
for certain fundamental modifications to the terms of the Indenture or the
rights of the holders of the Notes (including, but not limited to, further
subordination of the Notes, changes to the maturity and certain payment
provisions of the Notes and amendments to the Change of Control provisions of
the Indenture), supermajority, and in some cases unanimous, consent of the
holders of the Notes then outstanding is required. See "Description of the New
Notes -- Events of Default and Remedies" and "-- Amendments and Supplements."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend
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thereon as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. New Notes issued pursuant to the Exchange Offer in exchange for Old Notes
may be offered for resale, resold or otherwise transferred by Holders thereof
(other than any such holder which is an "affiliate" of the Company or any
Guarantor within the meaning of Rule 405 under the Securities Act and other than
any broker-dealer who purchased Old Notes directly from the Company for resale
pursuant to Rule 144A under the Securities Act or any other available exemption
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such Notes. Each broker-dealer that acquired Old Notes for its own account as
a result of market making or other trading activities and that receives New
Notes for its own account pursuant to the Exchange Offer must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Letter of Transmittal states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented form time to time, may be used by a broker-dealer
in connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the effective date of this Prospectus, it will make
this Prospectus available to any broker-dealer for use in connection with any
such resale. See "Plan of Distribution." However, to comply with the securities
laws of certain jurisdictions, if applicable, the New Notes may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with. To the extent that Old Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes will be adversely affected.
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
The New Notes are a new issue of securities, have no established trading
market and may not be widely distributed. The Company does not intend to list
the New Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation system. Although the New Notes are expected to be eligible for trading
in the PORTAL market, no assurance can be given that an active public or other
market will develop for the New Notes or as to the liquidity of or the trading
market for the New Notes. If a trading market does not develop or is not
maintained, holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a market for the New Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the New Notes, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities, and the price at which the holders of New Notes will be able to sell
such New Notes is not assured and the New Notes could trade at a premium or
discount to their purchase price or face value. Depending on prevailing interest
rates, the market for similar securities and other facts, including the
financial condition of the Company, the New Notes may trade at a discount from
their principal amount.
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<PAGE> 27
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company to the Initial Purchasers on May 7,
1996, pursuant to the Purchase Agreement. The Initial Purchasers subsequently
resold the Old Notes in reliance on Rule 144A under the Securities Act and
certain other exemptions under the Securities Act. The Company and the Initial
Purchasers also entered into the Registration Rights Agreement, pursuant to
which the Company agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to July 6, 1996, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its reasonable best efforts to cause such registration statement
to be declared effective by the Commission on or prior to September 19, 1996 and
(iii) to cause the Exchange Offer to remain open for a period of not less than
30 days. This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the conditions, terms
and provisions of the Registration Rights Agreement. The form and terms of the
New Notes will be identical in all material respects to the form and terms of
the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) holders of New Notes will not be entitled to Liquidated Damages
and (iii) holders of New Notes will not be, and upon consummation of the
Exchange Offer, Eligible Holders of Old Notes will no longer be, entitled to
certain rights under the Registration Rights Agreement intended for holders of
unregistered securities. See "Conditions of the Exchange Offer."
Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Eligible Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
As of the date of this Prospectus, $100.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of September 15, 1996, there were two registered
holders of the Old Notes, including Cede, which held $97.95 million of aggregate
principal amount of the Old Notes for 38 of its participants. Solely for reasons
of administration (and for no other purpose), the Company has fixed the close of
business on September 15, 1996, as the record date (the "Record Date") for
purposes of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only an Eligible Holder of the Old Notes
(or such Eligible Holder's legal representative or attorney-in-fact) may
participate in the Exchange Offer. There will be no fixed record date for
determining Eligible Holders of the Old Notes entitled to participate in the
Exchange Offer. The Company believes that, as of the date of this Prospectus, no
such Eligible Holder is an affiliate (as defined in Rule 405 under the
Securities Act) of the Company or any of the Guarantors.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
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<PAGE> 28
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be Friday, October 25, 1996 at 5:00 p.m., New
York City time, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the Expiration Date shall be the latest date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will, in accordance with applicable law, file a post-effective
amendment to the registration statement (a "Post-effective Amendment") and
resolicit the registered holders of the Old Notes. If the Company files a
Post-effective Amendment, it will notify the Exchange Agent of an extension of
the Exchange Offer by oral or written notice, and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the effectiveness of such Post-effective Amendment. Such
notice and public announcement shall set forth the new Expiration Date, which
new Expiration Date shall be no less than five days after the then applicable
Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, notwithstanding any other
provisions of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue the New Notes in exchange for, any Old Notes, if the
Exchange Offer violates any applicable law or interpretation of the staff of the
Commission. The Company expects that the foregoing conditions will be satisfied.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), Eligible
Holders of Old Notes are entitled to receive Liquidated Damages of $0.05 per
week per $1,000 principal amount of Old Notes held by such holders (up to a
maximum of $0.30 per week per $1,000 principal amount of Old Notes). A
"Registration Default" with respect to the Exchange Offer shall generally occur
if: (i) the registration statement concerning the exchange offer (the
"Registration Statement") has not been filed with the Commission on or prior to
July 6, 1996; (ii) the Registration Statement is not declared effective on or
prior to September 19, 1996 (the "Effectiveness Target Date") or (iii) the
Exchange Offer is not consummated within 45 days after the earlier of the
effectiveness of the Registration Statement and the Effectiveness Target Date.
Holders of New Notes will not be and, upon consummation of the Exchange Offer,
Eligible Holders of Old Notes will no longer be, entitled to (i) the right to
receive the Liquidated Damages or (ii) certain other rights under the
Registration Rights Agreement intended for holders of Transfer Restricted
Securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to the Registrar under the Indenture of New Notes
in the same aggregate principal amount as the aggregate principal amount of Old
Notes that are tendered by holders thereof pursuant to the Exchange Offer.
ACCRUED INTEREST ON THE OLD NOTES
The New Notes will bear interest at a rate equal to 10 1/4% per annum from
and including their date of issuance. Eligible Holders whose Old Notes are
accepted for exchange will have the right to receive interest accrued thereon
from the date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange, which interest accrued at the
rate of 10 1/4% per annum, will cease to accrue on the day prior to the issuance
of the New Notes. See "Description of New Notes -- Principal, Maturity and
Interest."
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PROCEDURES FOR TENDERING OLD NOTES
The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by
an Eligible Institution (as defined). In the event that a signature on a Letter
of Transmittal or a notice of withdrawal, as the case may be, is required to be
guaranteed, such guarantee must be by a firm which is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or otherwise be an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible
Institutions"). If the Letter of Transmittal is signed by a person other than
the registered holder of the Old Notes, the Old Notes surrendered for exchange
must either (i) be endorsed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution or (ii) be accompanied by a bond power, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder, with the signature thereon guaranteed by an
Eligible Institution. The term "registered holder" as used herein with respect
to the Old Notes means any person in whose name the Old Notes are registered on
the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or after the Expiration Date (including the right to waive the
ineligibility of any holder who seeks to tender Old Notes in the Exchange
Offer). The interpretation of the terms and conditions of the Exchange Offer
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes for exchange must be
cured within such period of time as the Company shall determine. The Company
will use reasonable efforts to give notification of defects or irregularities
with respect to tenders of Old Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Old Notes will
not be deemed to have been made until such irregularities have been cured or
waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old
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<PAGE> 30
Notes in the Exchange Offer should contact such registered holder promptly and
instruct such registered holder to tender on such Beneficial Owner's behalf. If
such Beneficial Owner wishes to tender directly, such Beneficial Owner must,
prior to completing and executing the Letter of Transmittal and tendering Old
Notes, make appropriate arrangements to register ownership of the Old Notes in
such Beneficial Owner's name. Beneficial Owners should be aware that the
transfer of registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes
are being acquired by the Eligible Holder and each Beneficial Owner in the
ordinary course of business of the Eligible Holder and each Beneficial Owner,
(ii) the Eligible Holder and each Beneficial Owner are not participating, do not
intend to participate, and have no arrangement or understanding with any person
to participate, in the distribution of the New Notes, (iii) the Eligible Holder
and each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the staff of the Commission set
forth in no-action letters that are discussed herein under "Resales of New
Notes," (iv) that if the Eligible Holder is a broker-dealer that acquired Old
Notes as a result of market making or other trading activities, it will deliver
a prospectus in connection with any resale of New Notes acquired in the Exchange
Offer, (v) the Eligible Holder and each Beneficial Owner understand that a
secondary resale transaction described in clause (iii) above should be covered
by an effective registration statement containing the selling security holder
information required by Item 507 of Regulation S-K of the Commission and (vi)
neither the Eligible Holder nor any Beneficial Owner is an "affiliate," as
defined under Rule 405 of the Securities Act, of the Company or any Guarantor
except as otherwise disclosed to the Company in writing. In connection with a
book-entry transfer, each participant will confirm that it makes the
representations and warranties contained in the Letter of Transmittal.
Guaranteed Delivery Procedures. Eligible Holders who wish to tender their
Old Notes and (i) whose Old Notes are not immediately available or (ii) who
cannot deliver their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the Eligible Holder, the
certificate number or numbers of the tendered Old Notes, and the principal
amount of tendered Old Notes, stating that the tender is being made thereby and
guaranteeing that, within three (3) business days after the date of delivery of
the Notice of Guaranteed Delivery, the tendered Old Notes, a duly executed
Letter of Transmittal and any other required documents will be deposited by the
Eligible Institution with the Exchange Agent and (iii) such properly completed
and executed documents required by the Letter of Transmittal and the tendered
Old Notes in proper form for transfer (or confirmation of a book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC) must be received by
the Exchange Agent within three (3) business days after the Expiration Date. Any
Eligible Holder who wishes to tender Old Notes pursuant to the guaranteed
delivery procedures described above must ensure that the Exchange Agent receives
the Notice of Guaranteed Delivery and Letter of Transmittal relating to such Old
Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
Book-Entry Delivery. The Exchange Agent will establish an account with
respect to the Old Notes at the DTC ("Book-Entry Transfer Facility") for
purposes of the Exchange Offer promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing such
facility to transfer Old Notes into the Exchange Agent's account in accordance
with such facility's procedure for such transfer. Even though delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or a manually signed facsimile thereof), with
any required signature guarantees, or an Agent's Message (as defined below) in
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<PAGE> 31
connection with a book-entry transfer, and other documents required by the
Letter of Transmittal, must, in any case, be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover of this
Prospectus before the Expiration Date, or the guaranteed delivery procedure set
forth above must be followed. Delivery of the Letter of Transmittal and any
other required documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. The term "Agent's Message" means a message
transmitted by the Book-Entry Transfer Facility to, and received by, the
Exchange Agent and forming a part of a book-entry Confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Transfer Facility tendering the Old
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and that the Company may enforce such agreement
against such participant.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered promptly
after acceptance of the Old Notes. For purposes of the Exchange Offer, the
Company shall be deemed to have accepted validly tendered Old Notes, when, as,
and if the Company has given oral or written notice thereof to the Exchange
Agent.
In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
WITHDRAWAL RIGHTS
Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Old Notes, as applicable), (iii) be signed
by the Eligible Holder in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by a bond power in the name of
the person withdrawing the tender, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder, with the
signature thereon guaranteed by an Eligible Institution together with the other
documents required upon transfer by the Indenture, and (iv) specify the name in
which such Old Notes are to be re-registered, if different from the Depositor,
pursuant to such documents of transfer. Any questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, in its sole discretion. The Old Notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
Exchange Offer. Any Old Notes which have been tendered for exchange but which
are withdrawn will be returned to the Eligible Holder thereof without cost to
such Eligible Holder as soon as practicable after withdrawal. Properly withdrawn
Old Notes may be retendered by following one of the procedures described under
"The Exchange Offer -- Procedures for Tendering Old Notes" at any time on or
prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
Fleet National Bank is the Exchange Agent. All tendered Old Notes, executed
Letters of Transmittal and other related documents should be directed to the
Exchange Agent. Questions and requests for assistance and
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<PAGE> 32
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
<TABLE>
<S> <C> <C>
By Mail: By Hand/Overnight Express: Facsimile Transmission:
Fleet National Bank Fleet National Bank (860) 986-7908
777 Main Street 777 Main Street To confirm receipt:
MSN CT/MO/0224 MSN CT/MO/0224 Tel. (860) 986-1271
Hartford, Connecticut 06115 Hartford, Connecticut 06115
Attention: Corporate Trust Attention: Corporate Trust
Operations Operations
</TABLE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will offers be
accepted from or on behalf of) holders of Notes in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Notes in
such jurisdiction.
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing Prospectuses), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and the Guarantors, (v) fees and disbursements of independent certified
public accountants, (vi) rating agency fees, (vii) internal expenses of the
Company and the Guarantors (including, without limitation, all salaries and
expenses of officers and employees of the Company and the Guarantors performing
legal or accounting duties), and (ix) fees and expenses, if any, incurred in
connection with the listing of the New Notes on a securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
RESALES OF THE NEW NOTES
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
such Eligible
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Holder (other than (i) a broker-dealer who purchased Old Notes directly from the
Company for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act, or (ii) a person that is an
affiliate of the Company or any of the Guarantors within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the Eligible
Holder is acquiring the New Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. The Company has not requested
or obtained an interpretive letter from the Commission staff with respect to
this Exchange Offer, and the Company and the Eligible Holders are not entitled
to rely on interpretive advice provided by the staff to other persons, which
advice was based on the facts and conditions represented in such letters.
However, the Exchange Offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in such letters. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission enunciated in
Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), or interpreted in the
Commission's letters to Shearman and Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14, 1993), or similar no-action or
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives New Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-dealer
as a result of market making or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
The Company has agreed that for a period of 180 days after the effective date of
this Prospectus, it will make this Prospectus, as amended and supplemented,
available to any broker-dealer who receives New Notes in the Exchange Offer for
use in connection with any such resale. See "Plan of Distribution."
CONSEQUENCE OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exception from, or in a transaction not subject to, the
Securities Act and applicable states securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors -- Consequences of Failure to Exchange."
OTHER
Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisers in making their own decisions
on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Notes and will be entitled to all the
rights, and limitations applicable thereto, under the Indenture, except for any
such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. See "Description of New Notes." All untendered Old Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
33
<PAGE> 34
CAPITALIZATION
The following tables set forth the actual capitalization of TLC and its
direct and indirect subsidiaries as of June 30, 1996 and the capitalization of
Twin Laboratories Inc. and its subsidiary, ARP, at that date. This table should
be read in conjunction with the Consolidated Financial Statements of TLC and the
notes thereto included elsewhere in this Prospectus.
CAPITALIZATION OF TLC
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
--------------
ACTUAL
--------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents and marketable securities............................ $ 8,185
===========
Long-term debt (including current portion)
New Credit Facility.......................................................... $ 50,000
Notes........................................................................ 100,000
Other debt................................................................... 362
Capital lease obligations.................................................... 373
--------------
Total long-term debt................................................. 150,735
--------------
Senior redeemable cumulative Preferred Stock................................... 30,000
--------------
Junior redeemable cumulative Preferred Stock................................... 37,000
--------------
Shareholders' deficit
Capital stock................................................................ 1,000
Additional paid-in capital................................................... 80,701
Accumulated deficit.......................................................... (176,422)
--------------
Total shareholders' deficit.......................................... (94,721)
--------------
Total capitalization................................................. $ 123,014
===========
</TABLE>
CAPITALIZATION OF TWIN LABORATORIES INC.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1996
--------------
ACTUAL
--------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents and marketable securities............................ $ 8,185
===========
Long-term debt (including current portion)
New Credit Facility.......................................................... $ 50,000
Notes........................................................................ 100,000
Other debt................................................................... 362
Capital lease obligations.................................................... 373
--------------
Total long-term debt................................................. 150,735
--------------
Shareholder's deficit
Capital stock................................................................ 253
Additional paid-in capital................................................... 129,756
Accumulated deficit.......................................................... (156,483)
--------------
Total shareholder's deficit.......................................... (26,474)
--------------
Total capitalization................................................. $ 124,261
===========
</TABLE>
34
<PAGE> 35
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma financial data have been prepared by the
Company's management from the Consolidated Financial Statements of TLC and the
notes thereto included elsewhere in this Prospectus. The unaudited pro forma
condensed consolidated statements of income for the year ended December 31, 1995
and the six months ended June 30, 1995 and 1996 reflect adjustments as if the
Transactions had been consummated and were effective as of January 1, 1995. See
"Prospectus Summary -- The Acquisition."
The financial effects of the Transactions as presented in the pro forma
financial data are not necessarily indicative of TLC's results of operations
which would have been obtained had the Transactions actually occurred on the
date described above, nor are they necessarily indicative of the results of
future operations. The pro forma financial data should be read in conjunction
with the notes thereto, which are an integral part thereof, and with the
Consolidated Financial Statements of TLC and the notes thereto included
elsewhere in this Prospectus.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO
HISTORICAL ADJUSTMENTS FORMA
-------- -------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales.................................................. $148,735 $ -- $148,735
Cost of sales.............................................. 89,932 -- 89,932
-------- -------- --------
Gross profit............................................... 58,803 -- 58,803
Operating expenses......................................... 27,191 400(a) 27,591
-------- -------- --------
Income from operations..................................... 31,612 (400) 31,212
-------- -------- --------
Other (expense) income:
Interest income.......................................... 313 (313)(b) --
Interest expense......................................... (866) (14,818)(c) (15,684)
Transaction expenses..................................... (656) 656(d) --
Other.................................................... 61 -- 61
-------- -------- --------
(1,148) (14,475) (15,623)
-------- -------- --------
Income before provision for income taxes................... 30,464 (14,875) 15,589
Provision for income taxes................................. 240 5,931(e) 6,171
-------- -------- --------
Net income................................................. $ 30,224 $(20,806) $ 9,418
======== ======== ========
EBITDA(f).................................................. $ 33,516 $ -- $ 33,516
Ratio of earnings to fixed charges(g)...................... 24.1x 2.0x
</TABLE>
35
<PAGE> 36
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales.................................................. $ 81,837 $ -- $81,837
Cost of sales.............................................. 47,852 -- 47,852
---------- ----------- ---------
Gross profit............................................... 33,985 -- 33,985
Operating expenses......................................... 14,816 141(a) 14,957
---------- ----------- ---------
Income from operations..................................... 19,169 (141) 19,028
---------- ----------- ---------
Other (expense) income:
Interest income.......................................... 315 (315)(b) --
Interest expense......................................... (2,591) (5,260)(c) (7,851)
Transaction expenses..................................... (400) 400(d) --
Nonrecurring non-competition agreement expense........... (15,300) 15,300(d) --
Other.................................................... (23) -- (23)
---------- ----------- ---------
(17,999) 10,125 (7,874)
---------- ----------- ---------
Income before provision for income taxes................... 1,170 9,984 11,154
Provision for income taxes................................. 1,833 2,629(e) 4,462
---------- ----------- ---------
Net income (loss).......................................... $ (663) $ 7,355 $ 6,692
======= ========= ========
EBITDA(f).................................................. $ 20,470 $ -- $20,470
Ratio of earnings to fixed charges(g)...................... 1.4x 2.4x
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
Net sales.................................................. $ 69,820 $ -- $69,820
Cost of sales.............................................. 42,046 -- 42,046
---------- ----------- ---------
Gross profit............................................... 27,774 -- 27,774
Operating expenses......................................... 13,779 200(a) 13,979
---------- ----------- ---------
Income from operations..................................... 13,995 (200) 13,795
---------- ----------- ---------
Other (expense) income:
Interest income.......................................... 147 (147)(b) --
Interest expense......................................... (417) (7,427)(c) (7,844)
Other.................................................... 96 -- 96
---------- ----------- ---------
(174) (7,574) (7,748)
---------- ----------- ---------
Income before provision for income taxes................... 13,821 (7,774) 6,047
Provision for income taxes................................. 92 2,302(e) 2,394
---------- ----------- ---------
Net income................................................. $ 13,729 $ (10,076) $ 3,653
======= ========= ========
EBITDA(f).................................................. $ 14,509 $ -- $14,509
Ratio of earnings to fixed charges(g)...................... 23.0x 1.8x
</TABLE>
36
<PAGE> 37
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
- ---------------
(a) Represents the LGP Management Fee (as defined herein). See "Certain
Relationships and Related Transactions -- Transactions with LGP."
(b) Represents a reduction in interest income on cash and cash equivalents.
(c) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -----------------
1995 1995 1996
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest expense on the Notes and the New Credit
Facility at a composite interest rate of 9.5%,
including revolving credit commitment and
administration fees................................ $ 14,676 $7,338 $5,170
Interest expense on refinanced debt.................. (807) (386) (245)
------------ ------ ------
13,869 6,952 4,925
Amortization of deferred financing costs............. 949 475 335
------------ ------ ------
Interest expense adjustment.......................... $ 14,818 $7,427 $5,260
========== ====== ======
</TABLE>
(d) Represents a reduction in nonrecurring expenses incurred which are directly
attributable to the Transactions.
(e) Reflects (i) the net increase in the provision for income taxes assuming the
Company was a "C" corporation, and (ii) the increase in net expenses
described in notes a, b, c and d above.
(f) EBITDA represents income from operations before depreciation and
amortization expense, and certain other charges related to legal
settlements, increases in inventory reserves, a tax settlement relating to a
limited partnership interest, which interest is expected to be divested, and
the LGP Management Fee. While EBITDA is not intended to represent cash flow
from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company to
meet its future debt service, capital expenditures and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(g) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and one-third of rental expenses, representing that portion of
rental expenses attributable to interest) to income before provision for
income taxes and dividing that sum by such fixed charges.
37
<PAGE> 38
SELECTED HISTORICAL FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1991
and for the year then ended and as of June 30, 1995 and 1996 and for the six
month periods ended June 30, 1995 and 1996 are derived from the unaudited
consolidated financial statements of TLC. In the opinion of management, the
unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for such
periods. The results for the interim periods are not necessarily indicative of
the results for the related full fiscal year. The selected consolidated
financial data as of December 31, 1992, 1993, 1994 and 1995 and for each of the
years then ended has been derived from the audited consolidated financial
statements of TLC. The report of Deloitte & Touche LLP, independent auditors, on
the consolidated financial statements as of December 31, 1994 and 1995, and for
each of the three years in the period ended December 31, 1995 is included
elsewhere herein. The selected consolidated financial data should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements of TLC and the notes thereto and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales.................... $70,165 $83,014 $99,897 $117,342 $148,735 $69,820 $81,837
Cost of sales................ 44,664 51,214 62,131 70,247 89,932 42,046 47,852
------- ------- ------- -------- -------- ------- -------
Gross profit................. 25,501 31,800 37,766 47,095 58,803 27,774 33,985
Operating expenses........... 14,570 17,463 21,125 23,022 27,191 13,779 14,816
------- ------- ------- -------- -------- ------- -------
Income from operations....... 10,931 14,337 16,641 24,073 31,612 13,995 19,169
------- ------- ------- -------- -------- ------- -------
Other (expense) income:
Interest income........... 375 302 242 254 313 147 315
Interest expense.......... (461) (494) (487) (761) (866) (417) (2,591)
Transaction expenses...... -- -- -- -- (656) -- (400)
Nonrecurring
non-competition
agreement expense....... -- -- -- -- -- -- (15,300)
Other..................... (514) (135) 510 354 61 96 (23)
------- ------- ------- -------- -------- ------- -------
(600) (327) 265 (153) (1,148) (174) (17,999)
------- ------- ------- -------- -------- ------- -------
Income before unusual item,
provision for income taxes
and extraordinary item.... 10,331 14,010 16,906 23,920 30,464 13,821 1,170
Unusual item -- nonrecurring
charge for prior years'
income tax assessment..... -- -- -- 1,982 -- -- --
Provision for income taxes... 169 651 230 245 240 92 1,833
------- ------- ------- -------- -------- ------- -------
Income (loss) before
extraordinary item........ 10,162 13,359 16,676 21,693 30,224 13,729 (663)
Extraordinary item........... -- 76 -- -- -- -- --
------- ------- ------- -------- -------- ------- -------
Net income (loss)............ $10,162 $13,435 $16,676 $ 21,693 $ 30,224 $13,729 $ (663)
======= ======= ======= ======== ======== ======= =======
PRO FORMA RELATING TO CHANGE
IN TAX STATUS:(A)
Historical income before
provision for income
taxes..................... $10,331 $14,010 $16,906 $ 21,938 $ 30,464 $13,821 $ 1,170
Pro forma provision for
income taxes.............. 4,017 5,436 6,644 9,087 12,060 5,471 6,588
------- ------- ------- -------- -------- ------- -------
Pro forma net income
(loss).................... $ 6,314 $ 8,574 $10,262 $ 12,851 $ 18,404 $ 8,350 $(5,418)
======= ======= ======= ======== ======== ======= =======
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(b).................... $11,734 $15,229 $17,446 $ 25,023 $ 33,516 $14,509 $20,470
Capital expenditures......... 1,472 1,304 4,904 1,786 2,641 2,073 483
Depreciation................. 783 806 710 851 909 464 549
Amortization................. 20 86 95 99 102 50 193
Ratio of earnings to fixed
charges(c)................ 13.7x 16.6x 19.8x 21.2x 24.1x 23.0x 1.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital
(excluding cash and cash
equivalents, marketable
securities and current
debt)..................... $14,097 $18,575 $25,437 $ 35,056 $ 39,405 $35,397 $37,252
Property, plant and
equipment, net............ 7,645 7,863 10,732 12,071 13,036 13,679 12,960
Total assets................. 36,878 44,368 55,587 64,706 75,309 68,709 141,163
Total debt (including current
debt)..................... 6,100 6,066 8,039 9,288 8,792 10,474 150,735
Senior and junior redeemable
preferred stock........... -- -- -- -- -- -- 67,000
Shareholders' equity
(deficit)................. 26,587 33,180 40,543 48,671 55,405 45,903 (94,721)
</TABLE>
- ---------------
(a) The Company consisted of S corporations and, accordingly, federal and state
taxes were generally paid at the shareholder level only. Upon consummation
of the Transactions, the Company eliminated its S corporation status and,
accordingly, will be subject to federal and state income taxes.
(b) EBITDA represents income from operations before depreciation and
amortization expense, and certain other charges related to legal
settlements, increases in inventory reserves, a tax settlement relating to
a limited partnership interest, which interest is expected to be divested,
and the LGP Management Fee. While EBITDA is not intended to represent cash
flow from operations as defined by GAAP and should not be considered as an
indicator of operating performance or an alternative to cash flow (as
measured by GAAP) as a measure of liquidity, it is included herein to
provide additional information with respect to the ability of the Company
to meet its future debt service, capital expenditure and working capital
requirements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(c) The ratio of earnings to fixed charges is computed by adding fixed charges
(interest and one-third of rental expenses, representing that portion of
rental expenses attributable to interest) to income before unusual item,
provision for income taxes and extraordinary item, and dividing that sum by
such fixed charges.
39
<PAGE> 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial Data" and the audited Consolidated Financial
Statements of TLC and the notes thereto included elsewhere in this Prospectus.
The Company consisted of "S" corporations for the years ended December 31, 1995,
1994 and 1993 and through the consummation of the Acquisition on May 7, 1996.
Accordingly, federal and state taxes were generally paid at the shareholder
level only. The provision for income taxes through May 7, 1996 and for the years
ended December 31, 1995, 1994 and 1993 represented state taxes for New York,
which imposes a corporate tax for all income in excess of $0.2 million. Upon
consummation of the Transactions, the Company eliminated its "S" corporation
status and, accordingly, is subject to federal and state income taxes.
The following table sets forth, for the periods indicated, certain
historical income statement and other data for the Company and also sets forth
certain of such data as a percentage of net sales.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ -----------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- ------------- -------------
$ % $ % $ % $ % $ %
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vitamins, Minerals & Amino Acids............... $ 29.1 29.1% $ 32.3 27.5% $ 37.1 24.9% $18.3 26.2% $19.3 23.6%
Sports Nutrition............................... 34.7 34.7 39.9 34.0 53.9 36.2 24.6 35.2 28.7 35.0
Special Formulas............................... 23.6 23.7 31.0 26.4 41.2 27.7 16.9 24.2 21.7 26.6
Herbal Supplements & Phytonutrients............ 12.0 12.0 14.5 12.3 19.8 13.3 9.5 13.6 11.1 13.6
Herb Teas...................................... 3.0 3.0 4.2 3.6 5.8 3.9 3.2 4.6 4.1 5.0
Publishing..................................... 2.7 2.7 3.4 3.0 4.8 3.3 2.9 4.2 2.8 3.4
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Gross Sales.................................. 105.1 105.2 125.3 106.8 162.6 109.3 75.4 108.0 87.7 107.2
Discounts & Allowances....................... (5.2) (5.2) (8.0) (6.8) (13.9) (9.3) (5.6) (8.0) (5.9) (7.2)
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Net Sales.................................... $ 99.9 100.0% $117.3 100.0% $148.7 100.0% $69.8 100.0% $81.8 100.0%
Gross Profit................................... 37.8 37.8 47.1 40.1 58.8 39.5 27.8 39.8 34.0 41.5
Operating Expenses............................. 21.1 21.1 23.0 19.6 27.2 18.3 13.8 19.7 14.8 18.1
Income From Operations......................... 16.6 16.7 24.1 20.5 31.6 21.3 14.0 20.0 19.2 23.4
EBITDA......................................... 17.4 17.5 25.0 21.3 33.5 22.5 14.5 20.8 20.5 25.0
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 ("FIRST HALF 1996") COMPARED TO
SIX MONTHS ENDED JUNE 30, 1995 ("FIRST HALF 1995")
Net Sales. Net sales for first half 1996 was $81.8 million, an increase of
$12.0 million, or 17.2%, as compared to net sales of $69.8 million in first half
1995. The 17.2% increase was attributable to increases in gross sales in each of
the Company's six product categories other than publishing, partially offset by
an increase in discounts and allowances which was due to the Company's increased
sales volume. Vitamins, minerals and amino acids contributed $19.3 million, an
increase of $1.0 million, or 5.6%, as compared to $18.3 million in first half
1995. The increase in gross sales of vitamins, minerals and amino acids was
primarily due to continued strong consumer interest in these products. Sports
nutrition products contributed $28.7 million, an increase of $4.1 million or
16.6%, as compared to $24.6 million in first half 1995, primarily due to the
increased demand for a variety of these products. Special formulas contributed
$21.7 million, an increase of $4.8 million, or 28.9%, as compared to $16.9
million in first half 1995. The increase in gross sales of special formulas was
primarily due to the successful introduction of a variety of new product
formulations. Herbal supplements and phytonutrients contributed $11.1 million,
an increase of $1.6 million, or 16.3%, as compared to $9.5 million in first half
1995, and herb teas contributed $4.1 million, an increase of $0.9 million, or
27.9%, as compared to $3.2 million in first half 1995. The gross sales increase
in both herbal supplements and phytonutrients and herb teas was primarily due to
new product introductions, continued strong consumer interest in existing
products and increased penetration of Nature's Herbs and Alvita products into
domestic health food stores. Publishing contributed $2.8 million as compared to
$2.9 million in first half 1995.
40
<PAGE> 41
Gross Profit. Gross profit for first half 1996 was $34.0 million, which
represented an increase of $6.2 million, or 22.4%, as compared to $27.8 million
for first half 1995. Gross profit margin was 41.5% for first half 1996 as
compared to 39.8% for first half 1995. The overall increase in gross profit
dollars was attributable to the Company's higher sales volume in first half
1996. The increase in gross profit margin in first half 1996 as compared to
first half 1995 was due primarily to a more favorable product mix, to higher
gross profit margins on recently introduced new product formulations and product
line extensions, to a reduction in sales discounts and allowances offered on
certain TWINLAB and Nature's Herbs products under certain sales programs
introduced in 1995 and to continued absorption of manufacturing overhead
expenses over a larger sales base.
Operating Expenses. Operating expenses were $14.8 million for first half
1996, representing an increase of $1.0 million, or 7.5%, as compared to $13.8
million for first half 1995. As a percent of net sales, operating expenses
declined from 19.7% in first half 1995 to 18.1% in first half 1996. The increase
in operating expenses was primarily attributable to increased selling and
advertising expenses and higher operating expenses resulting from the Company's
increased level of sales in first half 1996. The decline in operating expenses
as a percent of net sales was due to the Company's ability to maintain its
expenditures for research and development and certain general and administrative
functions at approximately the same level as in first half 1995, while
substantially increasing the Company's sales volume.
EBITDA. EBITDA was $20.5 million in first half 1996, representing an
increase of $6.0 million, or 41.1%, as compared to $14.5 million for first half
1995. EBITDA margin increased to 25.0% of net sales in first half 1996 as
compared to 20.8% of net sales in first half 1995. The increase in EBITDA and
EBITDA margin was primarily due to the Company's higher sales volume in first
half 1996 and a reduction in the Company's operating expenses as a percent of
net sales.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales for fiscal 1995 was $148.7 million, an increase of
$31.4 million, or 26.8%, as compared to net sales of $117.3 million in fiscal
1994. The 26.8% increase was attributable to increases in gross sales in each of
the Company's six product categories, partially offset by an increase in
discounts and allowances due to the Company's increased sales volume. Vitamins,
minerals and amino acids contributed $37.1 million, an increase of $4.8 million,
or 14.7%, as compared to $32.3 million in fiscal 1994, primarily due to
continued strong consumer interest in these products. Sports nutrition
contributed $53.9 million, an increase of $14.0 million, or 34.9%, as compared
to $39.9 million in fiscal 1994, primarily due to the increased demand for a
variety of these products. Special formulas contributed $41.2 million, an
increase of $10.2 million, or 33.2%, as compared to $31.0 million in fiscal
1994, primarily due to the successful introduction of new product formulations
and strong growth in existing product lines. Herbal supplements and
phytonutrients contributed $19.8 million, an increase of $5.3 million, or 37.2%,
as compared to $14.5 million in fiscal 1994, and herb teas contributed $5.8
million, an increase of $1.6 million, or 37.4%, as compared to $4.2 million in
fiscal 1994. The gross sales increase in both herbal supplements and
phytonutrients and herb teas is primarily due to new product introductions,
continued strong consumer interest in existing products and increased
penetration of Alvita and Nature's Herbs products into domestic health food
stores. Publishing contributed $4.8 million, an increase of $1.4 million, or
39.1%, as compared to $3.4 million in fiscal 1994.
Gross Profit. Gross profit for fiscal 1995 was $58.8 million, which
represented an increase of $11.7 million or 24.9%, as compared to $47.1 million
for fiscal 1994. Gross margin was 39.5% for fiscal 1995 as compared to 40.1% for
fiscal 1994. The overall increase in gross profit dollars was attributable to
the Company's higher sales volume in fiscal 1995. The decrease in gross margin
for fiscal 1995 as compared to fiscal 1994 was due primarily to lower gross
margins on the Company's Nature's Herbs products due to certain raw materials
price increases and an increase in sales discounts and allowances offered on
certain TWINLAB and Nature's Herbs products under certain sales incentive
programs introduced in 1995, which programs are expected to be continued in
1996. Such decreases in gross margin were partially offset by increased sales
from a more favorable product mix and increases in the Company's gross margins
for TWINLAB sports nutrition products, special formulas and Alvita herb tea
products.
41
<PAGE> 42
Operating Expenses. Operating expenses were $27.2 million for fiscal 1995,
representing an increase of $4.2 million, as compared to $23.0 million for
fiscal 1994. As a percent of net sales, operating expenses declined from 19.6%
in fiscal 1994 to 18.3% in fiscal 1995. The increase in operating expenses was
primarily attributable to increased selling and advertising expenses and higher
operating expenses resulting from the Company's increased level of sales in
fiscal 1995. The decline in operating expenses as a percent of net sales is due
to the Company's ability to maintain its expenditures for research and
development and certain general and administrative functions at approximately
the same level as in fiscal 1994, while substantially increasing the Company's
sales volume.
EBITDA. EBITDA was $33.5 million in fiscal 1995, representing an increase
of $8.5 million, or 33.9%, compared to $25.0 million for fiscal 1994. EBITDA
margin increased to 22.5% of net sales in fiscal 1995, as compared to 21.3% of
net sales in fiscal 1994. The increase in EBITDA was primarily due to the
Company's higher sales volume in fiscal 1995 and a reduction in the Company's
operating expenses as a percent of net sales.
FISCAL 1994 COMPARED TO FISCAL 1993
Net Sales. Net sales for fiscal 1994 was $117.3 million, an increase of
$17.4 million, or 17.5%, as compared to net sales of $99.9 million in fiscal
1993. The 17.5% increase was attributable to increases in gross sales in each of
the Company's six product categories, partially offset by an increase in
discounts and allowances due to the Company's increased sales volume. Vitamins,
minerals and amino acids contributed $32.3 million, an increase of $3.2 million,
or 11.2%, as compared to $29.1 million in fiscal 1993, primarily due to
continued strong consumer interest in these products. Sports nutrition
contributed $39.9 million, an increase of $5.2 million, or 15.2%, as compared to
$34.7 million in fiscal 1993, primarily due to the increased demand for a
variety of these products. Special formulas contributed $31.0 million, an
increase of $7.4 million, or 30.9%, as compared to $23.6 million in fiscal 1993,
primarily due to the successful introduction of 18 new product formulations and
strong growth of existing product lines. Herbal supplements and phytonutrients
contributed $14.5 million, an increase of $2.5 million, or 20.8%, as compared to
$12.0 million in fiscal 1993 and herb teas contributed $4.2 million, an increase
of $1.2 million, or 40.6%, as compared to $3.0 million in fiscal 1993. The gross
sales increase in both herbal supplements and phytonutrients and herb teas is
primarily due to new product introductions, continued strong consumer interest
in existing products and increased penetration of Nature's Herbs and Alvita
products into domestic health food stores. Publishing contributed $3.4 million,
an increase of $0.7 million, or 27.4%, as compared to $2.7 million in fiscal
1993.
Gross Profit. Gross profit for fiscal 1994 was $47.1 million compared to
$37.8 million in fiscal 1993. As a percent of net sales, gross profit was 40.1%
for fiscal 1994 compared to 37.8% for fiscal 1993. The gross profit dollar
increase in fiscal 1994 compared to fiscal 1993 was due to the Company's higher
sales volumes and higher gross margins in fiscal 1994. The increase in gross
margin in fiscal 1994 compared to fiscal 1993 was attributable to a more
favorable product sales mix and higher gross margins on certain of the Company's
TWINLAB vitamins, minerals, amino acids, sports nutrition products and special
formulas. This increase in gross margin was partially offset by lower gross
margins for certain of the Company's Alvita herb tea products, which was due to
the relocation of Alvita Products, Inc.'s operations from Ronkonkoma, New York
to American Fork, Utah.
Operating Expenses. Operating expenses increased by $1.9 million, or 9.0%,
from $21.1 million in fiscal 1993 to $23.0 million in fiscal 1994. As a percent
of net sales, operating expenses declined to 19.6% in fiscal 1994 from 21.1% in
fiscal 1993. The dollar increase in operating expenses is primarily due to
higher selling, advertising and delivery expenses. The decline in operating
expenses as a percent of net sales is due partially to the Company's ability to
limit the increase in general and administrative expenses while achieving a
higher level of sales volume.
EBITDA. EBITDA was $25.0 million in fiscal 1994, an increase of $7.6
million, or 43.4%, compared to $17.4 million for fiscal 1993. EBITDA margin
increased to 21.3% of net sales in 1994 as compared to 17.5% of net sales in
fiscal 1993. The increase in EBITDA and EBITDA margin was due to increased sales
volumes together with higher gross margins and lower operating expenses as a
percent of net sales.
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<PAGE> 43
LIQUIDITY AND CAPITAL RESOURCES
For first half 1996, cash provided by operating activities was $16.8
million, and during fiscal 1995 cash provided by operating activities was $26.8
million, compared to $12.9 million in fiscal 1994 and $10.6 million in fiscal
1993. The increase in fiscal 1995 compared to fiscal 1994 and fiscal 1993 was
primarily due to higher net income and reflects higher levels of accounts
payable and accrued liabilities, partially offset by higher accounts receivable
and inventory balances due to higher levels of sales volume at the Company. Cash
used in financing activities was $24.0 million in fiscal 1995, $13.0 million in
fiscal 1994 and $7.3 million in fiscal 1993 and primarily consisted of
distributions to the Stockholders of $23.5 million, $13.6 million and $9.4
million for fiscal 1995, fiscal 1994 and fiscal 1993, respectively. Cash used in
financing activities was $10.2 million in first half 1996, reflecting the net
cash effect of the Transactions, including the payments to the Stockholders made
pursuant to the Acquisition, and distributions of $8.9 million to the
Stockholders.
Capital expenditures, including purchases under capital leases, were $0.5
million, $2.6 million, $2.5 million and $4.9 million for first half 1996, fiscal
1995, fiscal 1994 and fiscal 1993, respectively. The higher level of capital
expenditures in fiscal 1993 reflects the construction of the Company's
manufacturing facility in American Fork, Utah, which commenced operations in the
last quarter of fiscal 1993. Historical capital expenditures were primarily used
to purchase production equipment, expand capacity and improve manufacturing
efficiency. Capital expenditures are expected to be approximately $3.4 million
in fiscal 1996 and will be used to purchase manufacturing equipment and fund
plant expansion to support the Company's future growth. The Company estimates
that its historical level of maintenance capital expenditures has been
approximately $0.5 million per fiscal year. See "Business."
In connection with the Acquisition, the Company issued the Senior Preferred
Stock and the Junior Preferred Stock for aggregate consideration of $67.0
million, entered into the New Credit Facility and borrowed $53.0 million
thereunder, and issued $100.0 million principal amount of 10 1/4% Senior
Subordinated Notes due 2006. Subsequent to the Transactions, the Company repaid
approximately $3.0 million of outstanding indebtedness under the Term Loan
contained in the New Credit Facility. See "Prospectus Summary -- The
Acquisition."
Financing arrangements under which the Company is the borrower contain
certain financial and operating covenants which, among other things, require the
maintenance of a maximum leverage ratio and a minimum fixed charge ratio and
which restrict the payment of dividends and the making of loans, advances or
other distributions to TLC except in certain limited circumstances. See
"Description of New Notes" and "Description of New Credit Facility."
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the next 18 to 24 months. The
Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations and borrowings under the revolving credit
facility contained in the New Credit Facility.
One of the Company's business strategies is to pursue acquisition
opportunities, including product line acquisitions, that complement its existing
products or are compatible with its business philosophy and strategic goals.
Future acquisitions could be financed by internally generated funds, bank
borrowings, public offerings or private placements of equity or debt securities,
or a combination of the foregoing. There can be no assurance that the Company
will be able to make acquisitions on terms favorable to the Company and that
funds to finance an acquisition will be available or permitted under the
Company's financing instruments. See "Description of New Notes" and "Description
of New Credit Facility." If the Company completes acquisitions, it will
encounter various associated risks, including the possible inability to
integrate an acquired business into the Company's operations, potentially
increased goodwill amortization, diversion of management's attention and
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business -- Business Strategy."
The Natur-Pharma Merger was treated as taxable asset purchases for federal
and state income tax purposes and as a recapitalization for financial accounting
purposes. For federal and state income tax purposes, the purchase price was
allocated among the various corporations and their respective assets and
liabilities
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<PAGE> 44
based on the respective fair values as of the date of the consummation of the
Acquisition. This resulted in different book and tax asset bases for the assets
of Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab
Specialty Corporation and B. Bros. Realty Corporation, which resulted in
deferred tax assets of approximately $57.3 million which will reduce future tax
liabilities.
IMPACT OF INFLATION
Generally, the Company has been able to pass on inflation-related cost
increases; consequently, inflation has not had a material impact on the
Company's historical operations or profitability.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
Recent pronouncements of the Financial Accounting Standards Board, which
are not required to be adopted at this date, include Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting For the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and SFAS No. 123,
"Accounting for Stock Based Compensation." These pronouncements are not expected
to have a material impact on the Company's financial statements.
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<PAGE> 45
BUSINESS
GENERAL
The Company believes based upon its knowledge of the nutritional supplement
industry that it is one of the leading manufacturers and marketers of brand name
nutritional supplements sold through domestic health food stores. Since the
Company's founding in 1968 by David and Jean Blechman, the Company has
emphasized the development and introduction of high-quality, unique products in
response to emerging trends in the nutritional supplement industry. The Company
produces a full line of nutritional supplements and offers the broadest product
line in the industry with more than 800 products and 1,500 SKU's. The Company's
product line includes vitamins, minerals, amino acids, fish and marine oils,
sports nutrition products and special formulas marketed under the TWINLAB(R)
trademark and a full line of herbal supplements and phytonutrients and herb teas
marketed under the Nature's Herbs(R) and Alvita(R) trademarks, respectively.
None of the Company's products individually accounted for more than 7% of total
net sales in 1995. The Company's broad product line, strong history of new
product introductions and innovations, superior marketing and advertising
programs and premium product quality have established TWINLAB, Nature's Herbs
and Alvita as leading brands in the nutritional supplement industry.
Under the management of Mr. and Mrs. Blechman's five sons, the Company has
diversified its product line through internal growth, product development and
selected acquisitions, including the acquisition in 1989 of Natur-Pharma Inc., a
leading manufacturer and marketer of herbal supplements and phytonutrients under
the Nature's Herbs brand name, and the acquisition in 1991 of Alvita Products,
Inc., a leading marketer of herb teas. The Company has achieved increased net
sales and EBITDA every year since 1990. In particular, during the three-year
period from 1993 through 1995, the Company achieved a compound annual growth
rate in net sales and EBITDA of 22.0% and 38.6%, respectively. For the fiscal
year ended December 31, 1995, the Company achieved net sales growth of 26.8% to
$148.7 million and EBITDA growth of 33.9% to $33.5 million, as compared to
fiscal year 1994. For the six months ended June 30, 1996, the Company achieved
net sales of $81.8 million and EBITDA of $20.5 million, representing an increase
of 17.2% and 41.1%, respectively, as compared to the six months ended June 30,
1995.
The Company's products target consumers who utilize nutritional supplements
in their daily diet and who demand premium quality ingredients in a broad
variety of dosages and delivery methods. The Company's products compete
primarily in the health food store market, where the dominant competitive
factors include product attributes such as quality, potency and the uniqueness
of the product formulation. The Company sells its products domestically through
a network of approximately 60 distributors, who service approximately 11,000
health food stores and other selected retail outlets. The Company believes that
its products are available in over 90% of the health food stores in the United
States. The health food store channel of distribution has expanded significantly
in recent years and is expected to grow further as national chains, including
those which sell the Company's products such as GNC, WFM, Wild Oats Markets,
Fresh Fields, and other industry participants continue to add stores in new and
existing markets. Certain of these chains, such as GNC and WFM, manufacture and
market their own private label products in addition to selling brand name
products manufactured by third parties such as the Company. The health food
store market differs significantly from the mass market for vitamin and other
nutritional supplements where price and convenience constitute the primary bases
of competition. The nutritional supplement products sold in grocery stores, drug
stores and mass merchandisers are typically manufactured by large pharmaceutical
companies and private label manufacturers. The Company's products are also
offered in Europe, Asia, South America and other international markets through
arrangements with overseas distributors.
The Company believes it is well positioned to capitalize on the growth of
the nutritional supplement market. Based on estimates contained in the Packaged
Facts Report, the retail market for vitamins, minerals and other nutritional
supplements has grown at a compound annual rate of greater than 12% from $3.3
billion in 1991 to over $4.6 billion in 1994. Furthermore, the Company's rate of
sales growth has exceeded the industry's growth rate for each year during this
period. Packaged Facts forecasts approximately 7% annual industry growth through
the end of the decade in vitamins, minerals and supplements, which management
believes will be fueled by (i) favorable demographic trends towards older
Americans, who are more likely to
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consume nutritional supplements; (ii) product introductions in response to new
scientific research findings; (iii) the nationwide trend toward preventive
medicine in response to rising health care costs; and (iv) the heightened
understanding and awareness of the connection between diet and health. Moreover,
although the industry has grown dramatically in recent years, there is still a
large untapped domestic market as only an estimated 50% of Americans currently
consume vitamins, minerals and herbal supplements on a regular basis.
Twin Laboratories Inc. was incorporated in 1989 under the laws of the State
of Utah and maintains its principal executive offices at 2120 Smithtown Avenue,
Ronkonkoma, New York 11779. Its telephone number is (516) 467-3140. In
connection with the consummation of the Acquisition, the name of the Company was
changed from Natur-Pharma Inc. to Twin Laboratories Inc.
BUSINESS STRATEGY
The Company's strategy is to continue to enhance its leadership position in
the domestic sale of vitamins, minerals and other nutritional supplements in
health food stores and to increase its market share and sales while continuing
to improve its overall operating efficiency and financial performance. The
Company intends to capitalize on the TWINLAB brand name by growing market share
domestically, increasing penetration of the Company's other brands, continuing
to introduce new products and product extensions, and expanding internationally.
Specifically, the Company seeks to:
Capitalize on Powerful Brand Name Recognition. The Company's recognized
product quality, broad product line, strong history of new product introductions
and innovations, and superior marketing and advertising programs have
established TWINLAB, Nature's Herbs and Alvita as leading brands in the
nutritional supplement industry. Each of the Company's product categories,
including vitamins, minerals and amino acids; sports nutrition; special
formulas; herbal supplements and phytonutrients; and herb teas, have posted
double digit sales growth in each of the last three years. The Company's
extensive marketing and advertising programs have been critical components of
its products' strong brand name recognition, and management believes that the
Company offers its customers the strongest marketing and advertising support
programs in the industry. In fiscal 1995 the Company invested $11.1 million, an
increase of 27% over fiscal 1994, on marketing and advertising to promote its
products. Furthermore, since quality is a critical factor in consumer purchase
decisions, the Company believes that its premium quality ingredients, modern
manufacturing facilities and comprehensive quality control procedures have
enabled the Company to establish a competitive advantage based on the quality of
its products.
Increase Penetration in the Growing Health Food Market. Management
believes that the expansion of retail distribution channels and the strong
growth characteristics of the nutritional supplement industry provide the
Company with significant opportunities to increase sales. Management further
believes that the established brand name recognition of the Company's products
positions it to increase its penetration of shelf space as health food retailers
seek to align themselves with companies who possess strong brand names, offer a
wide range of products, demonstrate continued marketing and advertising support
and provide consistently high levels of customer service. Since Nature's Herbs
and Alvita products currently are available in only an estimated 60% and 50%,
respectively, of domestic health food stores, compared to an estimated 90% for
TWINLAB products, the Company believes that it will be able to capitalize on
health food retailers' success with the TWINLAB product line in order to
significantly increase shelf space for the Company's herbal supplements,
phytonutrients and herb teas.
Continue to Introduce New Products and Product Innovations. A cornerstone
of the Company's success has been its ability to rapidly utilize recent
scientific and medical findings in its new product development efforts. The
Company has consistently been among the first in its industry to introduce new
products and product innovations which anticipate and meet customer demands for
newly identified nutritional supplement benefits. Furthermore, the Company's
geographically diverse network of more than 60 distributors allows the Company
to achieve immediate and broad distribution for new product launches. As part of
its ongoing research and development effort, the Company maintains an extensive
database and actively researches and monitors a wide variety of publications
containing scientific and medical research. From 1991 through 1995, the Company
introduced over 350 products, with over 90 new products introduced in 1995
alone. Gross sales
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during 1995 from new products introduced in 1995 were $18.4 million, or
approximately 11% of gross sales. The Company intends to build upon its
historical success by continuing to introduce new and innovative products not
previously available in health food stores.
Build Upon Established Customer Relationships. The Company's established
relationships with distributors and health food store retailers are based upon
the Company's long-standing commitment to a high level of customer service. In
order to ensure that its customers receive prompt and reliable service, the
Company has designed a flexible and responsive manufacturing process and has
achieved a 98% fill rate for customer orders. In addition, the Company's sales
force consists of 30 dedicated sales professionals who operate in sales
territories which cover the entire continental United States and Alaska. The
primary functions of the Company's sales force are to gain better placement and
additional shelf space for the Company's products and to stay abreast of
customer needs. The sales force personnel work with direct accounts,
distributors and individual retailers to enhance knowledge of TWINLAB, Nature's
Herbs and Alvita products and to achieve maximum exposure for these products.
Increase Penetration of Foreign Markets. Management believes that there
are substantial opportunities for the Company to expand its presence in foreign
markets. The Company has a department, headed by a senior sales professional,
dedicated to increasing sales in such markets. The Company's foreign marketing
effort is primarily focused on establishing additional relationships with
leading overseas distributor organizations as a cost-effective method of
increasing international sales. The Company presently has distribution
agreements covering over 44 foreign countries and has agreements for another
seven countries currently in negotiation. In 1995, the Company had net sales of
$8.3 million to foreign markets.
Supplement Internal Growth Through Strategic Acquisitions. As the
nutritional supplement industry is highly fragmented with many companies
producing only a single product line or single product, the Company believes
that it is strategically positioned to participate in the consolidation of the
industry due to its established brand name, broad distribution capabilities and
proven ability to generate sales of its products through successful marketing
programs. Since 1989 the Company has acquired two businesses, Natur-Pharma Inc.
(Nature's Herbs) and Alvita Products, Inc., and in each case has embarked on
successful expansion programs which resulted in substantially higher sales and
EBITDA for the acquired companies. Net sales for Natur-Pharma Inc. increased
from $5.2 million in 1990 (the first full year after its acquisition) to $17.9
million in 1995, and net sales for Alvita Products, Inc. increased from $1.7
million in 1992 (the first full year after its acquisition) to $5.6 million in
1995. The Company intends to actively pursue acquisition opportunities,
including product line acquisitions, that complement its existing products or
are compatible with its business philosophy and strategic goals. Some of such
acquisition opportunities may be material and some are currently under
investigation, discussion or negotiation, including opportunities in the natural
foods and natural personal care products industries. There can be no assurance
that any such opportunities will result in a completed acquisition. Future
acquisitions could be financed by internally generated funds, bank borrowings,
public offerings or private placements of equity or debt securities, or a
combination of the foregoing. See "Risk Factors -- Risks of Future
Acquisitions."
INDUSTRY
Based on estimates in the Packaged Facts Report, the retail market for
vitamins, minerals and other supplements has grown over 12% annually from $3.3
billion in 1991 to $4.6 billion in 1994. The herbal supplements and herb tea
market has grown at a compound annual growth rate of over 10% since 1991 to
approximately $1.1 billion in 1995. Sports nutrition products have grown 9%
annually since 1991 to over $1.2 billion in 1994. The Company believes that
these market segments will continue to experience strong growth due to recent
scientific research suggesting potential health benefits from regular
consumption of vitamins and other nutritional supplement products, increasing
national interest in preventive health measures and favorable demographic trends
that indicate increased usage of vitamins and other nutritional supplements.
Packaged Facts estimates compound annual growth rates in the market for
vitamins, minerals and other supplements of approximately 7% from 1994 through
1999. The market for herbal supplements and herb teas is projected to grow over
11% annually from 1994 through 1999, while sports nutrition sales are projected
to increase 8% annually from 1994 through 1999.
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The Company expects that the aging of the United States population,
together with a corresponding increased focus on preventive health measures,
will result in increased demand for nutritional supplement products. According
to Congressional findings that accompanied the Dietary Supplement Health and
Education Act of 1994, national surveys reveal that almost 50% of Americans
regularly consume vitamins, minerals and herbal supplements. The 35-and-older
age group of consumers, which represent 78% of regular users of vitamin and
mineral supplements, is expected to grow dramatically over the next two decades.
Specifically, based on data provided by the U.S. Bureau of the Census, from 1990
to 2010, the 35-44 and 45-and-older age groups are projected to grow at rates
175% and 225% faster than the general U.S. population, respectively. In
addition, the "baby boom echo" (the children of baby boomers) is projected to
result in substantial growth in the 16-21 age group, the largest segment of
consumers of sports nutrition products. The Company expects that growth in this
age group will result in increased demand for its sports nutrition products.
Vitamins and other nutritional supplements are sold primarily through six
channels of distribution: health food stores, drug stores, supermarkets and
other grocery stores, discount stores, mail order and direct sales
organizations. Mass market retailers (drug stores, grocery stores and discount
stores) account for approximately 60% of sales, while health food stores, mail
order and direct selling account for approximately 40% of sales.
The United States health food store market is comprised of approximately
11,000 stores, which are generally either independently owned or associated with
one of several regional or national chains, including GNC and WFM. According to
a 1994 retail survey, nutritional supplements account for over 41% of a typical
health food store's sales. Moreover, 54% of health food retailers state that
these products are their primary product. The health food store channel of
distribution has grown significantly in recent years and is expected to continue
to grow as customers of the Company, such as GNC, WFM, Wild Oats Markets, Fresh
Fields, and other industry participants continue to add stores in new and
existing markets. The growth in the health food channel of distribution is
partially attributable to the general growth in natural product sales. Natural
products are defined as products that are minimally processed, environmentally
friendly, largely or wholly free from artificial chemicals and, in general, as
close to their natural states as possible. Natural product industry sales have
consistently grown at nearly 10% per year since 1988, even during the recession
of the early 1990s. During 1994, natural products industry sales rose 23% to
$7.6 billion. The rate of growth accelerated from 7% in 1990 to 10%, 14% and 18%
in 1991, 1992 and 1993, respectively.
PRODUCTS
The Company has a highly diversified array of products and product
categories, each of which achieves strong gross margins. The Company
manufactures and markets over 800 products and over 1,500 SKU's in five product
categories: vitamins, minerals and amino acids; sports nutrition; special
formulas; herbal supplements and phytonutrients; and herb teas. The Company also
operates a subsidiary which publishes health, fitness and nutrition-related
publications.
The following table sets forth certain information concerning each of the
Company's product categories in fiscal 1995.
<TABLE>
<CAPTION>
THREE-YEAR
COMPOUND ANNUAL
NUMBER OF PERCENTAGE OF GROSS SALES
PRODUCT CATEGORY SKU'S TOTAL GROSS SALES GROWTH
--------------------------------------------- --------- ----------------- ---------------
<S> <C> <C> <C>
Vitamins, Minerals and Amino Acids........... 315 22.8% 12.9%
Sports Nutrition............................. 285 33.1 24.6
Special Formulas............................. 309 25.4 32.0
Herbal Supplements and Phytonutrients........ 465 12.2 28.7
Herb Teas.................................... 143 3.5 39.0
Publishing................................... N/A 3.0 33.1
--------- ------ -----
1,517 100.0% 24.4%
======== ============= =============
</TABLE>
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Vitamins, Minerals and Amino Acids. The vitamins, minerals and amino acids
category is comprised of a complete line of vitamins, minerals and amino acids
marketed under the TWINLAB brand name, including multivitamins and single-entity
vitamins (such as B-complex, C and E), minerals (such as calcium and magnesium)
and amino acids (such as glutamine and carnitine). These products are available
in a variety of delivery forms, including liquid, powder, capsule and tablet to
accommodate a variety of consumer preferences. This category targets a broad
array of health conscious consumers, with particular emphasis on consumers who
utilize nutritional supplements in their daily diet and who demand premium
quality ingredients in a broad variety of dosages and delivery methods.
Sports Nutrition. The sports nutrition category includes a wide variety of
nutritional supplements designed for and targeted to athletes. Sports nutrition
products include Hydra Fuel and Ultra Fuel drinks, which replenish glucose and
electrolytes depleted during strenuous exercise; and DietFuel, RxFuel, and
Ripped Fuel, which are marketed, as part of a low fat diet and exercise program,
for the preservation of lean body mass and the building of muscle mass. The
Company's sports nutrition products are utilized by both amateur and
professional athletes in a variety of competitive sports. The Company believes
that its strong sports nutrition business serves to increase the Company's brand
awareness among customers who, as they grow older, will shift their buying
patterns to include vitamins, minerals and herbal products, and who, based on
their positive experiences with the Company's brand name, are more likely to
purchase products from the Company's other product categories.
Special Formulas. The special formulas category consists of a broad
assortment of products formulated with specific health conditions or objectives
in mind. Special formulas are primarily targeted to sophisticated users of
health related products, including regular customers of health food stores.
Examples include OcuGuard, which is formulated for nutritional support of the
eyes, MaxiLIFE, which offers an advanced antioxidant formula, and Coenzyme
Q(10), which is designed for cardiovascular health. In addition, the Company
sells a variety of fish and marine oils in a number of different delivery forms
which offer a multitude of nutritional benefits, including favorable effects on
cardiovascular health.
Herbal Supplements and Phytonutrients. Herbal supplements and
phytonutrients (nutrients from botanical sources that are considered to have
medicinal properties) have become increasingly important categories in health
food stores. Through its Nature's Herbs product line, the Company produces a
full line of herbal supplements and phytonutrients which offer natural
alternatives to over-the-counter ("OTC") medications. The Company manufactures
and markets approximately 400 herbal and botanical supplements which are
produced at the Company's modern FDA registered manufacturing facility in
American Fork, Utah and sold under the Nature's Herbs brand name. Nature's Herbs
products include single herbs, such as saw palmetto, garlic, gingko, ginseng and
golden seal; traditional combinations, such as echinacea-golden seal;
standardized extracts, such as Bilberry Power and Milk Thistle Power sold under
the POWER HERBS(R) brand name; and natural HealthCare product formulations, such
as Allerin and Coldrin. Nature's Herbs products are packaged using the
innovative FRESH CARE(R) System developed by the Company. The FRESH CARE System
is the first all-glass and antioxidant-protected herbal packaging system that
helps remove oxygen while locking out air, moisture and light in order to
maintain potency and to extend freshness. Management believes that the
association of the Nature's Herbs product line with TWINLAB's strong name brand
recognition and reputation for premium quality and service, combined with the
increased penetration of herbal supplements and phytonutrients in the growing
health food store channel of distribution, have contributed to the rapid growth
experienced by this product line.
Herb Teas. Through its Alvita product line, the Company offers
approximately 100 herb teas in both single use bags and bulk. Alvita is a
leading brand of herb teas and is one of the most recognizable tea brands sold
through health food stores. Alvita was founded in 1922 and is one of the
nation's oldest herb tea companies. Alvita purchases tea in bulk form,
formulates blends of natural herb teas and designs the packaging for its
products. Alvita's teas are currently blended and packaged by an independent
contractor. Representative Alvita teas include Peppermint Leaf, Chamomile,
Echinacea, Golden Seal, Ginger and Senna Leaf, as well as new-age blends such as
Chinese Green Tea, available in a choice of citrus flavors, and TrimTime
Thermogenic Diet Tea. Alvita markets its products with an environmentally
conscious theme by packaging bulk tea and tea bags in paper and by not utilizing
shrink wrap for either its outer boxes or tea bags.
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Alvita recently launched a new line of herbal tea blends named Herbal Remeteas,
including Highland Lullaby, Manchurian Brain Blend, Jamaica Digesti Brew, and
Canadian Natur-Tussin. The Company believes that significant opportunities for
product line expansion exist in combining Alvita teas and other nutritional
supplements to create a new delivery form for traditional herbal supplements and
phytonutrients.
Publishing. Through Advanced Research Press, Inc., the Company publishes
Muscular Development, Fitness & Health, a high-quality bodybuilding and fitness
magazine featuring a scientific advisory board and contributors considered to be
among the most accomplished and knowledgeable in their respective fields. The
magazine covers recent developments and provides innovative information in the
fields of training and nutrition research, supplements, health, fitness and
diet. This publication serves as a useful vehicle to increase public awareness
of the Company's products and as an outlet for a portion of the Company's
advertising program. Muscular Development, Fitness & Health currently has a
monthly paid circulation of approximately 113,000 readers. The Company also
publishes health and fitness related books and is exploring the introduction of
new health and fitness related products.
PRODUCT DEVELOPMENT
The Company is recognized as an industry leader in new product development.
The Company closely monitors consumer trends and scientific research, and has
consistently introduced innovative products and programs in response thereto.
The Company's product development staff regularly studies over 50 different
health and nutrition periodicals, including the New England Journal of Medicine
and the Journal of the American Medical Association, in order to generate ideas
for new product formulations. Management believes that the Company's
introduction of new products has increased market share for both the Company and
its retail customers, and the Company intends to continue developing new
products and programs in the future. The Company was the first major nutritional
supplement manufacturer to introduce such industry-wide innovations as: an
all-capsule vitamin and mineral line that is well tolerated by allergy-prone
individuals; a complete line of amino acids and fish and marine oils; the most
advanced and complete array of antioxidants, including beta carotene,
L-glutathione, L-cysteine, N-acetyl cysteine (NAC) and an entirely new class of
antioxidants, including polyphenols, flavonoids and isoflavones; concentrated
Coenzyme Q(10); high potency phosphatidyl choline and patented GTF Chromium;
pioneering thermogenic products; standardized herbal extracts guaranteeing
potency (Certified Potency); the FRESH CARE packaging system, designed to
preserve potency and freshness; a full line of Ayurvedic Indian herbal products;
and a complete line of herb teas in single use bag and bulk form. From 1991
through 1995, the Company introduced over 350 products with over 90 new products
introduced in 1995 alone.
The Company's research and development expenses were $1.1 million in 1995,
$1.0 million in 1994 and $0.9 million in 1993, including the support of
scientific research at independent research centers located at major
universities and medical centers.
SALES AND DISTRIBUTION
The Company believes that its TWINLAB products are available in
approximately 90% of domestic health food stores. The Company sells its products
primarily through a network of approximately 60 distributors, which service
approximately 11,000 health food stores throughout the country and selected
retail outlets. Sales to domestic distributors represented approximately 88% of
the Company's gross sales in 1995. The Company's distributor customers include
GNC, Tree of Life, Cornucopia, Stow Mills, Nature's Best and other distributors
that supply retailers of vitamins, minerals and other nutritional supplements.
Management believes that it sells its products to every major nutritional
supplement distributor servicing health food stores and is generally the largest
independent supplier of nutritional supplements to each such distributor. The
Company is also currently expanding distribution into domestic military
exchanges.
Several of the Company's distributors, such as GNC, Cornucopia and Tree of
Life, are national in scope, but most are regional in nature and operate one or
more localized distribution centers. Generally, the Company enters into
nonexclusive area rights agreements with its domestic distributors, who are also
responsible for new account development. Retailers typically place orders with
and are supplied directly by the
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Company's distributors. In the past ten years, the Company has not lost a major
distributor customer other than through consolidation with an existing customer
of the Company. The breadth and depth of the products manufactured and the
ability to manufacture with minimal throughput times enables the Company to
maintain extremely high order fill rates, which management believes are among
the highest in the industry, with its customer base.
Tree of Life and GNC accounted for approximately 28% and 22%, respectively,
of the Company's net sales in 1995. No other single customer accounted for more
than 10% of the Company's net sales in 1995. The largest retail organization
which sells the Company's products is GNC, which operates approximately 2,400
stores.
Approximately 6%, or $8.3 million, of the Company's net sales in 1995 were
derived from international sales which originate from overseas distributor
organizations. The Company presently has distribution agreements for fifteen
European countries, including Great Britain, The Benelux Countries and the
Scandinavian countries; fourteen Latin American countries, including Mexico,
Brazil and Paraguay; eight Middle Eastern countries, including Israel and Saudi
Arabia; and various other countries in the Far East and the Caribbean. The
Company also has agreements for another seven countries currently in
negotiation.
MARKETING AND CUSTOMER SALES SUPPORT
The Company's marketing strategy, which centers around an extensive
advertising and promotion program, together with the Company's customer sales
support services have been critical components of the Company's growth, strong
brand name recognition and leading position within the nutritional supplement
industry. Management believes that the levels of its advertising and promotional
support and of its customer service rank among the highest in the industry.
The Company's marketing and advertising expenditures were approximately
$11.1 million in 1995, $8.7 million in 1994 and $7.1 million in 1993. Of the
Company's $8.4 million in 1995 advertising expenditures, approximately $5.5
million, or 65%, was spent on print advertising, approximately $2.0 million, or
24%, was spent on television and radio advertising and approximately $0.9
million, or 11%, was spent on production of advertising materials. As the
Company's customers align themselves with fewer vendors of brand name products,
the Company believes that its strong commitment to advertising and promotion
will continue to constitute a significant competitive advantage. The Company's
advertising strategy stresses brand awareness of the Company's various product
segments in order to generate purchases by customers and also communicates the
points-of-difference between the Company's products and those of its
competitors.
A significant portion of the Company's advertising budget is focused on
advertisements in magazines. The Company regularly advertises in consumer
magazines such as Better Nutrition, Delicious, Vegetarian Times, Let's Live,
Natural Health, New Age Journal, Bicycling, VeloNews, Triathlete, Runner's
World, Muscle & Fitness, Flex, and Ironman, as well as trade magazines such as
Natural Foods Merchandiser, Vitamin Retailer, Nutrition Science News, Health
Foods Business and Whole Foods.
Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as running competitions,
including the Boston Marathon and the Los Angeles Marathon, and bodybuilding
competitions, including the Arnold Classic and the NPC National Bodybuilding
Championships, and sponsorship of health-oriented television and radio programs.
In addition, the Company promotes its products at major industry trade shows and
through in-store point of sale materials. The Company also engages athletic
personalities as well as scientists to communicate on the Company's behalf with
the trade and the public and to promote the Company's products.
The Company's established customer relationships are based upon the
Company's long-standing commitment to a high level of customer service. The
Company's sales force currently consists of 30 dedicated sales professionals
whose primary functions are to gain better placement and additional shelf space
for TWINLAB, Nature's Herbs and Alvita products and to stay abreast of customer
needs. These sales representatives are assigned to specific territories covering
the entire continental United States and Alaska. These personnel work with
direct accounts, distributors and individual retailers to enhance knowledge of
the
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Company's products and to maximize exposure for TWINLAB, Nature's Herbs and
Alvita products. An additional three person sales and marketing staff supports
Nature's Herbs products and the servicing of customer needs. The Company also
designs and supplies marketing literature to help educate retailers and
consumers as to the benefits of the Company's products.
The Company operates an in-house customer service department to respond to
inquiries requesting information concerning product applications, background
data, ingredient compositions and the efficacy of products. The department is
currently staffed by three nutrition experts.
MANUFACTURING AND PRODUCT QUALITY
Virtually all of the Company's TWINLAB products are manufactured at the
Company's 80,000 square foot manufacturing facility located in Ronkonkoma, New
York. Herbal supplements and phytonutrients are manufactured at the Company's
48,000 square foot FDA registered manufacturing facility in American Fork, Utah.
Herb teas are currently packaged by an independent contractor and are warehoused
at the American Fork, Utah, facility. The Company's two modern manufacturing
facilities provide the Company with the capability to meet customers' sales
demands with a prompt response time and to maintain the highest level of quality
control. The Company is continuously upgrading its facilities and enhancing its
manufacturing capabilities through new equipment purchases and technological
improvements. Management believes that the Company's manufacturing facilities
are among the most advanced in the nutritional supplement industry. In 1995, the
Company acquired additional property adjacent to its American Fork, Utah,
facility to provide additional plant capacity for the operations of the
Natur-Pharma (Nature's Herbs) and Alvita Products Divisions of the Company. The
Company is constructing an 8,500 square foot addition to its Utah facility at a
cost of approximately $700,000. Management believes that the Company's Utah
facility will be sufficient to enable the Company to meet sales demand for the
foreseeable future and that its New York facility will be sufficient to meet
sales demand for TWINLAB products for approximately three years. Management
believes that it will have the option to lease additional space or to construct
a new facility at such time. The Company expects to enter into a contract for
the purchase of an approximately 110,000 square foot facility near its current
owned facility in Ronkonkoma, New York, which would be used to expand the
Company's manufacturing and warehousing capabilities. The transaction, which
will be subject to a number of customary conditions, is expected to close in
November 1996. The cost to the Company of the facility, including anticipated
renovations, is expected to aggregate approximately $6.0 million. There can be
no assurance at this time that the Company will acquire this facility.
The Company's modern manufacturing operations feature pharmaceutical
quality blending, filling and packaging capabilities, which enable the Company
to offer quality and consistency in formulation and delivery. The Company
operates flexible manufacturing lines which enables it to efficiently and
effectively shift output among various products as dictated by customer demand.
The Company is capable of producing over 25 million capsules and tablets, over
100,000 pounds of blended powder and up to 2,500 gallons of liquid preparations
per day. The Company has six high-speed capsule and tablet packaging lines, two
high-speed liquid filling lines, two powder filling lines and one chewable
tablet packaging line which are capable of operating simultaneously, at its
Ronkonkoma, New York, and American Fork, Utah, facilities. The Company
manufactures the powders used in its line of single-serving sports drink
products but utilizes a contract bottler for the hydration and bottling of these
products. The Company operates on a 24-hour work day that includes two
production shifts and a third shift dedicated solely to cleaning, maintenance
and equipment set-up.
The Company sources its raw material needs from over 200 different
suppliers, including some of the largest pharmaceutical and chemical companies
in the world. The Company's raw materials and packaging supplies are readily
available from multiple suppliers, and the Company is not dependent on any
single supplier for its needs. No single supplier accounted for more than 10% of
the Company's total purchases in 1995.
The Company's quality standards are a critical factor in consumer purchase
decisions, and the Company believes it has established a competitive advantage
based on the quality of its products. All of the Company's capsule and tablet
products are visually inspected before being packaged in virtually light-proof
amber glass for better product freshness and stability. Moreover, each of the
Company's products undergoes comprehensive quality control testing procedures
from the receipt of raw materials to the release of the packaged product.
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The Company utilizes real-time computerized monitoring of its manufacturing
processes to ensure proper product weights and measures. In addition, the
Company maintains two in-house laboratories with state-of-the-art testing and
analysis equipment where the Company performs most of its testing, including
stability tests, active component characterization utilizing thin-layer and
high-pressure liquid chromatography, and UV visible and infrared spectrometry.
The Company contracts with independent laboratories to perform the balance of
its testing requirements. A team of 50 full-time quality assurance professionals
regularly conducts a wide variety of visual and scientific tests on all
manufactured products, and samples of raw materials and finished products are
retained for quality control purposes for up to four years.
The Company has a strong commitment to maintaining the quality of the
environment. All of the Company's plastic containers are recyclable and,
wherever possible, the Company uses recyclable glass. The Company was also one
of the first companies in the industry to use biodegradable starch pellets for
packing materials. In addition, the Company has removed most solvents from its
production processes (using natural, environmentally-safe alternatives) and
helped develop a special glue, for manufacturing purposes, that contains
virtually no harmful hydrocarbons. The Company believes it is in material
compliance with all applicable environmental regulations.
COMPETITION
Within the nutritional supplement industry, suppliers can be divided into
three major categories: specialty firms, like the Company, which focus on
vitamins, minerals and other nutritional supplements targeted to health food
store retailers; major pharmaceutical companies and private label contractors,
which sell vitamins and other nutritional supplements that are targeted to mass
market retailers; and direct sale and mail order companies.
The domestic nutritional supplement industry that targets products to the
health food store market is highly fragmented, with a number of small
competitors involved in manufacturing and marketing vitamin and other
nutritional supplement products to health food retailers and distributors. Most
of these companies are relatively small businesses operating on a local or
regional level. Although most companies are privately held, resulting in the
Company's inability to precisely assess the size of its competitors, management
believes that the Company is substantially larger than the next largest firm
that targets independently-owned health food stores and that, among competitors
which sell through independent distributors, it is the largest company which
manufactures a majority of its own products.
The Company's principal competitors in the health food store market include
Nutraceuticals, Weider/ Schiff, Nature's Way, Solgar and Nature's Plus. Private
label products of the Company's customers also provide competition to the
Company's products. For example, a substantial portion of GNC's vitamin and
mineral supplement offerings are products offered under GNC's own private label.
Many of the Company's competitors in markets other than the health food store
market, including the major pharmaceutical companies, have substantially greater
financial and other resources than the Company.
The Company believes that the growing number of health food retailers are
increasingly likely to align themselves with those companies which offer a wide
variety of high quality products, have a loyal customer base, support their
brands with strong marketing and advertising programs and provide consistently
high levels of customer service. The Company believes that it competes favorably
with other nutritional supplement companies because of its comprehensive line of
products, premium brand names, commitment to quality, ability to rapidly
introduce innovative products, competitive pricing, high customer-order fill
rate, strong and effective sales force and distribution network, and
sophisticated advertising and promotional support. The wide variety and
diversity of the forms, potencies and categories of the Company's products are
important points of differentiation between the Company and many of its
competitors.
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REGULATORY MATTERS
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 FTC, the CPSC, the USDA and the EPA.
These activities are also regulated by various agencies of the states,
localities and foreign countries to which the Company's products are distributed
and in which the Company's products are sold. The FDA, in particular, regulates
the formulation, manufacture, and labeling of vitamin and other nutritional
supplements.
On October 25, 1994, the President signed into law the DSHEA. This new law
revises the provisions of the FFDC Act concerning the composition and labeling
of dietary supplements and, in the judgment of the Company, is favorable to the
dietary supplement industry. The legislation creates a new statutory class of
"dietary supplements." This new class includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet, and the
legislation grandfathers, with certain limitations, dietary ingredients on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient, one not on the market before October 15, 1994, will require
evidence of a history of use or other evidence of safety establishing that it
will reasonably be expected to be safe, such evidence to be provided by the
manufacturer or distributor to the FDA before it may be marketed. The DSHEA also
invalidates the FDA's prior enforcement theory that dietary supplements are food
additives requiring pre-market approval.
The substantial majority of the products marketed by the Company are
classified as dietary supplements under the FFDC Act. Advertising and label
claims for dietary supplements have been regulated by state and federal
authorities under a number of disparate regulatory schemes. There can be no
assurance that a state will not interpret claims presumptively valid under
federal law as illegal under that state's regulations, or that future FDA or FTC
regulations or decisions will not restrict the permissible scope of such claims.
The labeling requirements for dietary supplements have not been clearly
established. In December 1995, the FDA issued proposed regulations to govern the
labeling of dietary supplements. These regulations are expected to become final
later in 1996, and would require the Company to revise all of its dietary
supplement labels in 1997. The FDA has informally stated that it will, subject
to public comment, withhold enforcement of these regulations until January 1,
1998.
A small portion of the herb products sold by the Company are labeled as
over-the-counter drugs as opposed to dietary supplements. The regulatory status
of these products is determined by the classification of their active
ingredients. If certain of these active ingredients are determined to not be in
compliance with the applicable FDA Over-The-Counter Drug Monographs, which
prescribe permissible ingredients and permit the sale of such products, the
Company could be required to relabel or reformulate such products.
Some of the products marketed by the Company as dietary supplements may be
determined to be conventional foods by regulatory authorities. In such case,
labeling changes could be required to conform the labels for such products to
existing conventional food labeling regulations.
Both foods and dietary supplements are subject to the NLEA which prohibits
the use of any health claim for foods, including dietary supplements, unless the
health claim is supported by significant scientific agreement and is
pre-approved by the FDA. To date, the FDA has approved the use of health claims
for dietary supplements only in connection with calcium for osteoporosis, and
folic acid for neural tube defects. However, among other things, the DSHEA
amends, for dietary supplements, the NLEA by providing that "statements of
nutritional support" may be used in labelling for dietary supplements without
FDA pre-approval if certain requirements, including prominent disclosure on the
label of the lack of FDA review of the relevant statement, possession by the
marketer of substantiating evidence for the statement and post-use notification
to the FDA, are met. Such statements may describe how particular nutritional
supplements affect the structure, function or general well-being of the body
(e.g. "promotes your cardiovascular health").
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation,
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of certain of the Company's products. Compliance with such foreign governmental
regulations is generally the responsibility of the Company's distributors for
those countries. These distributors are independent contractors over whom the
Company has limited control.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
The Company's American Fork, Utah, facility is registered with the FDA as a
manufacturer of OTC drugs and is subject to periodic inspection by the FDA.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company.
FTC Proceeding
In 1989, Twin Laboratories Inc. received an informal inquiry from the New
York Regional Office of the FTC seeking substantiation for certain advertising
claims made for a segment of its "Fuel" bodybuilding, sports nutrition and
weight loss line of products. In response, Twin Laboratories Inc. submitted
scientific substantiation and financial information to the FTC. The Company has
been negotiating this matter with the FTC staff since December 1994.
In August 1995, the FTC staff informed the Company that it intended to
recommend to the FTC Commissioners that the FTC file a civil administrative
complaint against the Company unless the Company agreed to settle the matter by
a proposed consent order (the "Consent Order"), which Consent Order has since
been the subject of negotiations between the FTC staff and the Company. In
August 1996, the Company received a revised draft of the Consent Order which
provides for, among other things: (1) injunctive relief prohibiting the Company
from making certain muscle building and fat burning claims for four of its Fuel
products and substantially similar products thereto without scientific
substantiation and (2) a payment of $200,000 to the FTC. If a consent order is
entered, violations of the terms thereof would allow the FTC to seek maximum
penalties of $10,000 per day for each violation. The Company has determined at
the current time not to settle this matter on the terms set forth in the most
recent draft of the Consent Order, which draft the FTC has stated is its final
offer for a negotiated settlement. The Company cannot at this time predict
whether it will be able to reach a negotiated settlement of this matter.
The FTC staff recently informed the Company that unless a settlement is
reached, it would proceed to recommend to the FTC Commissioners that a civil
administrative complaint seeking injunctive relief be issued against the
Company. If such a recommendation were to be made by the FTC staff, the Company
will be entitled to a hearing before the FTC Commissioners to present its
position that the administrative complaint should not be issued. Should a
complaint be issued, there can be no assurance that any injunctive relief and
other terms of any eventual litigated resolution of this matter will be limited
to those sought in the most recent draft of the Consent Order.
In addition, the FTC staff has notified the Company that if the FTC were
successful in an administrative litigation against the Company, the FTC may
thereafter sue the Company in federal court seeking redress payments to
consumers who purchased products containing claims that are subject to any
administrative order that results from such administrative litigation. It is
premature to assess whether a federal court would grant such a remedy or how any
consumer redress payments would be calculated.
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The Company believes that it has adequate scientific substantiation or the
claims at issue, and intends to vigorously defend this matter if a settlement is
not reached. There can be no assurance that any injunctive relief or monetary
payment (including the potential consumer redress payments) resulting from a
negotiated or litigated resolution of this matter would not have a material
adverse effect on the Company.
Ma Huang
Approximately 14 of the Company's products include a Chinese herb known as
"Ma Huang," which contains naturally-occurring ephedrine. Such products
accounted for 11.7% of the Company's net sales for the fiscal year ended
December 31, 1995, and 10.5% of the Company's net sales for the six months ended
June 30, 1996. The Company's products which contain Ma Huang are generally
marketed for bodybuilding, weight loss, sports nutrition and for other purposes,
including increased endurance and energy, generally in conjunction with diet or
exercise, and as natural alternatives to over-the-counter medications.
Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects,
including the deaths of several individuals. The FDA has placed on public file a
list of over 600 such alleged adverse events. The death in Florida of a Long
Island college student on March 6, 1996, reportedly from over-ingestion of an
ephedrine-containing product (which was not manufactured or distributed by the
Company), received significant coverage in the press and national media. A press
release dated August 2, 1996 issued by the Massachusetts Department of Public
Health reported that a 23 year-old college student died in April 1996 of a heart
problem associated with ephedrine toxicity from the ingestion of a protein drink
containing Ma Huang. While press coverage and the deceased's death certificate
have reported that such protein drink is Ripped Fuel, one of the Company's
ephedrine-containing products, the Company does not have sufficient information
to make an assessment of this matter.
On April 10, 1996, the FDA issued a statement (the "Statement") warning
consumers not to purchase or consume dietary supplements containing ephedrine
with labels that often portray the products as apparent alternatives to illegal
street drugs. None of the Company's products which contain Ma Huang are marketed
for such purpose. The Statement explains that the products portrayed as apparent
alternatives to illegal street drugs pose significant health risks to
consumers -- dizziness, headache, gastrointestinal distress, irregular
heartbeat, heart palpitations, heart attack, strokes, seizures, psychosis and
death -- and that the labels on such products claim or imply that they produce
such effects as euphoria, increased sexual sensations, heightened awareness,
increased energy and other effects. In August 1996, the FDA sent warning letters
to several companies marketing such products as alternatives to illegal street
drugs, indicating that enforcement action with respect to such products may be
initiated.
In August 1996, the FDA convened a Food Advisory Committee (the
"Committee") meeting to review and make recommendations concerning the safety
and appropriate labeling of Ma Huang-containing dietary supplements. The FDA,
after considering the differing views expressed at the Committee meeting, may
propose regulations that will require reduced dosages coupled with strict
manufacturing standards, labeling restrictions and a prohibition against
combining Ma Huang with other central nervous system stimulants such as
caffeine. There can be no assurance that such regulations will not prohibit
either the sale of dietary supplements containing Ma Huang in combination with
any other ingredients or the sale of all dietary supplements containing any Ma
Huang. The promulgation of such regulations would require the Company to
reformulate and relabel substantially all of its Ma Huang products. There can be
no assurance as to the final form or content of any FDA regulations concerning
Ma Huang-containing dietary supplements or as to the effect that any attendant
adverse publicity or resulting reformulation and relabeling of the Company's
products would have on the sales of such products. The Company has experienced
reduced sales of its Ma Huang-containing products due to the adverse publicity
described above. The Company recently introduced a line of Ma Huang-free
products as alternatives to certain of its bodybuilding, weight loss and sports
nutrition products which currently contain Ma Huang. There can be no assurance
that such products will be received favorably by the Company's customers or that
sales of such alternative products would offset any decrease in sales
attributable to any reformulation and relabeling of the Company's Ma Huang
products.
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A number of states and local governmental entities have instituted bans on
sales of Ma Huang-containing products that are portrayed as apparent
alternatives to illegal street drugs; many other states and foreign
jurisdictions limit ephedrine levels and require appropriate warnings on product
labels, regulate ephedrine-containing products as controlled substances or
prohibit the sales of products which contain Ma Huang other than by licensed
pharmacists. For instance, the legislature of Nassau County, New York recently
enacted a local law prohibiting the sale of all ephedrine-containing products to
persons under 18 years of age, and prohibiting the sale or distribution of all
ephedrine-containing products claiming to produce such effects as euphoria,
increased sexual sensations, heightened awareness, increased energy, legal
"highs" and other similar effects (although the law allows the sale of
ephedrine-containing products if intended and labeled for use as weight loss
aids or sports nutrition products, such as those marketed by the Company, for
sale to and use by those 18 years or older). There are also federal, state and
local proposals to broaden the regulation of, or otherwise limit or prohibit,
the sale of products containing ephedrine, including a New York State bill which
would regulate any ephedrine-containing product, including Ma Huang, as a
controlled substance to be dispensed only by prescription, no matter what
labeling claims are made, and a recently introduced Congressional bill which
would regulate as a drug any Ma Huang dietary supplement claiming to produce
euphoria, heightened awareness or similar mental or psychological effects.
The Company's products containing Ma Huang may become subject to further
federal, state, local or foreign laws or regulations, which could require the
Company to: (i) reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or (ii) relabel its products with different warnings
or revised directions for use. Even in the absence of further laws or
regulations, the Company may elect to reformulate and/or relabel its products
which contain Ma Huang. While the Company believes that its Ma Huang products
could be reformulated and relabeled, there can be no assurance in that regard or
that reformulation and/or relabeling would not have a material adverse effect on
sales of such products.
The Company and others are defendants in a wrongful death action originally
commenced in July 1995 with respect to one of the Company's products containing
Ma Huang and with respect to a product that does not contain Ma Huang
manufactured by another defendant. There can be no assurance that the Company
will not be subject to further private civil actions with respect to its
products which contain Ma Huang. See "-- Legal Matters."
EMPLOYEES
At June 30, 1996, the Company employed 557 persons, of which 114 were
involved in executive, sales and administrative activities. The balance of the
Company's employees were engaged in production, packaging and shipping
activities. None of the Company's employees are covered by a collective
bargaining agreement, and management considers relations with its employees to
be good.
PROPERTIES
The Company owns a modern vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. This 80,000 square foot facility
also houses the Company's executive offices. The Company leases 26,300 square
feet of warehouse space in Ronkonkoma, 50,000 square feet of warehouse space in
Hauppauge, New York (the "Hauppauge Warehouse"), and 5,000 square feet of office
space in Ronkonkoma. The Company has settled a dispute with the landlord of the
Hauppauge Warehouse whose August 1996 notice of petition seeking the Company's
eviction from the facility was granted on September 19, 1996. As a result of
such settlement, the Company will be required to vacate the facility by November
15, 1996 and to relocate its primary distribution facility. The Company believes
that the settlement of this matter will not have an adverse effect on its
results of operations or financial condition. In addition, the Company owns a
modern FDA-registered 48,000 square foot manufacturing facility in American
Fork, Utah. This facility, which was constructed in 1993, houses office,
manufacturing and warehousing facilities for the operations of the Natur-Pharma
(Nature's Herbs) Division of the Company and office and warehousing facilities
for the operations of the Alvita Products Division of the Company.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. In 1995, the Company acquired
additional property adjacent to its American Fork, Utah, facility to provide
additional plant capacity for the operations of the Natur-Pharma (Nature's
Herbs) and
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Alvita Products Divisions of the Company. The Company is constructing an 8,500
square foot addition to its Utah facility at a cost of approximately $700,000.
Management believes that the Company's Utah facility will be sufficient to
enable the Company to meet sales demand for the foreseeable future and that its
New York facility will be sufficient to meet sales demand for TWINLAB products
for approximately three years. Management believes that it will have the option
to lease additional space or to construct a new facility at such time.
The Company expects to enter into a contract for the purchase of an
approximately 110,000 square foot facility near its current owned facility in
Ronkonkoma, New York, which would be used to expand the Company's manufacturing
and warehousing capabilities. The transaction, which will be subject to a number
of customary conditions, is expected to close in November 1996. The cost to the
Company of the facility, including anticipated renovations, is expected to
aggregate approximately $6.0 million. There can be no assurance at this time
that the Company will acquire this facility.
TRADEMARKS
The Company owns trademarks registered with the United States Patent and
Trademark Office and/or similar regulatory authorities in many other countries
for its TWINLAB, Nature's Herbs, Alvita and Fuel family of trademarks, and has
rights to use other names material to its business. In addition, the Company has
obtained trademarks for various of its products and has approximately 250
trademark registrations with the United States Patent and Trademark Office for
TWINLAB, Nature's Herbs and Alvita brands. Federally registered trademarks have
perpetual life, provided 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 that they have significant value in the marketing
of its products. The Company vigorously protects its trademarks against
infringement.
LEGAL MATTERS
Twin Laboratories Inc. and other encapsulators, and various distributors,
manufacturers, and retailers of added manufactured L-Tryptophan are defendants
in actions in federal and state courts seeking compensatory and, in some cases,
punitive damages for alleged personal injuries resulting from the ingestion of
products containing added manufactured L-Tryptophan. As of September 1, 1996,
Twin Laboratories Inc. was named defendant in two of these actions. The Company
believes that few new lawsuits are likely to be brought in view of the statutes
of limitations. Twin Laboratories Inc. has entered into the Indemnification
Agreement with SDA, a U.S. subsidiary of a Japanese corporation, Showa Denko,
K.K. ("SDK"). Under the Indemnification Agreement, SDA agrees to assume the
defense of all claims arising out of the ingestion of L-Tryptophan products and
to pay all legal fees and indemnify Twin Laboratories Inc. against liability in
any action if it is determined that a proximate cause of the injury sustained by
the plaintiff in the action was a constituent of the raw material sold by SDA to
Twin Laboratories Inc. or was a factor for which SDA or any of its affiliates
was responsible, except to the extent that action by Twin Laboratories Inc.
proximately contributed to the injury, and except for certain claims relating to
punitive damages, SDA appears to have been the supplier of all of the allegedly
contaminated L-Tryptophan. SDA has posted a revolving irrevocable letter of
credit for the benefit of the Indemnified Group if SDA is unable or unwilling to
satisfy any claims or judgement. SDK has unconditionally guaranteed the payment
obligations of SDA under the Indemnification Agreement. As of September 1, 1996,
130 of a total of approximately 132 suits in which the Company was a named
defendant have been dismissed or settled by SDA at no cost to the Company.
To date, the amount of damages sought in each of the remaining two
L-Tryptophan actions has not been specified. The Company's available product
liability insurance coverage of $3 million for L-Tryptophan matters in respect
of claims made prior to December 21, 1993 is not available with respect to these
two actions. There can be no assurance that when damages are specified in these
actions that the total amount thereof, if fully awarded against the Company
alone and ignoring the existence of the Indemnification Agreement, would not
have a material adverse impact upon the financial condition and results of
operations of the Company. However, the Indemnification Agreement, the defense
and resolution to date of numerous lawsuits by SDA without cost to the Company,
the multitude of defendants and the possibility that liability
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<PAGE> 59
could be assessed against or paid by other parties, have led management of the
Company, after consultation with outside legal counsel, to believe that the
prospect for a material adverse effect on the Company's results of operations or
financial condition is remote and no provision in the Company's financial
statements has been made for any loss that may result from these actions. The
Company no longer markets any products containing added manufactured
L-Tryptophan.
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability insurance coverage, the
Company currently has $75 million of product liability insurance (which does not
cover matters relating to L-Tryptophan) with a $25,000 self-insurance retention
per occurrence and $100,000 self-insurance retention in the aggregate. There can
be no assurance that such insurance will continue to be available at a
reasonable cost, or if available will be adequate to cover liabilities.
Twin Laboratories Inc. and others are named defendants in a wrongful death
action entitled Thomas Hendry v. Twin Laboratories, Inc., et al., originally
commenced in July 1995 in Fresno County (California) Superior Court (Action No.
536670-3). The plaintiff in this action alleges that his wife, Victoria Hendry,
died as a result of the ingestion of the Company's "Ripped Fuel" (a bodybuilding
product which plaintiff alleges contained Ma Huang, kola extract and chromium
picolinate) and/or "Super Dieter's Teas", a product of Laci Le Beau Tea Company,
and seeks both compensatory and punitive damages from the defendants. The
Company has answered the complaint and intends to vigorously contest the
plaintiff's claims. Discovery is not yet complete and it is premature to predict
the likely outcome of the case. However, after consultation with outside legal
counsel to the Company in this matter and after giving effect to the Company's
available product liability insurance coverage, the Company believes that the
prospect for a material adverse effect on the Company's result of operations or
financial condition is remote and no provision in the Company's financial
statements has been made for any loss that may result from this action. See
"-- Regulatory Matters."
The Company is presently engaged in various other legal actions, and
although ultimate liability cannot be determined at the present time, the
Company is currently of the opinion that the amount of any such liability from
these other actions and the lawsuit described in the preceding paragraph, after
taking into consideration the Company's insurance coverage, will not have a
material adverse effect on its results of operations and financial condition.
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<PAGE> 60
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Brian Blechman................... 46 Executive Vice President, Treasurer and Director
Dean Blechman.................... 39 Executive Vice President and Director
Neil Blechman.................... 46 Executive Vice President, Secretary and Director
Ross Blechman.................... 43 Chairman of the Board, Chief Executive Officer and
President
Steve Blechman................... 43 Executive Vice President and Director; Chairman of
the Board, Chief Executive Officer and President of
ARP
Stephen Welling.................. 42 President of Natur-Pharma (Nature's Herbs) Division
of Twin Laboratories Inc.
John G. Danhakl.................. 40 Director
Jennifer Holden Dunbar........... 33 Director
Jonathan D. Sokoloff............. 39 Director
</TABLE>
Brian Blechman, became an Executive Vice President and Director of the
Company upon consummation of the Acquisition. Mr. Blechman joined Twin
Laboratories Inc. in 1972 and served as Vice President, Purchasing & Quality
Control of the Company prior to the Acquisition. He is responsible for the
purchasing of all raw materials and has final responsibility for all quality
control and management of the plant facilities. He is also responsible for
capital expenditures for plant and equipment and for product formulations.
Dean Blechman, became an Executive Vice President and Director of the
Company upon consummation of the Acquisition. Mr. Blechman joined Twin
Laboratories Inc. in 1979 and served as Vice President, Sales of the Company
prior to the Acquisition. He has responsibility for overseeing the national
sales force and distributor network. Mr. Blechman is on the board of directors
of the National Nutritional Foods Association, a leading trade organization that
governs the industry's retailers, distributors and manufacturers.
Neil Blechman, became an Executive Vice President and Director of the
Company upon consummation of the Acquisition. Mr. Blechman joined Twin
Laboratories Inc. in 1972 and served as Vice President, Marketing & Advertising
of the Company prior to the Acquisition. He is primarily responsible for
directing marketing and advertising strategies, the design of product packaging
and point of sale materials, the production and creation of merchandising
displays, advertising, promotional activities and trade show activities.
Ross Blechman, became Chairman of the Board, Chief Executive Officer,
President and Director of the Company upon consummation of the Acquisition. Mr.
Blechman jointed Twin Laboratories Inc. in 1974 and served as Vice President,
Production of the Company prior to the Acquisition. He is primarily responsible
for plant operations, shipping, warehouse management, and for assuring that
quality standards are maintained. He is also responsible for MIS and human
resource functions. Mr. Blechman also directs the operations of the Alvita
Products Division of the Company.
Steve Blechman, became an Executive Vice President and Director of the
Company and Chairman of the Board, Chief Executive Officer and President of ARP
upon consummation of the Acquisition. Mr. Blechman joined Twin Laboratories Inc.
in 1974 and served as Vice President, Product Development & Marketing of the
Company prior to the Acquisition. He is involved in product development and
marketing, and is primarily responsible for developing new products for the
TWINLAB, Nature's Herbs and Alvita brands. Mr. Blechman also directs the
operations of ARP and the customer service department of Twin Laboratories Inc.
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<PAGE> 61
Stephen Welling, became the President of the Natur-Pharma (Nature's Herbs)
Division of Twin Laboratories Inc. upon consummation of the Acquisition. Mr.
Welling joined Natur-Pharma Inc. in 1977 as the controller and served as
President of Natur-Pharma Inc. prior to the Acquisition. Prior to his promotion
to President, Mr. Welling served as Vice President of Operations with
responsibility for manufacturing, personnel, quality management, legal affairs
and finance.
John G. Danhakl became a director of the Company upon consummation of the
Acquisition. He has been an executive officer and an equity owner of Leonard
Green & Partners, L.P. ("LGP"), a merchant banking firm which manages GEI, since
1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior
to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert
Incorporated. Mr. Danhakl is also a director of The Arden Group, Inc. and Kash
n' Karry Food Stores, Inc.
Jennifer Holden Dunbar became a director of the Company upon consummation
of the Acquisition. She joined Leonard Green & Associates, L.P. ("LGA"), a
merchant banking firm, as an associate in 1989, became a principal in 1993, and
through a corporation became a partner in 1994. Since 1994, Ms. Holden Dunbar
has also been an executive officer and equity owner of LGP. Ms. Holden Dunbar
previously was an associate with the merchant banking firm of Gibbons, Green,
van Amerongen and a financial analyst in mergers and acquisitions with Morgan
Stanley & Co. Ms. Holden Dunbar is also a director of Thrifty PayLess Holdings,
Inc., Thrifty PayLess, Inc., Kash n' Karry Food Stores, Inc. and several private
companies.
Jonathan D. Sokoloff became a director of the Company upon consummation of
the Acquisition. He joined LGA as a partner in 1990. Mr. Sokoloff has also been
an executive officer and equity owner of LGP since its formation in 1994. Mr.
Sokoloff was previously a Managing Director at Drexel Burnham Lambert
Incorporated. Mr. Sokoloff is also a director of Thrifty PayLess Holdings, Inc.,
Thrifty PayLess, Inc., Carr-Gottstein Foods Co. and several private companies.
The Company's By-laws and Certificate of Incorporation provide for the
Company's Board of Directors to be comprised of between eight and eleven
members, as determined from time to time by the stockholders. The Board is
currently comprised of eight members. Each Director holds office until the next
annual meeting of stockholders and until his successor is duty elected and
qualified, or until his earlier death, resignation or removal.
All of the Company's current Directors were nominated and elected to the
Company's Board of Directors in accordance with the Stockholders Agreement (as
hereinafter defined) as designees of GEI and the Continuing Stockholders,
respectively. See "Principal Stockholders -- Terms of the Stockholders
Agreement." Executive officers of the Company are appointed by, and serve at the
discretion of, the Board of Directors. Except for the Blechman Brothers'
familial relationships, there are no family relationships among the executive
officers or Directors of the Company.
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<PAGE> 62
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table shows the compensation
paid by the Company during the year ended December 31, 1995 ("Fiscal Year 1995")
to the five most highly compensated executive officers of the Company, who
collectively acted in a similar capacity to a chief executive officer, serving
as such at the end of Fiscal Year 1995 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FISCAL ----------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(A) COMPENSATION($)(B)
- ------------------------------------------------- ------ --------- ----------- ------------------
<S> <C> <C> <C> <C>
Ross Blechman.................................... 1995 402,461 368,145 9,527
Vice President
Brian Blechman................................... 1995 401,523 368,145 9,822
Vice President
Dean Blechman.................................... 1995 402,545 368,145 9,235
Vice President
Neil Blechman.................................... 1995 402,545 368,145 9,822
Vice President
Steve Blechman................................... 1995 402,548 368,145 9,527
Vice President
</TABLE>
- ---------------
(a) Bonuses are reported in the fiscal year earned and paid.
(b) (i) payment of premiums for term life insurance policies of $1,365 for Ross
Blechman; $1,660 for Brian Blechman; $1,073 for Dean Blechman; $1,660 for
Neil Blechman; and $1,365 for Steve Blechman, for 1995; (ii) payment of
premiums for executive medical insurance policies for each of Ross
Blechman, Brian Blechman, Dean Blechman, Neil Blechman and Steve Blechman,
of $1,250 for 1995 and (iii) payments under the Company's Profit Sharing
Plan of $6,912 for each of Ross Blechman, Brian Blechman, Dean Blechman,
Neil Blechman and Steve Blechman, for 1995. The amount set forth in this
column does not include "S" corporation dividend distributions sufficient
to pay income taxes on the earnings of the Company that were treated as
having been earned by the individual as a shareholder of the Company.
EMPLOYMENT AGREEMENTS
Upon consummation of the Acquisition, the Company entered into employment
agreements with each of the Blechman Brothers (each an "Employment Agreement").
The Employment Agreement provides that, unless a Public Offering Event (as
defined below, see "Principal Stockholders -- Terms of the Stockholders
Agreement") has occurred, the relevant individual will be employed as an
executive of the Company for a term of five years, renewable for terms of one
year thereafter. From and after the occurrence of a Public Offering Event, the
employment term is deemed to end on the third anniversary of such event;
provided that, the employment term will be automatically extended so as to
establish a three year remaining term of employment upon a termination of
employment for the purposes of the noncompetition and severance provisions of
the Employment Agreement. The Employment Agreement provides for a base salary of
$400,000 (as adjusted for inflation), in addition to other customary perquisites
and benefits. In addition to receiving a base salary, the executive is also
eligible to participate in the TLC's Bonus Plan which entitles such individual
to a bonus payment of up to 128% of his base salary for the relevant calendar
year based on annual increases in EBITDA (as defined therein) realized by the
Company for each year of the employment term. The Employment Agreement also
provides, subject to certain exceptions, that upon a termination of the
individual's employment during the term thereof (other than for "cause" as
defined therein), the Company is generally obligated to pay the individual an
amount equal to his base salary for the remaining term under the Employment
Agreement.
Upon consummation of the Acquisition, the Company entered into an
employment agreement with Stephen Welling to serve as President of the
Natur-Pharma (Nature's Herbs) Division of the Company (the "Division") (the
"Welling Employment Agreement"). The Welling Employment Agreement provides that
Mr. Welling will be employed as an executive of the Company for a term of three
years, renewable for terms
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<PAGE> 63
of one year thereafter. The Welling Employment Agreement provides for a base
salary of $135,000 (as adjusted for inflation), in addition to other customary
perquisites and benefits. In addition to receiving a base salary, Mr. Welling is
also eligible to participate in the Division Bonus Plan which entitles him to a
bonus payment up to 202.5% of his base salary for the relevant calendar year
based on annual increases in EBITDA (as defined therein) realized by the
Division for each year of the employment term. The Welling Employment Agreement
also provides, subject to certain exceptions, that upon a termination of Mr.
Welling's employment during the term thereof (other than for "cause" as defined
therein), the Company is generally obligated to pay Mr. Welling an amount equal
to his base salary for the remaining term under the Welling Employment
Agreement.
Upon consummation of the Acquisition, the Company entered into consulting
agreements with each of David and Jean Blechman (each a "Consulting Agreement").
The Consulting Agreement provides that the relevant individual be engaged as an
independent consultant to the Company for a term of five years. As consideration
for such consulting services, the Company is obligated to pay the individual an
annual consulting fee of $100,000, in addition to certain limited perquisites
and benefits.
Upon consummation of the Acquisition, the Company and TLC also entered into
non-competition agreements with each of the Stockholders (each a
"Non-Competition Agreement"). The term of the Non-Competition Agreement is equal
to the initial term of the relevant individual's employment or consulting
agreement, as the case may be. The Non-Competition Agreement generally prevents
the individual from participating in any manner in the management, operation
and/or ownership of any entity, anywhere in the world, which is engaged in
similar lines of business to those of the Company.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors are reimbursed for
their out-of-pocket expenses in attending Board meetings. Messrs. Danhakl and
Sokoloff and Ms. Holden Dunbar receive no fees in their capacities as directors,
but see "Certain Relationships and Related Transactions -- Transactions with
LGP" for a description of certain other arrangements pursuant to which LGP, of
which they (or corporations owned by them) are partners, receives compensation
from the Company.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE ACQUISITION
The Acquisition Agreement contains provisions customary for transactions of
similar size and type, including representations and warranties, which generally
will expire at the end of the fourteenth month following the month in which the
Acquisition Agreement was consummated. However, those representations and
warranties that are related to tax and environmental matters will expire,
respectively, at the date on which the applicable statute of limitations has
expired and the third anniversary of the consummation of the Acquisition
Agreement. Subject to the limitations set forth in the Acquisition Agreement
(which include, subject to certain exceptions, a $2,000,000 deductible on
liability and a maximum liability of $25,000,000), the Stockholders have agreed
to indemnify GEI, its permitted assigns and the Company against any liabilities
arising out of the breach of such representations and warranties while such
representations and warranties are still in effect. Pursuant to the Acquisition
Agreement, the Stockholders received, in addition to certain payments described
elsewhere in this Prospectus, a payment in respect of their estimated liability
for taxes on the Company's income prior to the consummation of the Transactions,
when the Company had "S" corporation status for federal income tax purposes.
This payment is subject to adjustment based on the actual tax liability as
calculated for the relevant period. In addition, certain fees, taxes and
expenses of parties to the Acquisition Agreement were or will be paid by the
Company in connection with the consummation of the Acquisition. See "Prospectus
Summary -- The Acquisition."
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<PAGE> 64
EMPLOYMENT AND CONSULTING AGREEMENTS
Upon consummation of the Acquisition, the Company entered into employment
agreements with each of the Continuing Stockholders and consulting agreements
with each of David and Jean Blechman. See "Management -- Employment Agreements."
TRANSACTIONS WITH DAVID BLECHMAN AND JEAN BLECHMAN
During the period from 1989 to 1992, Twin Laboratories Inc. assigned to
David and Jean Blechman certain promissory notes of Natur-Pharma Inc.,
representing inter-company payables, in the aggregate principal amount of
$1,500,000. These promissory notes bore interest at a rate of 10% per annum, and
$1,000,000 of the principal was repaid in 1994 and the remainder was repaid on
May 2, 1996. In June and July of 1991, Alvita Products, Inc. issued four
promissory notes payable to David Blechman and Jean Blechman in the aggregate
principal amount of $250,000. Such promissory notes bore interest at a rate of
9% per annum and were repaid in April 1994. In 1988 and 1989, ARP borrowed funds
from David Blechman and Jean Blechman in the aggregate principal amount of
$545,500. These loans were non-interest bearing, and $200,000 of the principal
was repaid in 1994 and the remainder was repaid on May 3, 1996. The Company
believes that these transactions were on terms at least as favorable to the
Company as could be obtained in transactions with independent third parties.
TRANSACTIONS WITH LGP
LGP is the investment advisor to and an affiliate of the general partner of
GEI, which after consummation of the Acquisition owns 48% of the outstanding
shares of common stock of TLC. Following consummation of the Acquisition,
Messrs. Danhakl and Sokoloff and Ms. Holden Dunbar, stockholders and directors
of the general partner of LGP, became directors of the Company. See
"Management -- Directors and Executive Officers."
Upon the consummation of the Acquisition, LGP received a fee of $1 million
for its services in arranging and structuring the Acquisition, including, among
other things, structuring and negotiating the Acquisition Agreement and the
Stockholders Agreement, arranging and negotiating the terms of the New Credit
Facility and related documents, assistance with the Offering, financial and
market analyses, and other similar consulting and investment banking services.
The majority of such services were performed on behalf of LGP by Messrs. Danhakl
and Sokoloff and Ms. Holden Dunbar.
In connection with the Acquisition, the Company entered into a Management
Services Agreement with LGP pursuant to which LGP will receive an annual
retainer fee of $400,000 plus reasonable expenses for providing certain
management, consulting and financial planning services (the "LGP Management
Fee"). The Company believes that the contacts and expertise provided by LGP in
these areas enhance the Company's opportunities and management's expertise in
these matters and that the fees to be paid to LGP fairly reflect the value of
the services to be provided by LGP. The specialized consulting services provided
by LGP overlap to some extent with the role of Messrs. Danhakl and Sokoloff and
Ms. Holden Dunbar as directors of the Company, for which they do not receive any
additional compensation. See "Management -- Director Compensation." In addition
to the LGP Management Fee, the Management Services Agreement provides that LGP
may receive reasonable and customary fees and reasonable expenses from time to
time for providing financial advisory and investment banking services in
connection with major financial transactions that may be undertaken in the
future; provided, however, that if the Continuing Stockholders maintain
ownership of more than 30% of the shares of common stock of TLC, then the
retention of LGP in connection with such major financial transactions is subject
to the approval of a majority of the Blechman Brothers then serving as directors
of the Company. The Management Services Agreement will terminate on the earlier
of its seventh anniversary or such time as GEI no longer owns two-thirds of the
shares of common stock of TLC issued to GEI pursuant to the Acquisition
Agreement.
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<PAGE> 65
PRINCIPAL STOCKHOLDERS
The shares of common stock of the Company are wholly owned by TLC.
The information in the following table sets forth certain information with
respect to the beneficial ownership of the common stock of TLC as of June 30,
1996 by (i) each person who beneficially owns more than 5% of the outstanding
shares of TLC's common stock, (ii) each executive officer of the Company, (iii)
each director of the Company and (iv) all directors and executive officers of
the Company as a group. Except as noted below, each person or entity has sole
voting and investment power with respect to the shares shown.
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF
NAME AND ADDRESS SHARES OWNERSHIP
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Green Equity Investors II, L.P. ......................................... 480,000 48%
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
John G. Danhakl(a)....................................................... 480,000 48%
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Jennifer Holden Dunbar(a)................................................ 480,000 48%
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Jonathan D. Sokoloff(a).................................................. 480,000 48%
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Brian Blechman........................................................... 89,689 9%
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Dean Blechman............................................................ 89,689 9%
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Neil Blechman............................................................ 89,689 9%
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Ross Blechman............................................................ 89,689 9%
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Steve Blechman........................................................... 89,689 9%
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF
NAME AND ADDRESS SHARES OWNERSHIP
- ------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Stephen Welling.......................................................... 1,555 *
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
All directors and executive officers as a group (9 persons)(b)........... 930,000 93%
</TABLE>
- ---------------
(a) The shares shown as beneficially owned by Messrs. Danhakl and Sokoloff and
Ms. Holden Dunbar represent 480,000 shares owned of record by GEI. GEI is a
Delaware limited partnership managed by LGP, which is an affiliate of the
general partner of GEI. Each of Leonard I. Green, Jonathan D. Sokoloff,
John G. Danhakl, Gregory J. Annick and Jennifer Holden Dunbar, either
directly (whether through ownership interest or position) or through one or
more intermediaries, may be deemed to control LGP and such general partner.
LGP and such general partner may be deemed to control the voting and
disposition of the shares of common stock of TLC owned by GEI. As such,
Messrs. Sokoloff and Danhakl and Ms. Holden Dunbar may be deemed to have
shared voting and investment power with respect to all shares held by GEI.
However, such individuals disclaim beneficial ownership of the securities
held by GEI except to the extent of their respective pecuniary interests
therein.
(b) Includes the shares referred to in Note (a) above.
* Less than 1%.
TERMS OF THE STOCKHOLDERS AGREEMENT
Upon consummation of the Acquisition, GEI, the Continuing Stockholders and
TLC entered into a Stockholders Agreement (the "Stockholders Agreement") in
respect of their holdings of shares of common stock of TLC. Pursuant to such
Stockholders Agreement, certain transfers of such stock by the parties to the
agreement are subject to tag-along rights of the other party and, for the five
years subsequent to the date of the agreement, the reasonable consent of the
other party. Such rights are generally effective until such time as the common
stock of TLC is publicly held (a "Public Offering Event"). In addition, such
consent rights of each party are contingent upon that party maintaining
ownership of two-thirds of the shares of common stock of TLC issued to such
party pursuant to the Acquisition Agreement.
Pursuant to the Stockholders Agreement, each of GEI and the Continuing
Stockholders is granted certain demand registration rights which commence on the
earlier of nine months after a Public Offering Event and the second anniversary
of the date of the agreement. The Stockholders Agreement also contains certain
"piggyback" registration rights arising in the event that TLC registers its
securities under the Securities Act.
Under the Stockholders Agreement, each of GEI and the Continuing
Stockholders are granted certain preemptive rights in the event that TLC issues
to the other party any equity or debt securities of TLC. These rights are
generally effective (i) until a Public Offering Event and (ii) provided that the
preempting party maintains ownership of two-thirds of the shares of common stock
of TLC issued to such party pursuant to the Acquisition Agreement.
Pursuant to the Stockholders Agreement, each of GEI and the Continuing
Stockholders agreed to vote their shares in favor of five nominees of the
Continuing Stockholders and three nominees of GEI to the Board of Directors of
TLC and the Company. The agreement provides that a wide range of actions to be
taken by TLC, including but not limited to the payment of certain dividends,
engagement in new businesses, and the acquisition of other businesses, require
the affirmative approval of a majority of each of the Continuing Stockholders
nominees and the GEI nominees to the Board of Directors. Generally, such rights
of each party are contingent upon that party maintaining ownership of two-thirds
of the shares of common stock of TLC issued to such party pursuant to the
Acquisition Agreement. Certain fundamental corporate actions, including but not
limited to, amendments to the Certificate of Incorporation, the sale of
substantially all of the assets of the Company, and the merger or combination of
the Company with another entity, additionally require an affirmative vote of
holders of at least 80% of the issued and outstanding common stock of TLC.
Generally,
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<PAGE> 67
such requirements for a super-majority stockholder vote are contingent upon the
Continuing Stockholders maintaining ownership of two-thirds of the shares of
common stock of TLC issued to them pursuant to the Acquisition Agreement. In
addition, all of these rights and requirements are generally only effective
until the occurrence of a Public Offering Event. See "Risk Factors -- Control by
Principal Stockholders."
Subject to the early termination of certain provisions of the Stockholders
Agreement upon the occurrence of a Public Offering Event, the Stockholders
Agreement terminates on the tenth anniversary of the date thereof.
Shares of common stock and Preferred Stock of TLC were issued to various
institutional investors (the "Senior Preferred Holders") pursuant to a Stock
Subscription Agreement among each such investor and TLC.
Upon consummation of the Acquisition, GEI, the Continuing Stockholders, the
Senior Preferred Holders and TLC entered into a secondary stockholders agreement
(the "Secondary Stockholders Agreement") in respect of their holdings of shares
of stock of TLC. Pursuant to such Secondary Stockholders Agreement, the Senior
Preferred Holders will have tag-along rights with respect to certain transfers
of common stock of TLC by GEI and/or the Continuing Stockholders. In addition,
on a sale of all or substantially all of the common stock of TLC by GEI and/or
the Continuing Stockholders, such sellers will have drag-along rights with
respect to shares of common stock of TLC held by the Senior Preferred Holders.
Further, GEI, the Company and the other Senior Preferred Holders will have
certain first option rights on sales by a Senior Preferred Holder of shares of
common stock of TLC. All of the above rights will terminate on the occurrence of
a Public Offering Event.
In addition, commencing on the fifth anniversary of the Secondary
Stockholders Agreement, the Senior Preferred Holders will be entitled to
exercise one demand registration right with respect to their shares of common
stock of TLC. Finally, the Senior Preferred Holders will have certain
"piggyback" registration rights on other registrations of equity securities of
TLC.
Subject to the early termination of certain provisions of the Secondary
Stockholders Agreement upon the occurrence of a Public Offering Event, the
Secondary Stockholders Agreement terminates on the tenth anniversary of the date
thereof.
DESCRIPTION OF NEW NOTES
Set forth below is a summary of certain provisions of the New Notes. The
New Notes will be issued pursuant to an indenture dated May 7, 1996, by and
among the Company, TLC, the Subsidiary Guarantors (as defined below) and Fleet
National Bank as trustee (the "Trustee"). Except as otherwise indicated below,
the following summary applies to both the Old Notes and the New Notes. As used
herein, the term "Notes" shall mean the Old Notes and the New Notes, unless
otherwise indicated.
The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of penalty interest
as Liquidated Damages, which terminate upon consummation of the Exchange Offer,
and (iii) will not bear any legends restricting transfer thereof. The New Notes
will be issued solely in exchange for an equal principal amount of Old Notes. As
of the date hereof, $100 million aggregate principal amount of Old Notes is
outstanding. See "The Exchange Offer."
The following summaries of certain provisions of the New Notes, the
Indenture and the Registration Rights Agreement are summaries only, do not
purport to be complete and are qualified in their entirety by reference to all
of the provisions of the Indenture and the Registration Rights Agreement,
including the definitions therein, which documents have been filed as exhibits
to this Registration Statement. Capitalized terms used herein and not otherwise
defined shall have the meanings assigned to them in the Indenture or the
Registration Rights Agreement, as appropriate. As used in this section, the
"Company" refers to the entity which survived the Natur-Pharma Merger, and shall
not refer to the subsidiaries of the Company. Wherever particular provisions of
the Indenture are referred to in this summary, such provisions are incorporated
by
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reference as a part of the statements made and such statements are qualified in
their entirety by such reference.
GENERAL
The New Notes will be unsecured, general obligations of the Company,
subordinate in right of payment to all Senior Debt of the Company, and senior or
pari passu in right of payment to all existing and future subordinated
Indebtedness of the Company. The New Notes will be limited in aggregate
principal amount to $100 million. The Notes will be jointly and severally
guaranteed (the "Guarantees") fully and unconditionally on an unsecured senior
subordinated basis by ARP, the Company's sole existing Subsidiary, and by each
of the Company's future Subsidiaries (the "Subsidiary Guarantors") and by TLC
(together with the Subsidiary Guarantors, the "Guarantors"). The obligations of
each Guarantor under its guarantee, however, will be limited in a manner
intended to avoid it being deemed a fraudulent conveyance under applicable law.
The term "Subsidiaries" as used herein or in the Indenture, however, does not
include any Unrestricted Subsidiaries. The New Notes will be issued only in
fully registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
The Notes will mature on May 15, 2006. The Notes will bear interest at
10 1/4% per annum from the date of issuance or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semi-annually on May 15 and November 15 of each year, commencing November 15,
1996, to the persons in whose names such Notes are registered at the close of
business on the May 1 or November 1 immediately preceding such Interest Payment
Date. Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of the Company maintained for such purpose, which office or
agency shall be maintained in the Borough of Manhattan, The City of New York. At
the option of the Company, payment of interest may be made by check mailed to
the Holders of the Notes at the addresses set forth upon the registry books of
the Company. No service charge will be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Until otherwise designated by the Company, the Company's office or agency will
be the corporate trust office of the Trustee presently located at 14 Wall
Street, New York, New York 10005.
SUBORDINATION
The New Notes and the Guarantees will be general, unsecured obligations of
the Company and the Guarantors, respectively, subordinated in right of payment
to all Senior Debt of the Company and the Guarantors, as applicable. As of June
30, 1996, the Company had approximately $50.4 million of outstanding Senior
Debt, substantially all of which was secured, and approximately $0.4 million of
debt which ranks pari passu with the Notes in right and priority of payment.
The Indenture provides that no payment (by set-off or otherwise) may be
made by or on behalf of the Company or a Guarantor, as applicable, on account of
the principal of, premium, if any, or interest on the Notes (including any
repurchases of Notes), or on account of the redemption provisions of the Notes
or any Obligation in respect of the Notes, for cash or property, (i) upon the
maturity of any Senior Debt of the Company or such Guarantor, as applicable, by
lapse of time, acceleration (unless waived) or otherwise, unless and until all
principal of, premium, if any, and the interest on and fees in respect of such
Senior Debt are first paid in full in cash or Cash Equivalents (or such payment
is duly provided for) or otherwise to the extent holders of Senior Debt accept
satisfaction of amounts due by settlement in other than cash or Cash
Equivalents, or (ii) in the event of default in the payment of any principal of,
premium, if any, or interest on or fee in respect of Senior Debt of the Company
or such Guarantor, as applicable, when it becomes due and payable, whether at
maturity or at a date fixed for prepayment or by declaration or otherwise (a
"Payment Default"), unless and until such Payment Default has been cured or
waived or otherwise has ceased to exist.
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Upon (i) the happening of an event of default (other than a Payment
Default) that permits the holders of Senior Debt to declare such Senior Debt to
be due and payable and (ii) written notice of such event of default is given to
the Company and the Trustee by the Senior Bank Representative or the holders of
an aggregate of at least $20 million principal amount outstanding of any other
Senior Debt or their representative (a "Payment Notice"), then, unless and until
such event of default has been cured or waived or otherwise has ceased to exist,
no payment (by set-off or otherwise) may be made by or on behalf of the Company,
if the Company is an obligor on such Senior Debt, or any Guarantor which is an
obligor under such Senior Debt on account of the principal of, premium, if any,
or interest on the Notes (including any repurchases of any of the New Notes), or
on account of the redemption provisions of the Notes or any Obligation in
respect of the Notes, in any such case. Notwithstanding the foregoing, unless
the Senior Debt in respect of which such event of default exists has been
declared due and payable in its entirety within 179 days after the Payment
Notice is delivered as set forth above (the "Payment Blockage Period") (and such
declaration has not been rescinded or waived), at the end of the Payment
Blockage Period, the Company and the Guarantors shall be required to pay all
sums not paid to the Holders of the Notes during the Payment Blockage Period due
to the foregoing prohibitions and to resume all other payments as and when due
on the Notes. Any number of Payment Notices may be given; provided, however,
that (i) not more than one Payment Notice shall be given within a period of any
360 consecutive days, and (ii) no default that existed upon the date of such
Payment Notice or the commencement of such Payment Blockage Period (whether or
not such event of default is on the same issue of Senior Debt) shall be made the
basis for the commencement of any other Payment Blockage Period.
In the event that, notwithstanding the foregoing, any payment or
distribution of assets of the Company or any Guarantor shall be received by the
Trustee or the Holders at a time when such payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in trust
for the benefit of the holders of such Senior Debt, and shall be paid or
delivered by the Trustee or such Holders, as the case may be, to the holders of
such Senior Debt remaining unpaid or unprovided for or to their representative
or representatives, or to the trustee or trustees under any indenture pursuant
to which any instruments evidencing any of such Senior Debt may have been
issued, ratably according to the aggregate principal amounts remaining unpaid on
account of such Senior Debt held or represented by each, for application to the
payment of all such Senior Debt remaining unpaid, to the extent necessary to pay
or to provide for the payment of all such Senior Debt in full in cash or Cash
Equivalents or otherwise to the extent holders of Senior Debt accept
satisfaction of amounts due by settlement in other than cash or Cash Equivalents
after giving effect to any concurrent payment or distribution to the holders of
such Senior Debt.
Upon any distribution of assets of the Company or any Guarantor upon any
dissolution, winding up, total or partial liquidation or reorganization of the
Company or a Guarantor, whether voluntary or involuntary, in bankruptcy,
insolvency, receivership or a similar proceeding or upon assignment for the
benefit of creditors or any marshalling of assets or liabilities, (i) the
holders of all Senior Debt of the Company or such Guarantor, as applicable, will
first be entitled to receive payment in full in cash or Cash Equivalents (or
have such payment duly provided for) or otherwise to the extent holders of
Senior Debt accept satisfaction of amounts due by settlement in other than cash
or Cash Equivalents before the Holders are entitled to receive any payment on
account of the principal of, premium, if any, and interest on the Notes or any
Obligation in respect of the Notes (other than Junior Securities) and (ii) any
payment or distribution of assets of the Company or such Guarantor of any kind
or character from any source, whether in cash, property or securities (other
than Junior Securities) to which the Holders or the Trustee on behalf of the
Holders would be entitled (by set-off or otherwise), except for the
subordination provisions contained in the Indenture, will be paid by the
liquidating trustee or agent or other person making such a payment or
distribution directly to the holders of such Senior Debt or their representative
to the extent necessary to make payment in full (or have such payment duly
provided for) on all such Senior Debt remaining unpaid, after giving effect to
any concurrent payment or distribution to the holders of such Senior Debt.
No provision contained in the Indenture or the Notes will affect the
obligation of the Company and the Guarantors, which is absolute and
unconditional, to pay, when due, principal of, premium, if any, and interest on
the New Notes. The subordination provisions of the Indenture and the Notes will
not prevent the occurrence of any Default or Event of Default under the
Indenture or limit the rights of the Trustee or any
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Holder, subject to the four immediately preceding paragraphs, to pursue any
other rights or remedies with respect to the New Notes.
As a result of the subordination provisions contained in the Indenture, in
the event of the liquidation, bankruptcy, reorganization, insolvency,
receivership or similar proceeding or an assignment for the benefit of the
creditors of the Company or a marshalling of assets or liabilities of the
Company, Holders of the New Notes may receive less, ratably, and holders of
Senior Debt may receive more, ratably, than other creditors of the Company or
the Guarantors.
OPTIONAL REDEMPTION
The Company will not have the right to redeem any Notes prior to May 15,
2001, except as provided in the immediately following paragraph. The Notes will
be redeemable at the option of the Company, in whole or in part, at any time on
or after May 15, 2001, upon not less than 30 days nor more than 60 days notice
to each Holder of Notes, at the following redemption prices (expressed as
percentages of the principal amount) if redeemed during the 12-month period
commencing May 15, of the years indicated below, together with accrued and
unpaid interest thereon to the Redemption Date (subject to the right of Holders
of record on a Record Date to receive interest due on an Interest Payment Date
that is on or prior to such Redemption Date):
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------------------------------- ----------
<S> <C>
2001...................................................................... 105.125%
2002...................................................................... 102.562%
2003...................................................................... 101.281%
2004 and thereafter....................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, prior to May 15, 1999, the Company may
redeem from time to time up to 35% of the aggregate principal amount of the
Notes originally outstanding at a redemption price of 109 1/2% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the
Redemption Date, with the net proceeds of one or more Equity Offerings;
provided, that at least 65% of the aggregate principal amount of the New Notes
originally outstanding remain outstanding immediately after the occurrence of
such redemption; provided, further, that such notice of redemption shall be sent
within 30 days after the date of closing of any such Equity Offering, and such
redemption shall occur within 60 days after the date such notice is sent.
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The New Notes may be redeemed in part in
multiples of $1,000 only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state that on and after the date of
redemption, upon surrender of such Note, a different Note or New Notes in a
principal amount equal to the unredeemed portion thereof will be issued. On and
after the date of redemption, interest will cease to accrue on the Notes or
portions thereof called for redemption.
The Notes will not have the benefit of any sinking fund.
The New Credit Facility limits, and any agreements governing Senior Debt
incurred after the closing of the Acquisition (the "Closing Date") may limit or
prohibit, the optional redemption of the Notes until all such Senior Debt has
been paid in full.
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CERTAIN COVENANTS
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indenture provides that in the event that a Change of Control has
occurred, each Holder of Notes will have the right, at such holder's option,
pursuant to an irrevocable and unconditional offer by the Company (the "Change
of Control Offer"), to require the Company to repurchase all or any part of such
Holder's Notes (provided, that the principal amount of such Notes must be $1,000
or an integral multiple thereof) on a date (the "Change of Control Purchase
Date") that is no later than 45 Business Days after the occurrence of such
Change of Control, at a cash price (the "Change of Control Purchase Price")
equal to 101% of the principal amount thereof, together with accrued interest to
the Change of Control Purchase Date. The Change of Control Offer shall be made
within 15 Business Days following a Change of Control and shall remain open for
not less than 20 Business Days following its commencement (the "Change of
Control Offer Period"). Upon expiration of the Change of Control Offer Period,
the Company shall purchase all Notes properly tendered in response to the Change
of Control Offer.
As used herein, a "Change of Control" means (i) any merger or consolidation
of the Company or TLC with or into any person or any sale, transfer or other
conveyance, whether direct or indirect, of all or substantially all of the
assets of either the Company or TLC, on a consolidated basis, in one transaction
or a series of related transactions, if, immediately after giving effect to such
transaction, any "person" or "group," (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange
Act"), whether or not applicable), other than any Excluded Person or Excluded
Persons or TLC, is or becomes the Beneficial Owner, directly or indirectly, of
more than 50% of the total voting power in the aggregate normally entitled to
vote in the election of directors, managers, or trustees, as applicable, of the
transferee or surviving entity, (ii) any "person" or "group," other than any
Excluded Person or Excluded Persons or TLC, is or becomes the Beneficial Owner,
directly or indirectly, of more than 50% of the total voting power in the
aggregate of all classes of Capital Stock of the Company then outstanding
normally entitled to vote in elections of directors, provided that any "person"
or "group" will be deemed to be the Beneficial Owner of any Capital Stock of the
Company held by TLC so long as such person or group is the Beneficial Owner of,
directly or indirectly, in the aggregate a majority of the Capital Stock of TLC
then outstanding normally entitled to vote in elections of directors, or (iii)
during any period of 12 consecutive months after May 7, 1996, individuals who at
the beginning of any such 12-month period constituted the Board of Directors of
either the Company or TLC (together, in each case, with any new directors whose
election by such Board or whose nomination for election by the shareholders of
the Company was approved by LGP or a Related Party of LGP or by the Excluded
Persons or by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company or TLC then in
office, as applicable.
On or before the Change of Control Purchase Date, the Company will (i)
accept for payment Notes or portions thereof properly tendered pursuant to the
Change of Control Offer, (ii) deposit with the Paying Agent cash sufficient to
pay the Change of Control Purchase Price (together with accrued and unpaid
interest) of all New Notes so tendered and (iii) deliver to the Trustee Notes so
accepted together with an Officers' Certificate listing the Notes or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
the Holders of Notes so accepted payment in an amount equal to the Change of
Control Purchase Price (together with accrued and unpaid interest), and the
Trustee will promptly authenticate and mail or deliver to such Holders a new
Note equal in principal amount to any unpurchased portion of the Note
surrendered. Any Notes not so accepted will be promptly mailed or delivered by
the Company to the Holder thereof. The Company will publicly announce the
results of the Change of Control Offer on or as soon as practicable after the
Change of Control Purchase Date.
Under clause (iii) of the definition of "Change of Control" above, among
other things, a Change of Control could occur in certain circumstances upon a
change in the constitution of a majority of the Board of Directors of either the
Company or TLC resulting from a proxy contest involving the solicitation of
revocable proxies.
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<PAGE> 72
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between the Company and the Initial Purchasers.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, any tender offer rules
under the Exchange Act, including Rules 13e-4 and 14e-1, as then in effect, and
the rules thereunder and all other applicable Federal and state securities laws
and any provisions of the Indenture which conflict with such laws shall be
deemed to be superseded by the provisions of such laws.
The New Credit Facility prohibits, and any agreements governing Senior Debt
incurred after the Closing Date may prohibit, the purchase of Notes in response
to a Change in Control Offer, unless all such Senior Debt has been paid in full.
Furthermore, a Change in Control will constitute an event of default under the
New Credit Facility. In addition, the Company's ability to purchase Notes upon a
Change in Control will be limited by its then available financial resources and,
if those resources are insufficient, its ability to arrange financing to effect
those purchases. There can be no assurance that the Company will have sufficient
funds to repurchase the Notes upon a Change in Control or that it will be able
to arrange financing for that purpose. Nevertheless, the Company's failure to
make a Change in Control Offer or to purchase all Notes properly tendered
pursuant to a Change in Control Offer will constitute an Event of Default under
the Indenture. See "Risk Factors -- Effect of Change of Control."
Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock
The Indenture provides that the Company and the Subsidiary Guarantors will
not, directly or indirectly, issue, assume, guaranty, incur, become directly or
indirectly liable with respect to (including as a result of an Acquisition), or
otherwise become responsible for, contingently or otherwise (individually and
collectively, to "Incur" or, as appropriate, an "Incurrence"), any Indebtedness
or any Disqualified Capital Stock (including Acquired Indebtedness), except for
Permitted Indebtedness.
Notwithstanding the foregoing, if (i) no Default or Event of Default shall
have occurred and be continuing at the time of, or would occur after giving
effect on a pro forma basis to, such Incurrence of Indebtedness (including
without duplication guarantees of Indebtedness of the Company and the Subsidiary
Guarantors otherwise permitted by the Indenture) or Disqualified Capital Stock
and (ii) on the date of such Incurrence (the "Incurrence Date"), the
Consolidated Interest Coverage Ratio of the Company for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a pro forma
basis to such Incurrence of such Indebtedness (without duplication) or
Disqualified Capital Stock and, to the extent set forth in the definition of
Consolidated Interest Coverage Ratio, the use of proceeds thereof, would be at
least 2.00 to 1 (the "Debt Incurrence Ratio"), then the Company and the
Subsidiary Guarantors may Incur such Indebtedness or Disqualified Capital Stock.
Indebtedness of any Person which is outstanding at the time such Person
becomes a Subsidiary of the Company or is merged with or into or consolidated
with the Company or a Subsidiary of the Company shall be deemed to have been
Incurred at the time such Person becomes such a Subsidiary of the Company or is
merged with or into or consolidated with the Company or a Subsidiary of the
Company, as applicable.
Notwithstanding anything to the contrary contained in the Indenture, the
Subsidiary Guarantors each may guaranty Indebtedness of the Company or any other
Subsidiary Guarantor that is permitted to be Incurred hereunder, either at the
time such Subsidiary Guarantor becomes a Guarantor of the New Notes or if later
the time the Company or such other Subsidiary Guarantor Incurs such
Indebtedness.
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Limitation on Restricted Payments
The Indenture provides that the Company and the Subsidiary Guarantors will
not, directly or indirectly, make any Restricted Payment if, after giving effect
to such Restricted Payment on a pro forma basis, (1) a Default or an Event of
Default shall have occurred and be continuing, (2) the Company is not permitted
to Incur at least $1.00 of additional Indebtedness pursuant to the Consolidated
Interest Coverage Ratio in the second paragraph of the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," or (3)
the aggregate amount of all Restricted Payments made by the Company and its
Subsidiaries, including after giving effect to such proposed Restricted Payment,
from and after May 7, 1996, would exceed the sum of (a) 50% of the aggregate
Consolidated Net Income of the Company for the period (taken as one accounting
period), commencing on the first day after May 7, 1996, to and including the
last day of the fiscal quarter ended immediately prior to the date of each such
calculation (or, in the event Consolidated Net Income for such period is a
deficit, then minus 100% of such deficit), plus (b) the aggregate Net Cash
Proceeds received by the Company as a capital contribution or from the sale of
its Qualified Capital Stock (other than (i) from or to a Subsidiary of the
Company, (ii) to the extent applied in connection with a Qualified Exchange and
(iii) to the extent applied to repurchase Capital Stock pursuant to clause (d)
of the definition of Permitted Payments), after May 7, 1996.
The foregoing provisions will not prohibit or be violated by (A) a
Qualified Exchange; (B) the payment or making of any Restricted Payment within
60 days after the date of declaration thereof or the making of any binding
commitment in respect thereof, if at said date of declaration or commitment,
such Restricted Payment would have complied with the provisions contained in
clauses (1), (2) and (3) of the first paragraph hereof; (C) Permitted Payments;
(D) Restricted Investments, provided, that, after giving pro forma effect to
such Restricted Investment, the aggregate amount of all such Restricted
Investments made on or after May 7, 1996 pursuant to this subclause (D) that are
outstanding (after giving effect to (x) the amount of such Restricted
Investments returned in cash to the Company or a Subsidiary Guarantor, the
payment of cash dividends or the repayment in cash of the principal of loans or
the cash return on any Restricted Investment to the Company or the Subsidiary
Guarantor that made such Restricted Investment and (y) the release of any
guarantee that constituted a Restricted Investment, to the extent it has been
released, in each case on or prior to the date of such calculation) at any time
does not exceed $10 million; and (E) Restricted Payments in an amount not to
exceed $5 million minus (x) the amount of any Restricted Payments made (other
than pursuant to subclauses (A), (C) and (D) above) since May 7, 1996 and (y)
(1) 100% of the amount of any deficit in Consolidated Net Income for the period
(taken as one accounting period) commencing on the first day after May 7, 1996
to the date of such Restricted Payment plus (2) the aggregate Net Cash Proceeds
received by the Company as a capital contribution or from the sale of its
Qualified Capital Stock (other than (i) from or to a Subsidiary of the Company,
(ii) to the extent applied in connection with a Qualified Exchange, and (iii) to
the extent applied to repurchase Capital Stock pursuant to clause (d) of the
definition of Permitted Payments), after May 7, 1996, up to the amount of the
deficit, if any, applied pursuant to clause (y) (1) above. The full amount of
any Restricted Payment made pursuant to the foregoing clauses (B) and (D) (but
not pursuant to clauses (A), (C) or (E)) of the immediately preceding sentence,
however, will be deducted in the calculation of the aggregate amount of
Restricted Payments available to be made referred to in clause (3) of the
immediately preceding paragraph.
Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company and the Subsidiary Guarantors will
not, directly or indirectly, create, assume or suffer to exist any consensual
restriction on the ability of any Subsidiary of the Company: (i) (a) to pay
dividends or make other distributions to the Company or any of its Subsidiaries
(1) on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (b) to pay any Indebtedness
owed to the Company or any of its Subsidiaries, (ii) to make loans or advances
to the Company or any of its Subsidiaries or (iii) to transfer any of its
properties or assets to the Company or any of its Subsidiaries, except (a)
restrictions imposed by the Notes or the Indenture, (b) restrictions imposed by
applicable law and regulation, (c) existing restrictions under Indebtedness
outstanding on May 7, 1996 or under any Acquired Indebtedness not incurred in
violation of the Indenture or any agreement relating to any
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property, asset, or business acquired by the Company or any of its Subsidiaries,
which restrictions in each case existed at the time of acquisition, were not put
in place in connection with or in anticipation of such acquisition and are not
applicable to any person, other than the person acquired, or to any property,
asset or business, other than the property, assets and business so acquired, (d)
any such restriction or requirement imposed by Indebtedness Incurred under
clause (b) under the definition of "Permitted Indebtedness," provided such
restriction or requirement is not materially more restrictive than that imposed
by the Credit Agreement as of May 7, 1996, (e) restrictions with respect to a
Subsidiary of the Company imposed pursuant to a binding agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary, provided such restrictions apply
solely to the Capital Stock or assets of such Subsidiary which are being sold,
(f) restrictions on transfer contained in Purchase Money Indebtedness Incurred
pursuant to paragraph (e) of the definition of Permitted Indebtedness, provided
such restrictions relate only to the transfer of the property acquired with the
proceeds of such Purchase Money Indebtedness, (g) customary restrictions imposed
on the transfer of copyrighted or patented materials and customary provisions in
agreements that restrict the assignment of such agreements or any rights
thereunder, and (h) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clause (c) or (f) of this
paragraph that are not materially more restrictive than those being replaced and
do not apply to any other person or assets than those that would have been
covered by the restrictions in the Indebtedness so refinanced. Notwithstanding
the foregoing, neither (a) customary provisions restricting subletting or
assignment of any lease entered into in the ordinary course of business, nor (b)
Liens not prohibited by the terms of the Indenture shall be considered a
restriction on the ability of the applicable Subsidiary to transfer such lease
or any assets, as the case may be.
Limitations on Layering Indebtedness
The Indenture provides that the Company and the Guarantors will not,
directly or indirectly, Incur, or suffer to exist any Indebtedness that is
subordinate in right of payment to any other Indebtedness of the Company or a
Guarantor unless, by its terms, such Indebtedness (i) has a maturity date
subsequent to the Stated Maturity of the Notes and an Average Life longer than
that of the Notes and (ii) is subordinate in right of payment to, or ranks pari
passu with, the New Notes or the Guarantee, as applicable. For purposes of this
provision, no Indebtedness shall be deemed to be subordinated in right of
payment to any other Indebtedness solely by reason of the fact that such other
Indebtedness is secured by any Lien.
Limitation on Liens
The Indenture provides that the Company and the Subsidiary Guarantors will
not, create, incur, assume or suffer to exist, to secure any Indebtedness other
than Senior Debt, any Lien, other than Permitted Liens, upon any of their
respective assets now owned or acquired on or after the date of the Indenture or
upon any income or profits therefrom unless the Company or such Subsidiary
Guarantor provides, concurrently or immediately thereafter, that the Notes are
equally and ratably secured, provided that, if such Indebtedness is Subordinated
Indebtedness, the Lien securing such Subordinated Indebtedness shall be
subordinate and junior to the Lien securing the Notes or the Guarantee, as
applicable, with the same relative priority as such Subordinated Indebtedness
shall have with respect to the Notes or the Guarantee, as applicable, provided,
further, that, in the case of Indebtedness of a Subsidiary Guarantor, if such
Subsidiary Guarantor shall cease to be a Subsidiary Guarantor in accordance with
the provisions of the Indenture, such equal and ratable Lien to secure the Notes
shall, without any further action, cease to exist.
Limitation on Sale of Assets and Subsidiary Stock
The Indenture provides that the Company and the Subsidiary Guarantors will
not, in one transaction or a series of related transactions, convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of their
respective property, business or assets (other than cash or Cash Equivalents),
including by merger or consolidation (in the case of a Subsidiary Guarantor),
and including any sale or other transfer or issuance of any Capital Stock (other
than directors qualifying shares) of any Subsidiary of the Company, whether by
the Company or a Subsidiary (an "Asset Sale"), unless within 360 days following
such Asset Sale (1)(a) the Net
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Cash Proceeds received from such Asset Sale are (i) (x) used to purchase one or
more businesses or to purchase more than 50% of the Capital Stock of a person
operating one or more businesses, (y) used to make capital expenditures or (z)
used to acquire other long-term assets, in each case, so long as such business
or businesses, capital expenditures or long-term assets will constitute, be a
part of or be used in a Related Business or (ii) used to retire Senior Debt and
to permanently reduce the amount of such Indebtedness outstanding (including
that in the case of a revolver or similar arrangement that makes credit
available, such commitment is so permanently reduced by such amount) and (b) the
Net Cash Proceeds of such Asset Sale not applied as provided in clause (a) (the
"Asset Sale Offer Amount") are applied to the optional redemption of the Notes
in accordance with the terms of the Indenture or to the repurchase of the Notes
pursuant to an irrevocable, unconditional cash offer (the "Asset Sale Offer") to
repurchase Notes at a purchase price (the "Asset Sale Offer Price") of 100% of
the principal amount, plus accrued interest to the date of payment, (2) at least
75% of the consideration for such Asset Sale consists of cash or Cash
Equivalents; provided that (x) the amount of any liabilities (as shown on the
Company's most recent consolidated balance sheet) of the Company or any
Subsidiary that are assumed by the transferee in such Asset Sale and (y) any
notes or other obligations received by the Company or any such Subsidiary
Guarantor from such transferee that are immediately (but in no event more than
30 days after receipt) converted by the Company or such Subsidiary Guarantor
into cash or Cash Equivalents (to the extent of the cash or Cash Equivalents, as
the case may be, received), shall be deemed to be cash or Cash Equivalents, as
the case may be, for purposes of this provision and, provided, further, this
clause (2) shall not apply to the sale or disposition of assets or as a result
of a foreclosure (or a secured party taking ownership of such assets in lieu of
foreclosure) or as a result of an involuntary proceeding in which the Company
cannot, directly or through its Subsidiaries, direct the type of proceeds
received; (3) no Default or Event of Default would occur after giving effect, on
a pro forma basis, to, such Asset Sale, and (4) with respect to any Asset Sale
or series of related Asset Sales, the Net Cash Proceeds of which exceed
$500,000, the Board of Directors of the Company determines in good faith that
the Company or such Subsidiary, as applicable, receives Fair Market Value for
such Asset Sale. The Indenture will provide that an Asset Sale Offer may be
deferred until the accumulated Net Cash Proceeds from Asset Sales not applied to
the uses set forth in clause (l)(a) above exceeds $10 million and that each
Asset Sale Offer shall remain open for not less than 20 Business Days following
its commencement (the "Asset Sale Offer Period"). Upon expiration of the Asset
Sale Offer Period, the Company shall apply the Asset Sale Offer Amount plus an
amount equal to accrued interest to the purchase of all Notes properly tendered
(on a pro rata basis if the Asset Sale Offer Amount is insufficient to purchase
all Notes so tendered) at the Asset Sale Offer Price (together with accrued
interest). To the extent Holders of Notes do not tender Notes in connection with
any such Asset Sale Offer, the remaining Net Cash Proceeds may be applied in any
manner not prohibited by the Indenture.
Notwithstanding the foregoing provisions of the prior paragraph, the
following transactions shall not be deemed Asset Sales:
(i) the Company and the Subsidiary Guarantors may in the ordinary
course of business, convey, sell, lease, transfer, assign or otherwise
dispose of property in the ordinary course of business;
(ii) the Company and the Subsidiary Guarantors may (x) convey, sell,
lease, transfer, assign or otherwise dispose of assets pursuant to and in
accordance with the limitation on mergers, sales or consolidations
provisions in the Indenture, (y) make Restricted Payments permitted by the
Restricted Payment covenant in the Indenture and (z) engage in Exempted
Affiliate Transactions;
(iii) the Company and the Subsidiary Guarantors may convey, sell,
lease, transfer, assign or otherwise dispose of assets or issue Capital
Stock to the Company or any of the Subsidiary Guarantors;
(iv) the Company and the Subsidiary Guarantors may sell or dispose of
damaged, worn out or other obsolete property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary Guarantor, as
applicable;
(v) the Company and the Subsidiary Guarantors may exchange assets held
by the Company or a Subsidiary Guarantor for assets held by any person or
entity; provided, that the assets received in such exchange in the good
faith reasonable judgment of the Board will immediately constitute, be a
part of, or
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be used in, a Related Business; provided, further, that the Board has
determined that the terms of any exchange are fair and reasonable;
(vi) the Company and the Subsidiary Guarantors may enter into Sale and
Leaseback Transactions with respect to property acquired or completed after
the Issue Date;
(vii) the Company and the Subsidiary Guarantors may liquidate Cash
Equivalents in the ordinary course of business;
(viii) the Company and the Subsidiary Guarantors may create or assume
Liens (or permit any foreclosure thereon) securing Indebtedness to the
extent that such Lien does not violate the "-- Liens" covenant above; and
(ix) the Subsidiary Guarantors may consummate any sale or series of
related sales of assets or properties of the Company and the Subsidiary
Guarantors having an aggregate Fair Market Value of less than $2 million in
any fiscal year.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the Exchange
Act and the rules and regulations thereunder and all other applicable Federal
and state securities laws, and any provisions of the Indenture which conflict
with such laws shall be deemed to be superseded by the provisions of such laws.
The New Credit Facility prohibits, and any agreements governing Senior
Indebtedness incurred after the Closing Date may prohibit or restrict, the
purchase of Notes in response to an Asset Sale Offer unless all such Senior
Indebtedness has been paid in full.
Limitation on Transactions with Affiliates
The Indenture provides that neither the Company nor any of the Subsidiary
Guarantors will be permitted after May 7, 1996 to enter into any contract,
agreement, arrangement or transaction with any Affiliate (an "Affiliate
Transaction"), or any series of related Affiliate Transactions (other than
Exempted Affiliate Transactions), unless the terms of such Affiliate Transaction
are fair and reasonable to the Company or such Subsidiary, as the case may be,
and are at least as favorable as the terms which could reasonably be expected to
be obtained by the Company or such Subsidiary, as the case may be, in a
comparable transaction made on an arm's length basis with persons who are not
Affiliates.
Without limiting the foregoing, in connection with any Affiliate
Transaction or series of related Affiliate Transactions (other than Exempted
Affiliate Transactions) (1) involving consideration to either party in excess of
$1 million, the Company must deliver an Officers' Certificate to the Trustee,
stating that the terms of such Affiliate Transaction are fair and reasonable to
the Company, and no less favorable to the Company than could reasonably be
expected to have been obtained in an arm's length transaction with a
non-Affiliate, and (2) involving consideration to either party in excess of $5
million, the Company must also, prior to the consummation thereof, obtain a
written favorable opinion as to the fairness of such transaction to the Company
from a financial point of view from an independent investment banking firm of
national reputation, provided, that this sentence shall not apply to the sale of
the products of the Company or its Subsidiaries to any Affiliate of LGP or any
Related Party thereof, which sale is in the ordinary course of business and in
accordance with industry practice.
Limitation on Merger, Sale or Consolidation
The Indenture provides that the Company will not directly or indirectly,
consolidate with or merge with or into another person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another person or group of affiliated persons or adopt a Plan of Liquidation,
unless (i) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity or, in the case of a Plan of Liquidation, the
entity which receives the greatest value from such Plan of Liquidation, is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental
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indenture all of the obligations of the Company in connection with the Notes and
the Indenture; (ii) no Default or Event of Default shall exist or shall occur
immediately after giving effect on a pro forma basis to such transaction; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Consolidated Net Worth of the consolidated surviving or transferee entity or, in
the case of a Plan of Liquidation, the entity which receives the greatest value
from such Plan of Liquidation, is at least equal to the Consolidated Net Worth
of the Company immediately prior to such transaction; and (iv) immediately after
giving effect to such transaction on a pro forma basis, the consolidated
resulting, surviving or transferee entity or, in the case of a Plan of
Liquidation, the entity which receives the greatest value from such Plan of
Liquidation, would immediately thereafter be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Debt Incurrence Ratio set forth in
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company or consummation of a Plan of Liquidation in
accordance with the foregoing, the successor corporation formed by such
consolidation or into which the Company is merged or to which such transfer is
made or, in the case of a Plan of Liquidation, the entity which receives the
greatest value from such Plan of Liquidation, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
the Indenture with the same effect as if such successor corporation had been
named therein as the Company, and the Company shall be released from all
obligations under the Notes and the Indenture.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
Limitation on Lines of Business
The Indenture provides that neither the Company nor any of its Subsidiaries
shall directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
Restriction on Sale and Issuance of Subsidiary Stock
The Indenture provides that the Company will not sell, and the Subsidiary
Guarantors will not issue or sell, any shares of Capital Stock (other than
directors qualifying shares) of any Subsidiary of the Company to any person
other than the Company or a wholly owned Subsidiary of the Company, except for
shares of common stock with no preferences or special rights or privileges and
with no redemption or prepayment provisions. Notwithstanding the foregoing, (a)
the Company and the Subsidiary Guarantors may consummate an Asset Sale of all of
the Capital Stock owned by the Company and the Subsidiary Guarantors of any
Subsidiary and (b) the Company or any Subsidiary Guarantor may pledge,
hypothecate or otherwise grant a Lien on any Capital Stock of any Subsidiary to
the extent not prohibited under the "-- Liens" covenant.
Future Subsidiary Guarantors
The Indenture provides that all present and future Subsidiaries of the
Company jointly and severally will guaranty irrevocably and unconditionally all
principal, premium, if any, and interest on the Notes on a senior subordinated
basis. The term Subsidiary does not include Unrestricted Subsidiaries.
Release of Guarantors
Upon the sale or disposition (whether by merger, stock purchase, asset sale
or otherwise) of a Subsidiary Guarantor (or all or substantially all of the
assets of any such Subsidiary Guarantor or 50% or more of the Capital Stock of
any such Subsidiary Guarantor) to an entity which is not a Subsidiary of the
Company, which transaction is otherwise in compliance with the Indenture, such
Subsidiary Guarantor shall be deemed released from all its obligations under its
guarantee of the Notes; provided, however, that any such termination shall occur
only to the extent that all obligations of such Subsidiary Guarantor under all
of its guarantees of,
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and under all of its pledges of assets or other security interests which secure,
any Indebtedness of the Company shall also terminate upon such release, sale or
transfer. Upon the release of any Subsidiary Guarantor from its Guarantee
pursuant to the provisions of the Indenture, each other Subsidiary Guarantor not
so released shall remain liable for the full amount of principal of, and
interest on, the Notes as and to the extent provided in the Indenture.
Limitation on Status as Investment Company
The Indenture prohibits the Company and its Subsidiaries from being
required to register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended).
REPORTS
The Indenture provides that whether or not the Company is subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall deliver to the Trustee and to each Holder and to prospective holders of
New Notes identified to the Company by an Initial Purchaser, within 15 days
after it is or would have been required to file such with the Commission, annual
and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission,
if the Company were subject to the requirements of Section 13 or 15(d) of the
Exchange Act, including, with respect to annual information only, a report
thereon by the Company's certified independent public accountants as such would
be required in such reports to the Commission, and, in each case, together with
a management's discussion and analysis of financial condition and results of
operations which would be so required. In addition, from and after the
effectiveness of the Exchange Offer Registration Statement or the Shelf
Registration Statement, whether or not required by the rules and regulations of
the Commission, the Company will file a copy of all such information and reports
with the Commission for public availability (unless the Commission will not
accept such a filing) and make such information available to securities analysts
and prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure to pay any
installment of interest on the Notes as and when the same becomes due and
payable and the continuance of any such failure for 30 days, (ii) the failure to
pay all or any part of the principal, or premium, if any, on the Notes when and
as the same becomes due and payable at maturity, redemption, by acceleration or
otherwise, including, without limitation, payment of the Change of Control
Purchase Price or the Asset Sale Offer Price, or otherwise, (iii) the failure by
the Company or any Subsidiary Guarantor to observe or perform any other covenant
or agreement on the part of the Company or any Subsidiary Guarantor contained in
the Notes or the Indenture and, subject to certain exceptions, the continuance
of such failure for a period of 30 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the Notes then outstanding,
specifying such Default and requiring that it be remedied, (iv) certain events
of bankruptcy, insolvency or reorganization in respect of the Company or any of
its Significant Subsidiaries, (v) a default in any Indebtedness of the Company
or any of its Subsidiaries with an aggregate principal amount in excess of $10
million (a) resulting from the failure to pay principal at maturity or (b) as a
result of which the maturity of such Indebtedness has been accelerated prior to
its stated maturity, and (vi) final unsatisfied judgments not covered by
insurance aggregating in excess of $10 million, at any one time rendered against
the Company or any of its Subsidiaries and not stayed, bonded or discharged
within 60 days. The Indenture provides that if an Event of Default occurs and is
continuing, generally the Trustee must, within 90 days after the occurrence of
such default, give to the Holders notice of such Event of Default.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (iv), above, relating to the Company or any
Significant Subsidiary) then in every such case, unless the principal of all of
the Notes shall have already become due and payable, either the Trustee or the
Holders of 25% in aggregate principal amount of the Notes then outstanding, by
notice in writing to the Company (and to the Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal and accrued interest thereon
to be due and payable immediately, provided such acceleration shall not be
effective until five
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(5) Business Days after the Senior Bank Representative shall have been notified
of such acceleration. If an Event of Default specified in clause (iv), above,
relating to the Company or any Significant Subsidiary occurs, all principal and
accrued interest thereon will be immediately due and payable on all outstanding
Notes without any declaration or other act on the part of Trustee or the
Holders. The Holders of a majority in aggregate principal amount of Notes
generally are authorized to rescind such acceleration if all existing Events of
Default (other than the non-payment of the principal of, premium, if any, and
interest on the Notes which have become due solely by such acceleration) have
been cured or waived, except a default with respect to any provision requiring
supermajority approval to amend, which default may only be waived by such
supermajority.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all of the Holders any default, except a
default with respect to any provision requiring supermajority approval to amend,
which default may only be waived by such supermajority, except a default in the
payment of principal of, premium on, or interest on any Note not yet cured, and
except a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the Holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the Notes at the
time outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee. See "Risk Factors -- Waiver of
Defaults; Amendment of Indenture and Notes."
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that the Company may, at its option and at any time
elect to have its obligations and the obligations of the Guarantors discharged
with respect to the outstanding Notes ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and discharged
the entire Indebtedness represented by, and the Indenture shall cease to be of
further effect as to, all outstanding Notes and Guarantees, except as to (i)
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due from the trust
funds described below; (ii) the Company's obligations with respect to such Notes
concerning issuing temporary Notes, registration of Notes, mutilated, destroyed,
lost or stolen Notes, and the maintenance of an office or agency for payment and
money for security payments held in trust; (iii) the rights, powers, trust,
duties, and immunities of the Trustee, and the Company's and the Guarantor's
obligations in connection therewith; and (iv) the Legal Defeasance provisions of
the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and the Guarantors released with
respect to certain covenants that are set forth in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default" will no longer constitute an Event of Default with respect
to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, U.S. legal tender, non-callable government
securities or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such Notes on the
stated date for payment thereof or on the redemption date of such principal or
installment of principal of, premium, if any, or interest on such Notes, and the
Holders of Notes must have a valid, perfected, exclusive security interest in
such trust; (ii) in the case of Legal Defeasance before the date that is one
year prior to the Stated Maturity, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that (A) the Company has received from, or there has been
published by the Internal Revenue Service, a ruling or (B) since the date of
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the Indenture, there has been a change in the applicable federal income tax law,
in either case to the effect that, and based thereon such opinion of counsel
shall confirm that, the Holders of such Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Legal Defeasance and
will be subject to federal income tax on the same amounts, in the same manner
and at the same times as would have been the case if such Legal Defeasance had
not occurred; (iii) in the case of Covenant Defeasance before the date that is
one year prior to the Stated Maturity, the Company shall have delivered to the
Trustee an opinion of counsel in the United States reasonably acceptable to such
Trustee confirming that the Holders of such Notes will not recognize income,
gain or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit or, insofar as Events of
Default from bankruptcy or insolvency events are concerned, at any time in the
period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance shall not result in a breach or violation of,
or constitute a default under the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an Officers' Certificate stating that the deposit
was not made by the Company with the intent of preferring the Holders of such
Notes over any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the Company or others;
and (vii) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate, clauses (i)
through (vi) and, in the case of the opinion of counsel, clauses (i), (with
respect to the validity and perfection of the security interest), (ii), (iii)
and (v) of this paragraph have been complied with. Upon Legal Defeasance as
provided in the Indenture, the Guarantee of each Guarantor shall be fully
released and discharged and the Trustee shall promptly execute and deliver to
the Company any documents reasonably requested by the Company to evidence or
effect the foregoing.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting the Company, the Guarantors
and the Trustee to enter into a supplemental indenture for certain limited
purposes without the consent of the Holders. With the consent of the Holders of
not less than a majority in aggregate principal amount of the Notes at the time
outstanding, the Company, the Guarantors and the Trustee are permitted to amend
or supplement the Indenture or any supplemental indenture or modify the rights
of the Holders; except that any amendments or supplements to the provisions
relating to the "Repurchase of Notes at the Option of the Holder Upon a Change
of Control" covenant in a manner adverse to the Holders shall require the
consent of not less than 66 2/3% of the aggregate principal amount of Notes at
the time outstanding; provided, further, that no such modification may, without
the consent of each Holder affected thereby: (i) change the Stated Maturity on
any Note, or reduce the principal amount thereof or the rate (or extend the time
for payment) of interest thereon or any premium payable upon the redemption
thereof, or change the place of payment where, or the coin or currency in which,
any Note or any premium or the interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or reduce the Change of Control Purchase Price or Asset Sale Offer Price
or alter the redemption provisions of the Indenture in a manner adverse to the
Holders, (ii) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indenture, (iii) modify any
of the waiver provisions, except to increase any required percentage or to
provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each outstanding Note affected
thereby, or (iv) make the Notes further subordinated in right of payment to any
extent or under any circumstances to any other Indebtedness (it being understood
that amendments to the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock" which may have the effect of
increasing the amount of Senior Indebtedness that the Company and the Subsidiary
Guarantors may Incur shall not, for purposes of this clause (iv), be deemed to
make the Notes further subordinated in right of
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payment to any extent or under any circumstances to any other Indebtedness). See
"Risk Factors -- Waiver of Defaults; Amendment of Indenture and Notes."
NO PERSONAL LIABILITY OF PARTNERS, STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, the
Guarantors or any successor entity shall have any personal liability in respect
of the obligations of the Company or the Guarantors under the Indenture or the
New Notes by reason of his or its status as such stockholder, employee, officer
or director.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness or Disqualified Capital Stock of
any person existing at the time such person becomes a Subsidiary of the Company
or is merged or consolidated into or with the Company or one of its
Subsidiaries.
"Acquisition" means the purchase or other acquisition of any person or
substantially all the assets of any person by any other person, whether by
purchase, stock purchase, merger, consolidation, or other transfer, and whether
or not for consideration.
"Affiliate" means any person, directly or indirectly, controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise, provided, that, a Beneficial Owner of 10% or more of the total
voting power normally entitled to vote in the election of directors, managers or
trustees, as applicable, shall for such purposes be deemed to constitute
control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of (a) the
product of the number of years from the date of determination to the date or
dates of each successive scheduled principal (or redemption) payment of such
security or instrument and (b) the amount of each such respective principal (or
redemption) payment by (ii) the sum of all such principal (or redemption)
payments.
"Beneficial Owner" has the meaning attributed to it in Rules 13d-3 and
13d-5 under the Exchange Act (as in effect on May 7, 1996), whether or not
applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness), warrants, options, participations or other equivalents of or
interests (however designated) in stock issued by that corporation.
"Cash Equivalent" means for all purposes of the Indenture other than the
provisions thereof described under the caption "Subordination" above, (a)
securities issued or directly and fully guaranteed or insured by the United
States Government, or any agency or instrumentality thereof, having maturities
of not more than one year from the date of acquisition: (b) marketable general
obligations issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within one year from the date of acquisition thereof and, at the time of
acquisition thereof, having a credit rating of "A" or better from either
Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (c)
certificates of deposit, time deposits, eurodollar time deposits, overnight bank
deposits or bankers' acceptances having maturities of not more than one year
from the date of acquisition thereof of any domestic commercial bank, the
long-term debt of which is rated at the time of acquisition thereof at least A
or the equivalent thereof by Standard & Poor's Ratings Group, or A or the
equivalent thereof by Moody's Investors
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Service, Inc. and having capital and surplus in excess of $500,000,000; (d)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (a), (b) and (c) above entered into
with any bank meeting the qualifications specified in clause (c) above; (e)
commercial paper rated at the time of acquisition thereof at least A-2 or the
equivalent thereof by Standard & Poor's Ratings Group or P-2 or the equivalent
thereof by Moody's Investors Service, Inc., or carrying an equivalent rating by
a nationally recognized rating agency, if both of the two named rating agencies
cease publishing ratings of investments, and in either case maturing within 270
days after the date of acquisition thereof, and (f) interests in any investment
company which invests solely in instruments of the type specified in clauses (a)
through (e) above. For purposes of the provisions of the Indenture described
under the caption "Subordination" above, "Cash Equivalent" means (a) securities
issued or directly and fully guaranteed or insured by the United States
Government, or any agency or instrumentality thereof, having maturities of not
more than 180 days from the date of acquisition; (b) marketable general
obligations issued by any state of the United States of America or any political
subdivision of any such state or any public instrumentality thereof maturing
within 180 days from the date of acquisition thereof and, at the time of
acquisition thereof, having a credit rating of "A" or better from either
Standard & Poor's Ratings Group or Moody's Investors Service, Inc.; (c)
certificates of deposit, time deposits, eurodollar time deposits, overnight bank
deposits or bankers' acceptances having maturities of not more than 180 days
from the date of acquisition thereof of any domestic commercial bank the
long-term debt of which is rated at the time of acquisition thereof at least A
or the equivalent thereof by Standard & Poor's Ratings Group, or A or the
equivalent thereof by Moody's Investors Service, Inc. and having capital and
surplus in excess of $500,000,000; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(a), (b) and (c) above entered into with any bank meeting the qualifications
specified in clause (c) above; (e) commercial paper rated at the time of
acquisition thereof at least A-1 or the equivalent thereof by Standard & Poor's
Ratings Group or P-1 or the equivalent thereof by Moody's Investors Service,
Inc., or carrying an equivalent rating by a nationally recognized rating agency,
if both of the two named rating agencies cease publishing ratings of
investments, and in either case maturing within 180 days after the date of
acquisition thereof; and (f) interests in any investment company which invests
solely in instruments of the type specified in clauses (a) through (e) above.
"Consolidated EBITDA" means, with respect to any person, for any period,
the Consolidated Net Income of such person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of (i) Consolidated income tax
expense, (ii) Consolidated depreciation and amortization expense (including
amortization of debt discount and deferred financing costs in connection with
any Indebtedness of such person and its Subsidiaries), provided that
Consolidated depreciation and amortization of a Subsidiary that is less than
wholly owned shall only be added to the extent of the equity interest of the
Company in such Subsidiary, (iii) Consolidated Interest Expense, (iv) all other
non-cash items and (v) up to $13.6 million of fees and expenses actually
incurred in connection with the Transactions.
"Consolidated Interest Coverage Ratio" of any person on any date of
determination (the "Transaction Date") means the ratio, on a pro forma basis, of
(a) the aggregate amount of Consolidated EBITDA of such person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and businesses permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Interest Expense of such
person (exclusive of amounts attributable to operations and businesses
permanently discontinued or disposed of, but only to the extent that the
obligations giving rise to such Consolidated Interest Expense would no longer be
obligations contributing to such person's Consolidated Interest Expense
subsequent to the Transaction Date) during the Reference Period; provided, that
for purposes of calculating each of Consolidated EBITDA and Consolidated
Interest Expense for this definition, (i) with respect to any Reference Period
commencing prior to May 7, 1996, the Transactions shall be assumed to have
occurred on the first day of such Reference Period, (ii) Acquisitions which
occurred during the Reference Period or subsequent to the Reference Period and
on or prior to the Transaction Date shall be assumed to have occurred on the
first day of the Reference Period, (iii) transactions giving rise to the need to
calculate the Consolidated Interest Coverage Ratio shall be assumed to have
occurred on the first day of the Reference Period, (iv) the incurrence of any
Indebtedness or issuance of any Disqualified Capital Stock
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during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date (and the application of the proceeds therefrom to
the extent used to refinance or retire other Indebtedness) shall be assumed to
have occurred on the first day of such Reference Period, and (v) the
Consolidated Interest Expense of such person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless such
person or any of its Subsidiaries is a party to an Interest Swap or Hedging
Obligation (which shall provide a term including at least the 12-month period
immediately following the Transaction Date) that has the effect of fixing the
interest rate on the date of computation, in which case such rate (whether
higher or lower) shall be used.
"Consolidated Interest Expense" of any person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such person and its
Consolidated Subsidiaries during such period, excluding amortization of debt
issuance costs incurred in connection with the Notes or the New Credit Facility
but including (i) original issue discount and non-cash interest payments or
accruals on any Indebtedness, (ii) the interest portion of all deferred payment
obligations, and (iii) all commissions, discounts and other fees and charges
owed with respect to bankers' acceptances and letters of credit financings and
currency and Interest Swap and Hedging Obligations, in each case to the extent
attributable to such period and (b) the amount of cash dividends paid by such
person or any of its Consolidated Subsidiaries in respect of Preferred Stock
(other than by Subsidiaries of such person to such person or such person's
wholly owned Subsidiaries). For purposes of this definition, (x) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP, and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such person or a
Subsidiary of such person of an obligation of another person shall be deemed to
be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Net Income" means, with respect to any person for any period,
the net income (or loss) of such person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) all gains and losses which are either
extraordinary (as determined in accordance with GAAP) or are either unusual or
nonrecurring (including any gain or loss from the sale or other disposition of
assets outside the ordinary course of business or from the issuance or sale of
any Capital Stock), (b) the net income, if positive, of any person, other than a
Consolidated Subsidiary but including an Unrestricted Subsidiary, in which such
person or any of its Consolidated Subsidiaries has an interest, except to the
extent of the amount of any dividends or distributions actually paid in cash to
such person or a wholly owned Consolidated Subsidiary of such person during such
period, but in any case not in excess of such person's pro rata share of such
person's net income for such period, (c) the net income or loss of any person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition, (d) the net income, if positive, of any of such person's
Consolidated Subsidiaries in the event and solely to the extent that the
declaration or payment of dividends or similar distributions is not at the time
permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary, (e) the effects of
changes in accounting principles, (f) any non-cash compensation expense in
connection with the exercise of, grant to or repurchase from officers, directors
and employees of stock, stock options or stock equivalents, (g) any one-time
non-cash charge or expense associated with the write-off of deferred debt
issuance costs associated with the New Credit Facility or the Notes and (h) the
amortization of the consideration for the Non-Competition Agreements entered
into in connection with the Transactions.
"Consolidated Net Worth" of any person at any date means the aggregate
consolidated stockholders' equity of such person (plus amounts of equity
attributable to preferred stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
consolidated stockholders' equity),
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(a) the amount of any such stockholders' equity attributable to Disqualified
Capital Stock or treasury stock of such person and its Consolidated Subsidiaries
and (b) all upward revaluations and other write-ups in the book value of any
asset of such person or a Consolidated Subsidiary of such person subsequent to
May 7, 1996.
"Consolidated Subsidiary" means, for any person, each Subsidiary of such
person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such person in accordance with GAAP.
"Credit Agreement" means the one or more credit agreements (including,
without limitation, the New Credit Facility) entered into by and among the
Company, certain of its subsidiaries, and certain financial institutions, which
provide for in the aggregate one or more term loans and/or revolving credit
facilities, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, as such credit
agreement and/or related documents may be amended, restated, supplemented,
renewed, replaced or otherwise modified from time to time whether or not with
the same agent, trustee, representative lenders or holders, and, subject to the
proviso to the next succeeding sentence, irrespective of any changes in the
terms and conditions thereof. Without limiting the generality of the foregoing,
the term "Credit Agreement" shall include any amendment, amendment and
restatement, renewal, extension, restructuring, supplement or modification to
any such credit agreement and all refundings, refinancings and replacements of
any such credit agreement, including any agreement (i) extending the maturity of
any Indebtedness incurred thereunder or contemplated thereby, (ii) adding or
deleting borrowers or guarantors thereunder, so long as borrowers and issuers
include one or more of the Company and its Subsidiaries and their respective
successors and assigns, (iii) increasing the amount of Indebtedness Incurred
thereunder or available to be borrowed thereunder, provided that on the date
such Indebtedness is Incurred it would not be prohibited by the covenant
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock," or (iv) otherwise altering the terms and conditions thereof in a manner
not prohibited by the terms hereof.
"Disqualified Capital Stock" means (a) except as set forth in clause (b) of
this paragraph, with respect to any person, Capital Stock of such person that,
by its terms or by the terms of any security into which it is then convertible,
exercisable or exchangeable, is, or upon the happening of an event or the
passage of time would be, required to be redeemed or repurchased (including at
the option of the holder thereof) by such person or any of its Subsidiaries, in
whole or in part, on or prior to the Stated Maturity of the New Notes and (b)
with respect to any Subsidiary of such person (including with respect to any
Subsidiary of the Company), any Capital Stock (i) not held by the Company or a
wholly owned Subsidiary of the Company or (ii) other than any common stock with
no preference, privileges, or redemption or repayment provisions.
"Equity Offering" means an underwritten public offering pursuant to a
registration statement filed with the SEC in accordance with the Securities Act,
the consequence of which is that the common stock of either the Company or TLC
is listed on a national securities exchange or quoted on the national market
system or the SmallCap Market of NASDAQ.
"Excluded Person" means collectively or individually Green Equity Investors
II, L.P., David Blechman, Jean Blechman, Brian Blechman, Dean Blechman, Neil
Blechman, Ross Blechman and Steve Blechman and their respective Related Parties.
"Exempted Affiliate Transaction" means (a) compensation, indemnification
and other benefits paid or made available (x) pursuant to the Employment
Agreements and Consulting Agreements, or (y) for or in connection with services
actually rendered and comparable to those generally paid or made available by
entities engaged in the same or similar businesses (including reimbursement or
advancement of reasonable out-of-pocket expenses, loans to officers, directors
and employees in the ordinary course of business consistent with past practice
and directors' and officers' liability insurance), (b) certain transactions,
expenses and payments pursuant to the terms of or contemplated by the
Stockholders Agreement, the Secondary Stockholders Agreement or the Stock
Purchase Agreement, (c) any Restricted Payments or other payments or
transactions expressly permitted under the covenant discussed above under
"Limitation on Restricted Payments," (d) transactions between the Company and
any of its wholly owned Subsidiaries or among wholly owned Subsidiaries of the
Company, (e) payments to LGP for management services under the Management
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Services Agreement in an amount not to exceed $1 million in any fiscal year, (f)
payments to LGP for reasonable and customary fees and expenses for financial
advisory and investment banking services provided to the Company in connection
with major financial transactions; provided, however, that to the extent that
any such Affiliate Transaction referred to in clause (f) involves payments in
excess of $2.5 million, such Affiliate Transaction must be evidenced by a
resolution of the Board of Directors set forth in an Officers' Certificate
addressed and delivered to the Trustee certifying that such Affiliate
Transaction has been approved by a majority of the disinterested members of the
Board of Directors, and (g) transactions between or among the Company and its
Subsidiaries or between or among Subsidiaries of the Company, provided that any
ownership interest in any such Subsidiary which is not beneficially owned
directly or indirectly by the Company or any of its Subsidiaries is not
beneficially owned by an Affiliate of the Company or TLC other than by virtue of
the direct or indirect ownership interest in such Subsidiary held (in the
aggregate) by the Company and/or one or more of its Subsidiaries.
"Existing Indebtedness" means Indebtedness of the Company or a Subsidiary
Guarantor in existence on May 7, 1996.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession, as in effect on May 7, 1996.
"Indebtedness" of any person means, without duplication, (a) all
liabilities and obligations, contingent or otherwise, of any such person, (i) in
respect of borrowed money (whether or not the recourse of the lender is to the
whole of the assets of such person or only to a portion thereof), (ii) evidenced
by bonds, notes, debentures or similar instruments, (iii) representing the
balance deferred and unpaid of the purchase price of any property or services,
except those incurred in the ordinary course of its business that would
constitute a trade payable to trade creditors, (iv) evidenced by bankers'
acceptances or similar instruments issued or accepted by banks, (v) for the
payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced
by a letter of credit or a reimbursement obligation of such person with respect
to any letter of credit; (b) all net obligations of such person under Interest
Swap and Hedging Obligations; (c) all liabilities and obligations of others of
the kind described in the preceding clause (a) or (b) that such person has
guaranteed or which are secured by a Lien on any assets or property of such
person and all obligations to purchase, redeem or acquire any Capital Stock
which are related to a payment obligation in respect of such Indebtedness;
provided that if the liabilities or obligations which are secured by a Lien have
not been assumed in full by such person or are not such person's legal liability
in full, the amount of such Indebtedness for the purposes of this definition
shall be limited to the lesser of the amount of such Indebtedness secured by
such Lien or the Fair Market Value of the assets or property securing such Lien;
and (d) any and all deferrals, renewals, extensions, refinancing and refundings
(whether direct or indirect) of, or amendments, modifications or supplements to,
any liability of the kind described in any of the preceding clauses (a), (b) or
(c), or this clause (d), whether or not between or among the same parties.
"Interest Swap and Hedging Obligation" means any monetary obligation of any
person pursuant to any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate exchange agreement,
currency exchange agreement or any other agreement or arrangement designed to
protect against fluctuations in interest rates or currency values, including,
without limitation, any arrangement whereby, directly or indirectly, such person
is entitled to receive from time to time periodic payments calculated by
applying either a fixed or floating rate of interest on a stated notional amount
in exchange for periodic payments made by such person calculated by applying a
fixed or floating rate of interest on the same notional amount.
"Investment" by any person in any other person means (without duplication)
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such person (whether for cash, property, services, securities or otherwise) of
Capital Stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
person or any agreement to make
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any such acquisition; (b) the making by such person of any deposit with, or
advance, loan or other extension of credit to, such other person (including the
purchase of property from another person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such other
person) or any commitment to make any such advance, loan or extension (but
excluding accounts receivable or deposits arising in the ordinary course of
business); (c) other than guarantees of Indebtedness of the Company or any
Subsidiary Guarantor to the extent permitted by the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock," the
entering into by such person of any guarantee of, or other credit support or
contingent obligation with respect to, Indebtedness or other liability of such
other person; (d) the making of any capital contribution by such person to such
other person; and (e) the designation by the Board of Directors of the Company
of any person to be an Unrestricted Subsidiary. The Company shall be deemed to
make an Investment in an amount equal to the fair market value of the net assets
of any Subsidiary (or, if neither the Company nor any of its Subsidiaries has
theretofore made an Investment in such Subsidiary, in an amount equal to the
Investments being made), at the time that such Subsidiary is designated an
Unrestricted Subsidiary, and any property transferred to an Unrestricted
Subsidiary from the Company or a Subsidiary shall be deemed an Investment valued
at its fair market value at the time of such transfer. The amount of any such
Investment shall be reduced by any liabilities or obligations of the Company or
any of its Subsidiaries to be assumed or discharged in connection with such
Investment by an entity other than the Company or any of its Subsidiaries.
"Junior Security" means, so long as the effect of any exclusion employing
this definition is not to cause the Notes to be treated in any bankruptcy case
or proceeding or similar event as part of the same class of claims as Senior
Debt or any class of claims pari passu with, or senior to, the Senior Debt, for
any payment or distribution, debt or equity securities of the Company or any
successor corporation provided for by a plan of reorganization or readjustment
that are subordinated at least to the same extent that the Notes are
subordinated to the payment of all Senior Debt then outstanding; provided that
(a) if a new corporation results from such reorganization or readjustment, such
corporation assumes any Senior Debt not paid in full in cash or Cash Equivalents
in connection with such reorganization or readjustment and (b) the rights of the
holders of such Senior Debt are not, without the consent of such holders,
altered by such reorganization or readjustment.
"LGP" means Leonard Green & Partners, L.P.
"Management Services Agreement" means the management services agreement,
dated as of the May 7, 1996, between the Company and LGP substantially as in
effect on May 7, 1996.
"Net Cash Proceeds" means the aggregate amount of Cash or Cash Equivalents
received by the Company in the case of a sale of Qualified Capital Stock and by
the Company and its Subsidiaries in respect of an Asset Sale plus, in the case
of an issuance of Qualified Capital Stock upon any exercise, exchange or
conversion of securities (including options, warrants, rights and convertible or
exchangeable debt) of the Company that were issued for cash after the Issue
Date, the amount of cash originally received by the Company upon the issuance of
such securities (including options, warrants, rights and convertible or
exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and (in the case of Asset Sales, reasonable and customary) expenses
(including, without limitation, the fees and expenses of legal counsel and
investment banking fees and expenses) incurred in connection with such Asset
Sale or sale of Qualified Capital Stock, and, in the case of an Asset Sale only,
less (i) the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable taxes required to be paid by the
Company or any of its respective Subsidiaries in connection with such Asset
Sale, (ii) the amounts of any repayments of Indebtedness secured, directly or
indirectly, by Liens on the assets which are the subject of such Asset Sale or
Indebtedness associated with such assets which is due by reason of such Asset
Sale (i.e., such disposition is permitted by the terms of the instruments
evidencing or applicable to such Indebtedness, or by the terms of a consent
granted thereunder, on the condition that the proceeds (or portion thereof) of
such disposition be applied to such Indebtedness), and other fees, expenses and
other expenditures, in each case, reasonably incurred as a consequence of such
repayment of Indebtedness (whether or not such fees, expenses or expenditures
are then due and payable or made, as the case may be); (iii) all amounts deemed
appropriate by the Company (as evidenced by a signed certificate of the Chief
Financial Officer of the Company delivered to
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the Trustee) to be provided as a reserve, in accordance with GAAP ("GAAP
Reserves"), against any liabilities associated with such assets which are the
subject of such Asset Sale; and (iv) with respect to Asset Sales by Subsidiaries
of the Company, the portion of such cash payments attributable to Persons
holding a minority interest in such Subsidiary.
"Obligation" means any principal, premium or interest payment, or monetary
penalty, or damages, or purchase price due by the Company or any Guarantor under
the terms of the New Notes or the Indenture, including any liquidated damages
due pursuant to the terms of the Registration Rights Agreement.
"Permitted Indebtedness" means, without duplication (a) Indebtedness
evidenced by the Notes and represented by the Indenture, (b) Indebtedness of the
Company and the Subsidiary Guarantors (without duplication) Incurred from time
to time under or in respect to the Credit Agreement up to an aggregate amount
outstanding at any time in an aggregate principal amount up to $88 million,
minus the amount of any such Indebtedness permanently reduced with Net Cash
Proceeds from any Asset Sale or assumed by a transferee in an Asset Sale; (c)
Indebtedness incurred by the Company or any Subsidiary Guarantor from time to
time in an aggregate principal amount outstanding at any time of up to $10
million (which may be Incurred pursuant to the Credit Agreement); (d)
Indebtedness incurred by the Company to any Subsidiary Guarantor, and
Indebtedness incurred by any Subsidiary Guarantor to any other Subsidiary
Guarantor or Subsidiary Guarantors or to the Company; provided, that, in the
case of Indebtedness of the Company, such obligations shall be unsecured and
subordinated in right of payment to the Company's obligations pursuant to the
Notes; (e) Purchase Money Indebtedness Incurred by the Company or any Subsidiary
Guarantor, in an aggregate principal amount not to exceed $20 million at any
time outstanding from time to time; (f) Indebtedness arising from tender, bid,
performance or government contract bonds, other obligations of like nature, or
warranty or contractual service obligations of like nature, or warranty or
contractual service obligations, in any case, Incurred by the Company or the
Subsidiary Guarantors in the ordinary course of business; (g) Interest Swap and
Hedging Obligations that are Incurred for the purpose of fixing or hedging
interest rate or currency risk with respect to any fixed or floating rate
Indebtedness that is permitted by the Indenture to be outstanding or any
receivable or liability the payment of which is determined by reference to a
foreign currency; provided, that the notional amount of any such Interest Swap
and Hedging Obligation does not exceed the principal amount of Indebtedness or
the amount of such receivable or liability to which such Interest Swap and
Hedging Obligation relates; and (h) Indebtedness in respect of bankers'
acceptances and letters of credit, all in the ordinary course of business in an
aggregate amount outstanding at any time of up to $2.5 million; (i) Existing
Indebtedness; and (j) Refinancing Indebtedness that serves to Refinance, without
duplication, in whole or in part, the Indebtedness permitted by this paragraph
or any one or more successive Refinancings of any thereof.
"Permitted Lien" means any of the following:
(a) Liens existing on May 7, 1996;
(b) Liens imposed by governmental authorities for taxes, assessments
or other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with
respect thereto are maintained on the books of the Company in accordance
with GAAP;
(c) statutory liens of carriers, warehousemen, mechanics, materialmen,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business provided that (i) the underlying obligations
are not overdue for a period of more than 30 days, or (ii) such Liens are
being contested in good faith and by appropriate proceedings and adequate
reserves with respect thereto are maintained on the books of the Company in
accordance with GAAP;
(d) Liens securing the performance of bids, trade contracts (other
than borrowed money), leases, statutory obligations, surety and appeal
bonds, performance bonds and other obligations of a like nature incurred in
the ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do
not in any case materially detract from the value of the
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property, subject thereto (as such property is used by the Company or any
of its Subsidiaries) or interfere with the ordinary conduct of the business
of the Company or any of its Subsidiaries;
(f) Liens arising by operation of law in connection with judgments,
only to the extent, for an amount and for a period not resulting in an
Event of Default with respect thereto;
(g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(h) Liens securing the Notes;
(i) Liens securing Indebtedness of a person existing at the time such
person becomes a Subsidiary or is merged with or into the Company or a
Subsidiary or Liens securing Indebtedness incurred in connection with an
Acquisition, provided in each case that such Liens were in existence prior
to the date of such acquisition, merger or consolidation, were not incurred
in anticipation thereof, and do not extend to any other assets;
(j) Liens securing or arising from Purchase Money Indebtedness
permitted to be incurred under clause (e) of the definition of Permitted
Indebtedness, provided such Liens relate to the property (and monetary
proceeds thereof) which was acquired or constructed with such Purchase
Money Indebtedness and the Capital Stock of any Person formed to acquire
such property and that does not own any other material property; and
(k) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner not materially more
adverse to the Holders of the Notes than the terms of the Liens securing
such refinanced Indebtedness.
"Permitted Payments" means, without duplication, (a) payments to TLC in an
amount sufficient to permit TLC to pay reasonable and necessary operating
expenses and other general corporate expenses (including any reasonable
professional fees and expenses, but excluding all expenses payable to or to be
paid to or on behalf of an Excluded Person); (b) payments to TLC to enable TLC
to pay foreign, federal, state or local tax liabilities, not to exceed the
amount of any tax liabilities that would be otherwise payable by the Company and
its Subsidiaries and Unrestricted Subsidiaries to the appropriate taxing
authorities if they filed separate tax returns to the extent that TLC has an
obligation to pay such tax liabilities relating to the operations, assets or
capital of the Company or its Subsidiaries and Unrestricted Subsidiaries,
provided any such payment shall either be used by TLC to pay such tax
liabilities within 90 days of TLC's receipt of such payment or refunded to the
payee; (c) payments to TLC to enable TLC to pay, or the payment by the Company
directly of, the payments provided for by clauses (a), (e) and (f) and the
transactions, expenses and payments described in clause (b) of the definition of
"Exempted Affiliated Transaction"); and (d) cash dividends paid to TLC to the
extent necessary to permit TLC to repurchase common stock, stock options and
stock equivalents of TLC held by departing or deceased directors, officers or
employees of TLC, the Company or any of the Subsidiary Guarantors, in an
aggregate amount not to exceed in any fiscal year $1,000,000 plus (x) the
cumulative amount by which (1) the product of $1,000,000 times the number of
preceding fiscal years subsequent to May 7, 1996 exceeds (2) the amount of such
payments made during such fiscal years, plus (y) the aggregate cash
consideration received by TLC, after May 7, 1996 and prior to or substantially
concurrently with the date of such repurchase, from the sale or issuance of
common stock of TLC to directors, officers and employees of TLC, the Company and
the Subsidiary Guarantors (including, to the extent not otherwise included in
the amount of such cash consideration, cash repayments of principal received by
TLC on loans made to such persons to enable them to purchase such stock) to the
extent such cash consideration was contributed, or is substantially concurrently
with such dividend contributed, to the Company as a capital contribution
(provided that the net amount of cash dividends paid under this clause (d) shall
not exceed $7.5 million).
"Purchase Money Indebtedness" means any Indebtedness of such person to any
seller or other person incurred to finance the acquisition or construction
(including in the case of a Capitalized Lease Obligation, the lease) of any
business or real or personal tangible property (or, in each case, any interest
therein) acquired or constructed after May 7, 1996 which, in the reasonable good
faith judgment of the Board of Directors of the
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Company, is related to a Related Business of the Company and which is incurred
concurrently with, or within 180 days of, such acquisition or the completion of
such construction and, if secured, is secured only by the assets so financed.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Indebtedness of the Company
with the Net Cash Proceeds received by the Company from the substantially
concurrent sale of Qualified Capital Stock or a substantially concurrent capital
contribution to the Company, or any exchange of Qualified Capital Stock for any
Capital Stock or Indebtedness of the Company.
"Reference Period" with regard to any person means the four full fiscal
quarters (or such lesser period during which such person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the New Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of ((a) and (b) above are, collectively, a "Refinancing"), any
Indebtedness or Disqualified Capital Stock in a principal amount or, in the case
of Disqualified Capital Stock, liquidation preference, not to exceed (after
deduction of the amount of fees, consents, premiums, prepayment penalties and
reasonable expenses incurred in connection with such Refinancing) the principal
amount of the Indebtedness so refinanced (or if such Indebtedness provides for
an amount less than the principal amount thereof to be due and payable upon the
acceleration thereof, such lesser amount as of the date of the issuance of such
Refinancing Indebtedness) or, in the case of Disqualified Capital Stock, the
liquidation preference of the Disqualified Capital Stock so refinanced, plus, in
the case of the Credit Agreement, additional Indebtedness which on the date of
Incurrence is permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock"; provided, that other than with
respect to a Refinancing of Indebtedness under the Credit Agreement, (A) such
Refinancing Indebtedness of any Subsidiary of the Company shall only be used to
refinance outstanding Indebtedness or Disqualified Capital Stock of such
Subsidiary, (B) Refinancing Indebtedness shall (x) not have an Average Life
shorter than the Indebtedness or Disqualified Capital Stock to be so refinanced
at the time of such Refinancing and (y) in all respects, be no less subordinated
or junior, if applicable, to the rights of Holders of the New Notes than was the
Indebtedness or Disqualified Capital Stock to be refinanced and (C) such
Refinancing Indebtedness shall have no installment of principal (or redemption
payment) scheduled to come due earlier than the scheduled maturity of any
installment of principal of the Indebtedness or Disqualified Capital Stock to be
so refinanced which was scheduled to come due prior to the Stated Maturity.
"Related Business" means the business conducted (or proposed to be
conducted, including the activities referred to in and being contemplated by the
Company, as described or referred to in this Prospectus) by the Company and its
Subsidiaries as of May 7, 1996 and any and all businesses that in the good faith
judgment of the Board of Directors of the Company are reasonably related
businesses, including reasonably related extensions thereof and including,
without limitation, any business related to the manufacturing or marketing of
products sold through health food stores.
"Related Party" means (i) with respect to any Excluded Person, (A) any
controlling stockholder, 80% or more owned Subsidiary, or spouse or immediate
family member (in the case of an individual) of such Excluded Person or (B) any
trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding an 80% or more
controlling interest of which consist of such Excluded Person and/or such other
persons referred to in the immediately preceding clause (A), and (ii) only with
respect to Green Equity Investors II, L.P. (and in addition to the persons
described in the foregoing clause (i)) any partnership or corporation which is
managed by or controlled by LGP or any affiliate thereof. For the purposes of
this definition, "control" of any individual, corporation, partnership, trust,
unincorporated organization or a government or any agency or political
subdivision thereof (a "Person"), shall mean the
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possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities or by contract or otherwise.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than investments in (a) Cash Equivalents, (b) the Company
or a Subsidiary Guarantor, (c) Investments in or acquisitions of Capital Stock,
bonds, notes, debentures, partnership or other ownership interests or other
securities, including any option or warrant of or in any Person that is or
becomes, at the time of the acquisition thereof, a Subsidiary of the Company and
is or is to be primarily engaged in a Related Business; (d) Investments of such
Person existing as of the date of the Indenture and any extension, modification
or renewal of such Restricted Investment (but not increases thereof, other than
as a result of the accrual or accretion of interest or original issue discount
pursuant to the terms of such Investment), (e) transactions or arrangements with
officers or directors of the Company or any Subsidiary of the Company entered
into in the ordinary course of business (including compensation or employee
benefit arrangements with any officer or director of the Company or any
Subsidiary of the Company permitted under the covenant "Transactions with
Affiliates"); (f) investments in or acquisitions of Capital Stock or similar
interests in Persons (other than Affiliates of the Company) received in the
bankruptcy or reorganization of or by such Person or any exchange of such
investment with the issuer thereof or taken in settlement of or other resolution
of claims or disputes, and, in each case, extensions, modifications and renewals
thereof; and (g) Investments in Persons (other than Affiliates of the Company)
received by such Person as consideration from Asset Sales to the extent not
prohibited by "Limitation on Sale of Assets and Subsidiary Stock" covenant or
any exchange of any such Investment with the issuer thereof, and extensions,
modifications and renewals thereof; provided, however, that a merger of another
person with or into the Company or a Subsidiary Guarantor shall not be deemed to
be a Restricted Investment so long as the surviving entity is the Company or a
direct wholly owned Subsidiary Guarantor.
"Restricted Payment" means, with respect to any person, (a) the declaration
or payment of any dividend or other distribution in respect of Capital Stock of
such person, (b) any payment on account of the purchase, redemption or other
acquisition or retirement for value of Capital Stock of such person or, (c)
other than with the proceeds from the substantially concurrent sale of, or in
exchange for, Refinancing Indebtedness, any purchase, redemption, or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness, directly or
indirectly, by such person prior to the scheduled maturity, any scheduled
repayment of principal, or scheduled sinking fund payment, as the case may be,
of such Indebtedness and (d) any Restricted Investment by such person; provided,
however, that the term "Restricted Payment" does not include (i) any dividend,
distribution or other payment on or with respect to Capital Stock of a person to
the extent payable in shares of Qualified Capital Stock of such person; (ii) any
dividend, distribution or other payment to the Company, or to any of its wholly
owned Subsidiary Guarantors, by the Company or any of its Subsidiaries; or (iii)
the declaration or payment of dividends by any Subsidiary of the Company
provided such distributions are made to the Company (or a Subsidiary of the
Company, as applicable) on a pro rata basis (and in like form) to all
distributions so made to all other stockholders thereof.
"Sale and Leaseback Transaction" means any transaction by which the Company
or a Subsidiary Guarantor, directly or indirectly, becomes liable as a lessee or
as a guarantor or other surety with respect to any lease of any property
(whether real or personal or mixed), whether now owned or hereafter acquired
that the Company or any Subsidiary Guarantor has sold or transferred or is to
sell or transfer to any other Person in a substantially concurrent transaction
with such assumption of liability.
"Senior Bank Representative" means, at any time, the then-acting agent or
agents under the Credit Agreement, which shall initially be Chemical Bank.
"Senior Debt" of the Company or any Subsidiary Guarantor means Indebtedness
(including, without limitation, interest accruing after the commencement of any
bankruptcy case or proceedings whether or not allowed as a claim in such case or
proceeding) of the Company or such Guarantor arising under the Credit Agreement
or any Interest Swap and Hedging Obligation relating to such Indebtedness or
that, by the terms of the instrument creating or evidencing such Indebtedness,
is expressly designated Senior Debt and made
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senior in right of payment to the New Notes or the applicable guarantee;
provided, that in no event shall Senior Debt include (a) Indebtedness to any
Subsidiary of the Company or any officer, director or employee of the Company or
any Subsidiary of the Company, (b) Indebtedness incurred in violation of the
terms of the Indenture, (c) Indebtedness to trade creditors, and (d)
Disqualified Capital Stock.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X promulgated
pursuant to the Securities Act, as such Regulation S-X is in effect on the Issue
Date.
"Stated Maturity," when used with respect to any New Note, means May 15,
2006.
"Subordinated Indebtedness" means Indebtedness of the Company or a
Subsidiary Guarantor that is subordinated by its terms in right of payment to
the New Notes or such Guarantee, as applicable.
"Subsidiary," with respect to any person, means (i) a corporation a
majority of whose Capital Stock with voting power, under ordinary circumstances
to elect directors, is at the time, directly or indirectly, owned by such
person, by such person and one or more Subsidiaries of such person or by one or
more Subsidiaries of such person, (ii) any other person (other than a
corporation) in which such person, one or more Subsidiaries of such person, or
such person and one or more Subsidiaries of such person, directly or indirectly,
at the date of determination thereof has at least majority equity ownership
interest, or (iii) a partnership in which such person or a Subsidiary of such
person is, at the time, a general partner and in which such person, directly or
indirectly, at the date of determination thereof has at least a majority equity
ownership interest. Notwithstanding the foregoing, an Unrestricted Subsidiary
shall not be a Subsidiary of the Company or of any Subsidiary or Subsidiaries of
the Company for any purpose whatsoever.
"Transactions" means the transactions contemplated by the Stock Purchase
and Sale Agreement, dated as of March 5, 1996, as amended, among TLC, the
Company, Green Equity Investors II, L.P., David Blechman, Jean Blechman, Brian
Blechman, Dean Blechman, Neil Blechman, Ross Blechman, Steve Blechman and
Stephen Welling and the related financings thereof.
"Unrestricted Subsidiary" means any subsidiary of the Company that does not
own any Capital Stock of, or hold any Lien on any property of, the Company or
any other Subsidiary Guarantor and that, at the time of determination, shall be
an Unrestricted Subsidiary (as designated by the Board of Directors of the
Company); provided, that (i) neither immediately prior thereto nor after giving
pro forma effect to such designation would there exist a Default or Event of
Default and (ii) immediately after giving pro forma effect thereto, the Company
could incur at least $1.00 of Indebtedness pursuant to the Debt Incurrence Ratio
in the second paragraph of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." The Board of Directors of the
Company may designate any Unrestricted Subsidiary to be a Subsidiary, provided
that (i) no Default or Event of Default is existing or will occur as a
consequence thereof and (ii) immediately after giving effect to such
designation, on a pro forma basis, the Company could incur at least $1.00 of
Indebtedness pursuant to the Debt Incurrence Ratio in the second paragraph of
the covenant "Limitation of Incurrence of Additional Indebtedness and
Disqualified Capital Stock." Each such designation shall be evidenced by filing
with the Trustee a certified copy of the resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the New Notes will initially be issued in the
form of one or more registered New Notes in global form (the "Global Notes").
Each Global Note will be deposited on the date of the closing of the sale of the
Notes (the "Closing Date") with, or on behalf of, The Depository Trust Company
(the "Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary. Interests in Global Notes will be available for purchase only by
"qualified institutional buyers," as defined in Rule 144A under the Securities
Act ("QIBs").
Notes that are (i) originally issued to or transferred to institutional
"accredited investors," as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, who are not QIBs or to any other persons who are not QIBs or
(ii) issued as described below under "Certificated Securities," will be issued
in registered form
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without coupons (the "Certificated Securities"). Upon the transfer to a QIB of
Certificated Securities, such Certificated Securities will, unless the Global
Note has previously been exchanged for Certificated Securities, be exchanged for
an interest in the Global Note representing the principal amount of New Notes
being transferred.
The Depositary has advised the Company that it is (i) a limited-purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depositary was
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. QIBs may elect to hold New
Notes purchased by them through the Depositary. QIBs who are not Participants
may beneficially own securities held by or on behalf of the Depositary only
through Participants or Indirect Participants. Persons that are not QIBs may not
hold New Notes through the Depositary.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Note, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with an interest
in the Global Note and (ii) ownership of the New Notes will be shown on, and the
transfer of ownership thereof will be effected only through, records maintained
by the Depositary (with respect to the interests of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer New Notes or to pledge the New Notes as
collateral will be limited to such extent. The New Notes will be subject to
certain other restrictions on transferability.
So long as the Depositary or its nominee is the registered owner of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the New Notes represented by the Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have New Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in New Notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depositary's
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each QIB owning a beneficial interest in a Global Note must
rely on the procedures of the Depositary and, if such QIB is not a Participant
or an Indirect Participant, on the procedures of the Participant through which
such QIB owns its interest, to exercise any rights of a holder under the
Indenture or such Global Note. The Company understands that under existing
industry practice, in the event the Company requests any action of holders of
New Notes or a QIB that is an owner of a beneficial interest in a Global Note
desires to take any action that the Depositary, as the holder of such Global
Note, is entitled to take, the Depositary would authorize the Participants to
take such action and the Participants would authorize QIBs owning through such
Participants to take such action or would otherwise act upon the instructions of
such QIBs. Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of New Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such New Notes.
Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global Note registered in the name of the
Depositary or its nominee on the applicable record date will be
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payable by the Trustee to or at the direction of the Depositary or its nominee
in its capacity as the registered holder of the Global Note representing such
New Notes under the Indenture. Under the terms of the Indenture, the Company and
the Trustee may treat the persons in whose names the New Notes, including the
Global Notes, are registered as the owners thereof for the purpose of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of New Notes
(including principal, premium, if any, and interest), or to immediately credit
the accounts of the relevant Participants with such payment, in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global Note as shown on the records of the Depositary. Payments
by the Participants and the Indirect Participants to the beneficial owners of
New Notes will be governed by standing instructions and customary practice and
will be the responsibility of the Participants or the Indirect Participants.
Certificated Securities
If (i) the Company notifies the Trustee in writing that the Depositary is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of New
Notes in definitive form under the Indenture, then, upon surrender by the
Depositary of its Global Note, Certificated Securities will be issued to each
person that the Depositary identifies as the beneficial owner of the New Notes
represented by the Global Note. In addition, subject to certain conditions, any
person having a beneficial interest in a Global Note may, upon request to the
Trustee, exchange such beneficial interest for Certificated Securities. Upon any
such issuance, the Trustee is required to register such Certificated Securities
in the name of such person or persons (or the nominee of any thereof), and cause
the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related New Notes and each such person may conclusively
rely on, and shall be protected in relying on instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the New Notes to be issued).
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable. The
Company will have no responsibility for the performance by DTC or its
Participants of their respective obligations as described hereunder or under the
rules and procedures governing their respective operations.
SAME-DAY FUNDS SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the New Notes
represented by the Global Note (including principal, premium, if any, interest
and liquidated damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the registered holder of the Global
Note. With respect to Certificated Securities, the Company will make all
payments of principal, premium, if any, interest and liquidated damages, if any,
by wire transfer of immediately available funds to the accounts specified by the
holders thereof or, if no such account is specified, by mailing a check to each
such holder's registered address. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the New Notes represented by the Global Note are
expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such New Notes will, therefore, be required by the
Depositary to be settled in immediately available funds. The Company expects
that secondary trading in the Certificated Securities will also be settled in
immediately available funds.
DESCRIPTION OF NEW CREDIT FACILITY
The New Credit Facility, agented by The Chase Manhattan Bank
(s/k/a/Chemical Bank; "Chase") and The Bank of New York, provides for (i) a
six-year term loan facility, in the amount of $53.0 million maturing on May 7,
2002 (the "Term Loan"), and (ii) a six-year revolving credit facility (the
"Revolving Credit
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Facility") of $15.0 million expiring on May 7, 2002. The Revolving Credit
Facility and the Term Loan bear interest at an annual rate, at the Company's
option, equal to the "ABR plus the Applicable Margin" ("ABR Loans") or the
"Eurodollar Rate plus Applicable Margin" ("Eurodollar Loans"). As used herein
"ABR" means the highest of (i) the rate of interest publicly announced by Chase
as its prime rate in effect at its principal office in New York City, (ii) the
secondary market rate for certificates of deposit (grossed up for maximum
statutory reserve requirements) plus 1% and (iii) the federal funds effective
rate from time to time plus 0.5%. "Eurodollar Rate" means the rate (grossed up
for maximum statutory reserve requirements for eurocurrency liabilities) at
which eurodollar deposits for one, two, three or six months (as selected by the
Company) are offered to Chase in the interbank eurodollar market in the
approximate amount of Chase's share of the applicable loan. "Applicable Margin"
means (a) 1.25%, in the case of ABR Loans and (b) 2.50%, in the case of
Eurodollar Loans. Interest rates on the credit facilities are subject to
reduction in the event the Company meets certain financial tests.
The principal amount of the $53.0 million Term Loan is required to be
amortized commencing on October 31, 1996. Scheduled amortization payments under
the Term Loan will be $1.5 million in 1996, $3.8 million in 1997, $5.6 million
in 1998, $7.8 million in 1999, $10.1 million in 2000, $14.9 million in 2001 and
$9.3 million in 2002. Subsequent to the Transactions, the Company repaid
approximately $3.0 million of outstanding indebtedness under the Term Loan.
The proceeds of the Term Loan were used, together with proceeds of the
Offering and the issuance of the common stock and Preferred Stock of TLC and
available cash of the Company, to finance the Acquisition, to refinance certain
debt of the Company and to pay related fees and expenses. The proceeds of the
Revolving Credit Facility can be used to provide for the working capital
requirements of the Company on or after the consummation of the Acquisition and
for general corporate purposes, including, without limitation, the payment of
transaction fees and tax adjustments.
The New Credit Facility is secured by first priority security interests in
all of the tangible and intangible assets of the Company and its direct and
indirect subsidiaries. In addition, the loans under the New Credit Facility are
guaranteed by TLC, ARP and certain of the Company's future subsidiaries.
Additionally, the Company will be required to apply 75% (subject to reduction to
50% if certain financial tests are met) of excess cash flow (as defined in the
New Credit Facility), 100% of the net proceeds of certain dispositions of
material assets (other than inventory in the ordinary course of business), 50%
of the net proceeds of the issuance or sale of the first $60 million of equity
by TLC and 100% of the net proceeds of the incurrence of certain indebtedness,
to the repayment of the New Credit Facility.
The New Credit Facility contains certain financial and operating covenants
including a maximum leverage ratio, a minimum EBITDA and a minimum fixed charge
coverage ratio. In addition, the Company is limited in the amount of annual
capital expenditures and capital lease obligations it may incur.
The operating covenants of the New Credit Facility include limitations on
the ability of the Company to (i) incur additional indebtedness, other than
certain permitted indebtedness, (ii) permit additional liens or encumbrances,
other than certain permitted liens, (iii) make any investments in other persons,
other than certain permitted investments, (iv) become obligated with respect to
contingent obligations, other than certain permitted contingent obligations, and
(v) make restricted junior payments (including dividends on its common stock).
The operating covenants also include restrictions on certain specified
fundamental changes, such as mergers and asset sales, transactions with
shareholders and affiliates, and business outside the ordinary course as
currently conducted and certain extensions thereof, amendments or waivers of
certain specified agreements, and the issuance of guarantees or other credit
enhancements.
If for any reason the Company is unable to comply with the terms of the New
Credit Facility, including the covenants included therein, such noncompliance
would result in an event of default under the New Credit Facility and could
result in acceleration of the payment of the indebtedness outstanding under the
New Credit Facility.
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DESCRIPTION OF CAPITAL STOCK OF TLC
In August 1996, TLC amended its Amended and Restated Certificate of
Incorporation (as amended, the "Certificate of Incorporation") to change its
authorized capital stock to 75,000,000 shares of common stock, $1.00 par value
per share ("TLC Common Stock"), of which 1,000,000 shares were outstanding as of
August 31, 1996, and 2,000,000 shares of preferred stock, $.01 par value per
share, of which 67,000 shares were outstanding as of August 31, 1996.
The following summary description of the capital stock of TLC is qualified
in its entirety by reference to the Certificate of Incorporation and TLC's
Amended and Restated Bylaws (the "Bylaws"), copies of which are filed as
exhibits to the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Holders of shares of TLC common stock vote as a single class on all matters
submitted to a vote of the stockholders, including the election of directors,
with each share of TLC Common Stock entitled to one vote. There is no cumulative
voting with respect to the election of directors, with the result that holders
of more than 50% of the shares voting for the election of directors can elect
all of the directors. As of August 31, 1996, GEI owned 48% and the Continuing
Stockholders owned 45% of the TLC Common Stock. As a result, GEI and the
Continuing Stockholders, should they choose to act together, will retain the
voting power required to elect all directors and approve most other matters
required to be voted upon by the stockholders of TLC. See "Risk
Factors -- Control by Principal Stockholders."
Holders of TLC Common Stock on the applicable record date are entitled to
share ratably in such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor, subject to the
rights of the holders of any series of preferred stock. Upon the liquidation,
dissolution or winding up of TLC, each holder of TLC Common Stock will be
entitled to share ratably in any distribution of TLC's assets after the payment
of all debts and other liabilities, subject to any superior rights of the
holders of any outstanding shares of preferred stock.
Holders of the shares of TLC Common Stock have no preemptive or other
subscription rights and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the outstanding shares of
TLC Common Stock are fully paid and non-assessable.
Special meetings of stockholders may be called by TLC's Board of Directors,
the Chairman of the Board of Directors, the President or the holders of
twenty-five (25%) of the then outstanding TLC Common Stock.
Stockholders of TLC are required to provide advance notice of nominations
of directors to be made at, and of business proposed to be brought before, a
meeting of stockholders. The failure to deliver proper notice within the period
specified in TLC's Bylaws will result in the denial to the stockholder of the
right to make such nominations or propose such action at the meeting.
PREFERRED STOCK
TLC's Board of Directors has authority (without action by the stockholders)
to issue authorized and unissued shares of preferred stock in one or more
series, to designate the number of shares constituting any series, and to fix,
by resolution, the voting powers, designations, preferences and relative,
optional or other special rights thereof, including liquidation preferences and
the dividend, conversion and redemption rights of each such series; provided,
however, that TLC may not issue any additional series of preferred stock while
any shares of Senior Preferred Stock or Junior Preferred Stock are outstanding.
Under certain circumstances, TLC could issue the preferred stock as a method of
discouraging, delaying or preventing a change of control of TLC.
In connection with the consummation of the Acquisition and the Offering,
TLC issued the Senior Preferred Stock and Junior Preferred Stock, the terms of
which are described below.
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<PAGE> 96
SENIOR PREFERRED STOCK
The Certificate of Incorporation limits the number of shares of Senior
Preferred Stock which can be issued to 30,000 plus additional shares of Senior
Preferred Stock which may be issued in payment of dividends on the Senior
Preferred Stock if TLC elects to pay dividends in additional shares of Senior
Preferred Stock. The aggregate liquidation preference of the Senior Preferred
Stock issued upon the consummation of the Acquisition was $30.0 million.
Dividends on the Senior Preferred Stock accrue at the rate of 14% per annum and
will be payable quarterly when, as and if declared by the Board of Directors.
Dividends shall be paid in additional fully paid and non-assessable shares of
Senior Preferred Stock having an aggregate liquidation preference equal to the
amount of such dividends; provided, however, that TLC may, at its option and
upon a majority vote of directors not affiliated with LGP ("Unaffiliated
Directors"), pay dividends in cash.
The Senior Preferred Stock is redeemable at any time, in whole or in part,
at the option of TLC and upon a majority vote of Unaffiliated Directors, at the
amount of the liquidation preference including accrued and unpaid dividends,
except that (i) no partial redemption is allowed unless full cumulative
dividends have been paid on all shares and (ii) no optional redemption is
allowed at any time when TLC is making or required to make an offer to purchase
Preferred Stock upon a change of control. The Senior Preferred Stock will be
subject to mandatory redemption at the amount of the liquidation preference
including accrued and unpaid dividends on May 1, 2007.
In the event of a Change of Control (as defined), TLC will be required to
make an offer to repurchase the outstanding Senior Preferred Stock at a price
equal to 101% of the liquidation preference thereof, plus accrued and unpaid
dividends.
The Senior Preferred Stock ranks junior in right of payment to all
liabilities of TLC and to any preferred stock senior in right of payment to the
Senior Preferred Stock (if consented to by holders of a majority of the shares
of Senior Preferred Stock) and ranks senior in right of payment to the Junior
Preferred Stock and TLC Common Stock.
Holders of the Senior Preferred Stock have no voting rights with respect to
general corporate matters except as provided by law or as set forth in the
Certificate of Incorporation. The Certificate of Incorporation provides that the
Senior Preferred Stock will have class voting rights with regard to, among other
things, (i) authorization or issuance of stock which is senior to or on a parity
with the Senior Preferred Stock as to dividends and distributions upon
liquidation; (ii) issuance of additional shares of Senior Preferred Stock other
than in payment of dividends on Senior Preferred Stock; (iii) changes to the
Certificate of Incorporation or Bylaws of TLC so as to affect adversely any of
the preferences, rights, powers or privileges of the Senior Preferred Stock or
of the holders thereof as such; (iv) mergers, consolidations or sales of all or
substantially all of the assets of TLC (or of TLC and its subsidiaries, taken as
a whole) unless (a) the shares of Senior Preferred Stock will be redeemed upon
consummation of such transaction or (b) certain other conditions are met; (v)
certain transactions with affiliates; and (vi) subject to certain exceptions
(including exceptions relating to the Junior Preferred Stock), payment of
dividends on, or redemption or repurchase of, junior securities.
JUNIOR PREFERRED STOCK
The Certificate of Incorporation limits the number of shares of Junior
Preferred Stock which can be issued to 37,000, plus additional shares of Junior
Preferred Stock which may be issued in payment of dividends on the Junior
Preferred Stock if TLC elects to pay dividends in additional shares of Junior
Preferred Stock. The aggregate liquidation preference of the Junior Preferred
Stock issued upon the consummation of the Acquisition was $37.0 million.
Dividends on the Junior Preferred Stock accrue at the rate of 11.25% per annum
and will be payable quarterly when, as and if declared by the Board of
Directors. Dividends shall be paid in additional fully paid and non-assessable
shares of Junior Preferred Stock having an aggregate liquidation preference
equal to the amount of such dividends; provided, however, that if dividends are
then being paid in cash on the Senior Preferred Stock, TLC may, at its option
and upon a majority vote of Unaffiliated Directors, pay dividends on the Junior
Preferred Stock in cash. The Junior Preferred Stock will be
96
<PAGE> 97
subject to mandatory redemption at the amount of the liquidation preference
including accrued and unpaid dividends on May 1, 2008.
The Junior Preferred Stock ranks junior in right of payment to all
liabilities of TLC and to the Senior Preferred Stock and any other preferred
stock senior in right of payment to the Junior Preferred Stock (if consented to
by holders of a majority of the shares of Junior Preferred Stock) and ranks
senior in right of payment to any additional preferred stock which does not
expressly provide that it ranks senior to or on a parity with the Junior
Preferred Stock and the TLC Common Stock.
Other than as set forth above with respect to ranking, the powers, rights,
designations and preferences, and qualifications, restrictions and limitations
thereof, of the Junior Preferred Stock are substantially similar to those of the
Senior Preferred Stock.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Kramer, Levin, Naftalis & Frankel, counsel to the Company
("Counsel"), the following are the material anticipated federal income tax
consequences expected to result to holders from the acquisition, ownership and
disposition of the New Notes. This discussion is based upon current provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), applicable
Treasury regulations, judicial authority and administrative pronouncements, all
of which are subject to change, possibly with retroactive effect. Holders should
note that Counsel's opinion is not binding on the Internal Revenue Service (the
"Service"), and there can be no assurance that the Service will have a similar
view with respect to the tax consequences described below. No ruling has been or
will be requested by the Company from the Service on any matters relating to the
New Notes.
The following discussion is for general information only. The tax treatment
of a holder of the New Notes may vary depending upon such holder's particular
situation. The discussion only addresses the tax consequences to holders who
acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes
as capital assets and does not deal with special classes of holders, such as
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities, foreign corporations and persons who are not citizens or
residents of the United States, that may be subject to special rules not
discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, HOLDING, EXCHANGING AND
DISPOSING OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL OR FOREIGN TAX LAWS.
THE EXCHANGE OFFER
The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a holder thereof for federal income tax purposes.
An exchanging holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The New Notes will be issued without original issue discount. Stated
interest on the Old and New Notes will be taxable to a holder as ordinary
interest income at the time it is accrued or paid in accordance with such
holder's method of accounting for tax purposes.
BOND PREMIUM ON THE NEW NOTES
If a holder of a New Note purchased the Old Notes for an amount in excess
of the amount payable at the maturity date (or a call date, if appropriate) of
the Old Notes, the holder may deduct such excess as amortizable bond premium
over the aggregate terms of the Old Notes and the New Notes (taking into account
earlier call dates, as appropriate), under a yield-to-maturity formula. The
deduction is available only if an election is made by the purchaser or is in
effect. This election is revocable only with the consent of the Service. The
election applies to all obligations owned or subsequently acquired by the
holder. The holder's
97
<PAGE> 98
adjusted tax basis in the Old Notes and the New Notes will be reduced to the
extent of the deduction of amortizable bond premium. Except as may otherwise be
provided in future regulations, under the Code the amortizable bond premium is
treated as an offset to interest income on the Old Notes and the New Notes
rather than as a separate deduction item.
MARKET DISCOUNT ON THE NEW NOTES
Tax consequences of a disposition of the New Notes may be affected by the
market discount provisions of the Code. These rules generally provide that if a
holder acquired the Old Notes (other than in an original issue) at a market
discount which equals or exceeds 1/4 of 1% of the stated redemption price of the
New Notes at maturity multiplied by the number of remaining complete years to
maturity and thereafter recognizes gain upon a disposition (or makes a gift) of
the New Notes, the lesser of (i) such gain (or appreciation, in the case of a
gift) or (ii) the portion of the market discount which accrued while the Old or
New Notes were held by such holder will be treated as ordinary income at the
time of the disposition (or gift). For these purposes, market discount means the
excess (if any) of the stated redemption price at maturity over the basis of
such Old or New Notes immediately after their acquisition by the holder. A
holder of the New Notes may elect to include any market discount (whether
accrued under the Old Notes or the New Notes) in income currently rather than
upon disposition of the New Notes. This election once made applies to all market
discount obligations acquired on or after the first taxable year to which the
election applies, and may not be revoked without the consent of the Service.
A holder of any New Note who acquired the Old Note at a market discount
generally will be required to defer the deduction of a portion of the interest
on any indebtedness incurred or maintained to purchase or carry such Old or New
Note until the market discount is recognized upon a subsequent disposition of
such New Note. Such a deferral is not required, however, if the holder elects to
include accrued market discount in income currently.
REDEMPTION OR SALE OF THE NEW NOTES
Generally, any redemption or sale of the New Notes by a holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the extent that
such cash or property received is attributable to accrued, but previously
untaxed, interest) and the holder's tax basis in the New Notes. The tax basis of
a holder of the New Notes should generally be equal to the price paid for the
Old Notes exchanged therefor, plus any accrued market discount on the New Notes
(and the Old Notes exchanged therefor) included in the holder's income prior to
sale or redemption of the New Notes, or reduced by any amortizable bond premium
applied against the holder's income prior to sale or redemption of the New
Notes. Such gain or loss generally would be long-term capital gain or loss if
the holding period exceeded one year, except to the extent it constitutes
accrued market discount.
BACKUP WITHHOLDING AND INFORMATION REPORTING
A 31% "backup" withholding tax and information reporting requirements apply
to certain payments of interest and original issue discount on an obligation,
and to proceeds of the sale of an obligation before maturity, to certain
non-corporate holders. The Company, and/or any paying and and/or collection
agent, including a broker, as the case may be, will be required to withhold from
any payment that is subject to backup withholding a tax equal to 31% of such
payment unless the holder furnishes its taxpayer identification number (i.e.,
social security number in the case of an individual) in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies (with respect to payments of interest) as to no loss of exemption from
backup withholding and meets certain other conditions. Backup withholding,
however, in any event, generally does not apply to payments to certain "exempt
recipients" such as corporations.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
98
<PAGE> 99
PLAN OF DISTRIBUTION
Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market making or other trading (other than Old Notes
acquired directly from the Company), may exchange Old Notes for New Notes in the
Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and must,
therefore, acknowledge that it will deliver a prospectus in connection with any
resale of New Notes received in the Exchange Offer. This prospectus delivery
requirement may be satisfied by the delivery by such broker-dealer of this
Prospectus, as it may be amended or supplemented from time to time. The Company
has agreed that, for a period of 180 days after the effective date of this
Prospectus, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer who receives New Notes in the Exchange Offer for use in
connection with any such sale. The Company will not receive any proceeds from
any sales of New Notes by broker-dealers. New Notes received by broker-dealers
for their own accounts pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
of New Notes by broker-dealers may be made directly to a purchaser or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. Any broker-dealer that resells New Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such New Notes may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange Offer other
than commissions or concessions of any brokers or dealers and will indemnify
Eligible Holder (including any broker-dealer) against certain liabilities,
including liabilities under the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer that receives New
Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior
to using the Prospectus in connection with the sale or transfer of New Notes,
and acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements herein not misleading (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented prospectus to such broker-dealer.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded, except as so modified or superseded, shall
not be deemed to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference,
other than exhibits to such documents unless they are specifically incorporated
by reference into such documents. Requests for such copies should be directed
to: Twin Laboratories Inc., 2120 Smithtown Avenue, Ronkonkoma, New York 11779,
Attention: Philip M. Kazin, General Counsel.
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<PAGE> 100
LEGAL MATTERS
The validity of the Guarantees will be passed upon for the Company by
Kramer, Levin, Naftalis & Frankel, New York, New York. The validity of the New
Notes will be passed upon for the Company by Ray, Quinney & Nebeker, Salt Lake
City, Utah.
EXPERTS
The consolidated financial statements of TLC as of December 31, 1994 and
1995 and for each of the three years in the period ended December 31, 1995 which
are included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
100
<PAGE> 101
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)...................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1993, 1994 and
1995 and the Six Months Ended June 30, 1995 (unaudited) and 1996 (unaudited)..... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1993, 1994 and 1995 and the Six Months Ended June 30, 1996 (unaudited)........... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1993, 1994
and 1995 and the Six Months Ended June 30, 1995 (unaudited) and 1996
(unaudited)...................................................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 102
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Twinlab Corporation (formerly TLG Laboratories Holding Corp.)
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheets of Twinlab
Corporation (formerly TLG Laboratories Holding Corp.) and subsidiaries as of
December 31, 1994 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. 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 audit 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, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1994 and 1995, and the results of their consolidated operations and
their consolidated cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Jericho, New York
February 9, 1996
(May 7, 1996 as to Notes 1 and 16a, and
August 7, 1996 as to Notes 16b and 16c)
F-2
<PAGE> 103
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- ------- JUNE 30,
-----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 7).......................... $ 5,735 $ 7,945 $ 7,984
Marketable securities (Note 2).............................. 1,178 201 201
Accounts receivable, net of allowance for bad debts of $63,
$177 and $228, respectively (Notes 7 and 15)............. 17,892 24,372 22,701
Inventories (Notes 3 and 7)................................. 22,732 25,273 30,953
Deferred tax assets (Note 16)............................... -- -- 417
Prepaid expenses and other current assets................... 1,179 872 1,330
------- ------- -----------
Total current assets................................ 48,716 58,663 63,586
Marketable securities (Note 2)................................ 201 -- --
Property, plant and equipment, net (Notes 4, 8 and 9)......... 12,071 13,036 12,960
Deferred tax assets (Note 16)................................. -- -- 55,155
Other assets (Note 5)......................................... 3,718 3,610 9,462
------- ------- -----------
Total......................................................... $64,706 $75,309 $ 141,163
======= ======= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt (Notes 8 and 16).......... $ 1,101 $ 1,479 $ 1,500
Current portion of capital lease obligations (Note 9)....... 126 136 141
Loan payable -- bank (Note 7)............................... 660 660 --
Notes payable -- shareholders (Note 14)..................... 1,846 846 --
Accounts payable............................................ 3,612 6,854 8,678
Accrued expenses and other current liabilities (Note 6)..... 3,135 4,258 9,471
------- ------- -----------
Total current liabilities........................... 10,480 14,233 19,790
Long-term debt, less current portion (Notes 5 and 16)......... 5,116 5,367 48,862
Capital lease obligations, less current portion (Note 9)...... 439 304 232
Senior subordinated notes (Note 16)........................... -- -- 100,000
------- ------- -----------
Total liabilities................................... 16,035 19,904 168,884
------- ------- -----------
Senior redeemable cumulative preferred stock, $.01 par value;
156,410 shares authorized; 30,000 shares outstanding as of
June 30, 1996 (Note 16)..................................... -- -- 30,000
------- ------- -----------
Junior redeemable cumulative preferred stock, $.01 par value;
140,090 shares authorized; 37,000 shares outstanding as of
June 30, 1996 (Note 16)..................................... -- -- 37,000
------- ------- -----------
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity (deficit):
Common stock, $1 par value; 1,000,000 shares authorized;
450,000 shares outstanding as of December 31, 1994 and
1995 and 1,000,000 shares outstanding as of June 30, 1996
(Note 16)................................................ 450 450 1,000
Additional paid-in capital.................................. 68 68 80,701
Retained earnings (deficit)................................. 48,153 54,887 (176,422)
------- ------- -----------
Total shareholders' equity (deficit)................ 48,671 55,405 (94,721)
------- ------- -----------
Total......................................................... $64,706 $75,309 $ 141,163
======= ======= ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 104
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales (Note 15)........................... $99,897 $117,342 $148,735 $69,820 $ 81,837
Cost of sales................................. 62,131 70,247 89,932 42,046 47,852
------- -------- -------- ------- --------
Gross profit.................................. 37,766 47,095 58,803 27,774 33,985
Operating expenses............................ 21,125 23,022 27,191 13,779 14,816
------- -------- -------- ------- --------
Income from operations........................ 16,641 24,073 31,612 13,995 19,169
------- -------- -------- ------- --------
Other (expense) income:
Interest income............................. 242 254 313 147 315
Interest expense............................ (487) (761) (866) (417) (2,591)
Transaction expenses (Note 1)............... -- -- (656) -- (400)
Nonrecurring non-competition agreement
expense (Note 16)........................ -- -- -- -- (15,300)
Other....................................... 510 354 61 96 (23)
------- -------- -------- ------- --------
265 (153) (1,148) (174) (17,999)
------- -------- -------- ------- --------
Income before unusual item and provision for
income taxes................................ 16,906 23,920 30,464 13,821 1,170
Unusual item -- nonrecurring charge for prior
years' income tax assessment (Note 13)...... -- 1,982 -- -- --
Provision for income taxes (Note 10).......... 230 245 240 92 1,833
------- -------- -------- ------- --------
Net income (loss)............................. $16,676 $ 21,693 $ 30,224 $13,729 $ (663)
======= ======== ======== ======= ========
Pro forma (Note 1)
Historical income before provision for income
taxes....................................... $16,906 $ 21,938 $ 30,464 $13,821 $ 1,170
Pro forma provision for income taxes.......... 6,644 9,087 12,060 5,471 6,588
------- -------- -------- ------- --------
Pro forma net income (loss)................... $10,262 $ 12,851 $ 18,404 $ 8,350 $ (5,418)
======= ======== ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 105
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ---------- --------- ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1993........................... $ 442 $ 1 $ 32,737 $ 33,180
Issuance of capital stock -- B. Bros................. 8 67 -- 75
Net income........................................... -- -- 16,676 16,676
Distributions to shareholders........................ -- -- (9,388) (9,388)
------ ---------- --------- ---------
Balance at December 31, 1993......................... 450 68 40,025 40,543
Net income........................................... -- -- 21,693 21,693
Distributions to shareholders........................ -- -- (13,565) (13,565)
------ ---------- --------- ---------
Balance at December 31, 1994......................... 450 68 48,153 48,671
Net income........................................... -- -- 30,224 30,224
Distributions to shareholders........................ -- -- (23,490) (23,490)
------ ---------- --------- ---------
Balance at December 31, 1995......................... 450 68 54,887 55,405
Net loss (unaudited)................................. -- -- (663) (663)
Distributions to shareholders (unaudited)............ -- -- (8,929) (8,929)
Issuance of common stock (Note 16) (unaudited)....... 550 4,950 -- 5,500
Repurchase of shareholders' common stock and
recapitalization including income tax effects (Note
16) (unaudited).................................... -- 24,497 (169,284) (144,787)
Conversion of tax status from "S" corporation to "C"
corporation (Note 16) (unaudited).................. -- 51,186 (51,186) --
Dividends declared on senior preferred stock and
junior preferred stock (unaudited)................. -- -- (1,247) (1,247)
------ ---------- --------- ---------
Balance at June 30, 1996 (unaudited)................. $1,000 $ 80,701 $(176,422) $ (94,721)
====== ======= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 106
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $16,676 $21,693 $30,224 $13,729 $ (663)
Adjustment to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................ 805 950 1,011 514 742
Gain on sale of equipment............................ (35) (153) (58) (58) --
Bad debt expense..................................... -- (59) 169 25 51
Deferred income taxes................................ -- -- -- -- 1,728
Nonrecurring non-competition agreement expense....... -- -- -- -- 15,300
Other................................................ 8 1 -- -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (3,817) (5,880) (6,649) (690) 1,620
Inventories........................................ (4,381) (3,717) (2,541) (4,901) (5,680)
Prepaid expenses and other current assets.......... (547) 295 307 (359) (458)
Accounts payable................................... 2,354 (752) 3,242 5,260 1,824
Accrued expenses and other current liabilities..... (471) 494 1,123 324 2,316
------- ------- ------- ------- --------
Net cash provided by operating activities....... 10,592 12,872 26,828 13,844 16,780
------- ------- ------- ------- --------
Cash flows from investing activities:
Maturities of marketable securities..................... 1,163 1,120 1,178 375 --
Purchases of marketable securities...................... (1,767) -- -- -- --
Proceeds from sales of property, plant and equipment.... 1,358 435 825 59 10
Acquisition of property, plant and equipment............ (4,904) (1,786) (2,641) (2,073) (483)
Decrease (increase) in other assets..................... (283) (519) 6 240 (6,045)
------- ------- ------- ------- --------
Net cash used in investing activities........... (4,433) (750) (632) (1,399) (6,518)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of debt.......................... 2,758 6,073 4,685 4,154 153,000
Proceeds from issuance of senior and junior preferred
stock................................................ -- -- -- -- 67,000
Distributions to shareholders........................... (9,388) (13,565) (23,490) (16,496) (8,929)
Payments of debt........................................ (785) (5,389) (5,056) (2,905) (10,990)
Issuance of capital stock............................... 75 -- -- -- 5,500
Principal payments of capital lease obligations......... -- (121) (125) (62) (67)
Repurchase of shareholders' common stock and
recapitalization..................................... -- -- -- -- (215,737)
------- ------- ------- ------- --------
Net cash used in financing activities........... (7,340) (13,002) (23,986) (15,309) (10,223)
------- ------- ------- ------- --------
Net (decrease) increase in cash and cash equivalents...... (1,181) (880) 2,210 (2,864) 39
Cash and cash equivalents at beginning of period.......... 7,796 6,615 5,735 5,735 7,945
------- ------- ------- ------- --------
Cash and cash equivalents at end of period................ $ 6,615 $ 5,735 $ 7,945 $ 2,871 $ 7,984
======= ======= ======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest............................................. $ 466 $ 780 $ 853 $ 344 $ 435
======= ======= ======= ======= ========
Income taxes......................................... $ 248 $ 267 $ 216 $ 67 $ 123
======= ======= ======= ======= ========
Supplemental disclosure of non-cash investing
activities -- Assets acquired under capital lease
obligations............................................. $ -- $ 686 $ -- $ -- $ --
======= ======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 107
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
(INFORMATION AS IT RELATES TO THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS
UNAUDITED)
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
1. DESCRIPTION OF ENTITY AND BASIS OF PRESENTATION
Prior to May 7, 1996, Twin Laboratories Inc. ("Twin") and its affiliates,
Twinlab Export Corp. ("Export"), Twinlab Specialty Corporation ("Specialty"),
Alvita Products, Inc. ("Alvita"), Natur-Pharma, Inc. ("Natur-Pharma"), B. Bros.
Realty Corporation ("B Bros.") and Advanced Research Press, Inc. ("ARP")
(collectively the "Companies") operated as separate corporations, all of which
were wholly-owned by the same individuals (with some companies having different
ownership percentages among such individuals) except for Natur-Pharma and B.
Bros. which were only ninety-seven percent owned by such individuals.
In July 1995, the shareholders of the Companies signed a non-binding letter
of intent to sell an interest in the Companies and subsequently entered into a
stock purchase and sale agreement (the "Acquisition Agreement") (see Note 16).
In connection with the transactions contemplated by the Acquisition Agreement,
the Companies incurred $656 of professional expenses as of December 31, 1995
(the "Transaction Expenses").
On February 27, 1996, Twinlab Corporation (formerly TLG Laboratories
Holding Corp. ("TLC")) was incorporated in contemplation of the Acquisition
Agreement. The accompanying consolidated financial statements include the
accounts of TLC and subsidiaries (the "Company") after giving retroactive
effect, in a manner similar to a pooling of interests, to the merger of the
Companies pursuant to the Acquisition Agreement.
The Company's product line includes vitamins, minerals, amino acids, fish
and marine oils, sports nutrition products and special formulas marketed under
the TWINLAB trademark and a full line of herbal supplements and phytonutrients
and herb teas marketed under the Nature's Herbs and Alvita trademarks,
respectively. The Company sells its products through a network of approximately
60 distributors, who service approximately 11,000 health food stores and other
selected retail outlets.
Twin manufactures and markets complete lines in two product categories:
vitamins, minerals and amino acids; and sports nutrition, consisting of a total
of over 400 products.
Export sells Twin's products outside the United States. Specialty markets
innovative and special nutritional supplements, some in unique dosage form.
Alvita Products, Inc., under the brand Alvita, markets over 100 natural single
herb teas and blends in both teabag and bulk form. Natur-Pharma manufactures and
markets approximately 400 herbal and botanical supplements under the Nature's
Herbs brand. Natur-Pharma operates a manufacturing facility registered with the
Food and Drug Administration (FDA).
B. Bros. was incorporated for the purpose of constructing a building to
serve as Natur-Pharma's new office, warehouse and production facility.
ARP is a publisher of sports nutrition books and a body building and
fitness magazine entitled "Muscular Development, Fitness & Health."
The Companies had been S Corporations, pursuant to the Internal Revenue
Code, during the years ended December 31, 1993, 1994 and 1995 and through May 7,
1996. Upon completion of the Acquisition Agreement, the Companies terminated
their S Corporation status. The pro forma income statement information reflects
adjustments to the historical net income had the Companies not elected S
Corporation status for income tax purposes for all periods presented.
F-7
<PAGE> 108
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of combination -- All material intercompany accounts and
transactions have been eliminated.
b. Cash equivalents -- Investments with original maturities of three months
or less are considered cash equivalents and consist primarily of money market
funds.
c. Marketable securities -- The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" during the year ended December 31, 1994, which
requires changes in the accounting and reporting of investments in debt and
equity securities. The effect of adopting SFAS No. 115 on the Company's
consolidated financial statements was not material.
The marketable securities portfolio primarily consists of investments in
tax-exempt municipal bonds. Marketable securities are stated at amortized cost
as the Company has the intent and ability to hold these securities to maturity.
The aggregate fair value of the current marketable securities as of December 31,
1994 and 1995 was $1,170 and $201, respectively. The aggregate fair value of the
noncurrent marketable securities was $196 as of December 31, 1994.
d. Inventories -- Inventories are stated at the lower of cost (first-in,
first-out method) or market value.
e. Property, plant and equipment -- Depreciation is computed using the
straight-line method based upon the estimated useful lives of the related assets
which range from three to forty years. Amortization of leasehold improvements is
computed by the straight-line method over the shorter of the estimated useful
lives of the related assets or lease term.
f. Intangible assets -- Trademarks are being amortized on the straight-line
method over their expected lives, not to exceed forty years. Goodwill, which
represents the excess of purchase price over fair value of net assets acquired,
is being amortized on the straight-line method over forty years. Covenants not
to compete are being amortized on the straight-line method over five years.
g. Income taxes -- In February 1992, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes", which required significant changes in accounting
for income taxes, including an asset and liability approach to income taxes. The
Company adopted SFAS No. 109 in the year ended December 31, 1993. There was no
cumulative effect to the consolidated financial statements as a result of the
change in accounting, nor did SFAS No. 109 have a material effect on the amount
of income taxes provided in the year ended December 31, 1993.
h. Revenue recognition -- Revenue from product sales is recognized at the
time of shipment to the customer. Revenue from magazine subscriptions is
recorded as deferred revenue at the time of sale and a pro rata share is
included in revenue as magazines are delivered to subscribers. Advertising
revenue is recognized when the related magazines are issued.
i. Research and development expenses -- The Company charges research and
development expenses to operations as incurred. Research and development
expenses were $861, $1,030 and $1,140 for the years ended December 31, 1993,
1994 and 1995, respectively.
j. Fair value of financial instruments -- The following methods and
assumptions were used to estimate the fair value of each class of financial
instruments:
1) Cash and cash equivalents -- The carrying amounts approximate fair
value because of the short maturity of these instruments.
2) Marketable securities -- Fair value approximates quoted market
value.
F-8
<PAGE> 109
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3) Receivables -- The carrying amount approximates fair value because
of the short maturity of these instruments.
4) Debt -- The carrying amounts approximate fair value based on
borrowing rates currently available to the Company for bank loans with
similar terms.
k. Use of estimates in the preparation of financial statements -- 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.
l. Unaudited interim financial statements -- In the opinion of management,
the unaudited consolidated financial statements for the six months ended June
30, 1995 and 1996 are presented on a basis consistent with the audited
consolidated financial statements and reflect all adjustments, consisting of
only normal recurring adjustments, necessary for a fair presentation of the
results thereof. The results of operation for interim periods are not
necessarily indicative of the results to be expected for the entire year.
m. Reclassifications -- Certain prior year balances have been reclassified
to conform with current year classifications.
3. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------- --------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Inventories consist of the following:
Raw materials........................................... $10,183 $11,006 $ 12,115
Work in process......................................... 4,720 4,550 6,892
Finished goods.......................................... 7,829 9,717 11,946
------- ------- --------
Total........................................... $22,732 $25,273 $ 30,953
======= ======= =======
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Land, building and leasehold improvements........................ $10,039 $11,204
Plant equipment.................................................. 5,883 6,097
Office equipment................................................. 1,776 1,942
Automobiles...................................................... 70 56
------- -------
17,768 19,299
Less: accumulated depreciation and amortization.................. 5,697 6,263
------- -------
Property, plant and equipment -- net........................... $12,071 $13,036
------- -------
Depreciation and amortization expense.......................... $ 851 $ 909
======= =======
</TABLE>
F-9
<PAGE> 110
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Due from related trust(a).......................................... $1,640 $1,786
Trademarks, net of accumulated amortization of $128 and $157,
respectively..................................................... 948 1,063
Goodwill, net of accumulated amortization of $96 and $114,
respectively..................................................... 607 590
Other.............................................................. 523 171
------ ------
Total.................................................... $3,718 $3,610
====== ======
</TABLE>
- ---------------
(a) The Company had advanced, to a related party trust, payments for premiums
on a split dollar life insurance policy on the lives of the principal
shareholders. The amounts advanced were to be repaid from the benefits or
cash value of the policy and were collateralized by the cash surrender
value of the policy. The principal shareholders were covered by a "second
to die" policy in the face amount of $10,000. Such policy was terminated in
May 1996 and the related advances were collected (see Note 16).
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------ ------
<S> <C> <C>
Accrued salaries, employee benefits and payroll taxes.............. $ 839 $ 935
Deferred revenue................................................... 689 787
Accrued professional fees.......................................... 134 700
Other.............................................................. 1,473 1,836
------ ------
Total.................................................... $3,135 $4,258
====== ======
</TABLE>
7. LOAN PAYABLE -- BANK
Natur-Pharma had a revolving line of credit arrangement with a bank. A
maximum of $1,000 was available to Natur-Pharma with interest payable monthly at
the bank's variable base rate (8.5 percent at December 31, 1995). Terms of the
agreement included maintaining a $75 compensating balance, achieving quarterly
net income of at least $50 and limitations on repayment of notes payable to
shareholders. Borrowings were secured by inventories, accounts receivable and a
guarantee by Twin. The credit arrangement was to mature on June 1, 1996 and was
subject to annual review by the bank. Borrowings against such line of credit
aggregated $660 at December 31, 1994 and 1995. Such borrowings were refinanced
in May 1996 in connection with the Acquisition Agreement (see Note 16).
Twin had entered into a line of credit arrangement with a bank which was
cancelable by either party at any time and was to expire on May 31, 1996. A
maximum amount of $10,000 was available with interest charged at the Alternate
Base Rate of the bank, which was the higher of the prime rate (8.5 percent at
December 31, 1995) or the Federal Funds rate (6.0 percent at December 31, 1995)
plus 1/2 percent. There were no borrowings against such line of credit at
December 31, 1994 and 1995. The line of credit agreement was cancelled in May
1996 (see Note 16).
F-10
<PAGE> 111
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------ ------
<S> <C> <C>
Mortgage payable to a bank collateralized by land and building,
payable in monthly installments of $22, including interest at 9.5
percent plus a $1,737 balloon payment due May 1, 2002(a)........... $2,282 $2,228
Mortgage payable to a bank collateralized by land and building,
payable in monthly installments of $24, including interest at 9.9
percent, maturing August 2006(a)................................... 2,171 2,104
Loan payable to a bank, payable in monthly installments of $14,
inclusive of interest at the prime rate plus .5 percent with the
balance due on June 1, 1996(a)..................................... -- 1,121
Note payable to a bank collateralized by equipment, payable in
monthly installments of $10, including interest at 8.43 percent,
maturing August 31, 2001(a)........................................ 584 516
Note payable to a bank, unsecured, payable in monthly installments of
$8, including interest at 7.7 percent, maturing July 1, 2002(a).... -- 506
Note payable to a power authority, payable in monthly installments of
$2, including interest at 6.38 percent, maturing February 2011..... 296 289
Loan payable to a bank due on August 1, 1995......................... 792 --
Other................................................................ 92 82
------ ------
6,217 6,846
Less: current portion................................................ 1,101 1,479
------ ------
Total...................................................... $5,116 $5,367
====== ======
</TABLE>
- ---------------
(a) Such debt was refinanced in May 1996 in connection with the Acquisition
Agreement (see Note 16).
The mortgages payable to banks provide, among other things, for the
maintenance by certain of the companies of a minimum tangible net worth balance,
certain financial ratios and limitations on additional borrowings.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------------
<S> <C>
1996................................................................... $1,479
1997................................................................... 315
1998................................................................... 335
1999................................................................... 366
2000................................................................... 396
Thereafter............................................................. 3,955
------
Total............................................................. $6,846
======
</TABLE>
9. CAPITAL LEASE OBLIGATIONS
The Company is obligated under leases for equipment, which are treated as
capital leases for financial reporting purposes due to certain provisions in the
lease agreements. Included in plant equipment at December 31, 1994 and 1995 are
assets held under capital leases with a net carrying value of $652 and $583,
F-11
<PAGE> 112
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Accumulated amortization on these assets at December 31, 1994 and
1995 was $34 and $103, respectively.
The future minimum lease payments, by year and in the aggregate, and the
present value of the future minimum lease payments at December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------------
<S> <C>
1996................................................................... $164
1997................................................................... 164
1998................................................................... 164
------
Total........................................................... 492
Amount representing interest........................................... 52
------
Present value of the future minimum lease payments (including $136
payable currently).................................................... $440
======
</TABLE>
10. INCOME TAXES
Prior to the consummation of the Acquisition Agreement, all of the
Companies were "S" corporations and as such Federal and state taxes were
generally paid at the shareholder level only. However, when corporate taxable
income of any company exceed $200, such company was required to pay New York
State corporate income taxes equal to the difference between the personal and
the corporate tax rate (approximately 2 percent at December 31, 1995) for all
taxable income in excess of $200, except for Natur-Pharma, Alvita and B. Bros.,
which are subject to the tax laws of the State of Utah.
Some of the companies were not "S" corporations since inception. The
following table sets forth the effective date each company elected "S"
corporation status and the "C" corporation retained earnings at the time of "S"
corporation election:
<TABLE>
<CAPTION>
"C" CORPORATION
EFFECTIVE DATE OF "S" RETAINED
COMPANY CORPORATION ELECTION EARNINGS
--------------------------------------------------- --------------------- ----------------
<S> <C> <C>
Twin............................................... January 1, 1987 $6,299
Export............................................. At inception None
Specialty.......................................... At inception None
Alvita............................................. January 1, 1992 $ 39
Natur-Pharma....................................... January 1, 1993 $ 575
B. Bros............................................ At inception None
ARP................................................ January 1, 1989 $ (89)
</TABLE>
The provision for income taxes for the years ended December 31, 1993, 1994
and 1995 and through the consummation of the Acquisition Agreement on May 7,
1996 represents state taxes.
Twin is undergoing a routine audit of its Federal income tax return for the
year ended December 31, 1993. Management believes that any amounts which might
be assessed will not have a material effect on the consolidated financial
statements.
11. EMPLOYEE BENEFIT PLANS
Twin provides a profit sharing plan for all full-time employees who have
satisfied length of service and minimum age requirements. Profit sharing expense
related to Twin's plan was $250 for the years ended December 31, 1993, 1994 and
1995.
F-12
<PAGE> 113
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the Natur-Pharma, Inc. Employee Savings Plan, eligible participating
employees may elect to contribute up to twenty-five percent of their salaries to
an investment trust. Natur-Pharma may, at its sole discretion, contribute to the
plan. Participants are fully vested in their own contributions and vest in
Natur-Pharma's contributions at a rate of 20 percent per year beginning one year
after the date of contribution. Natur-Pharma contributed and charged to expense
$7, $11 and $37 under this plan for the years ended December 31, 1993, 1994 and
1995, respectively.
12. COMMITMENTS AND CONTINGENCIES
a. Leases -- The Company leases certain warehouse space and equipment under
operating leases. Generally, the leases carry renewal provisions and require the
payment of maintenance costs. Rental payments may be adjusted for increases in
taxes and other costs above specific amounts. Rental expense charged to
operations for the years ended December 31, 1993, 1994 and 1995 was
approximately $1,254, $1,281 and $1,370, respectively.
Future minimum payments under noncancellable operating leases with initial
or remaining terms of more than one year, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
----------------------------------------------------------------------------
<S> <C>
1996................................................................. $1,269
1997................................................................. 981
1998................................................................. 866
1999................................................................. 764
2000................................................................. 829
------
Total...................................................... $4,709
======
</TABLE>
b. Legal matters -- Twin and other encapsulators, and various
manufacturers, distributors, suppliers, importers and retailers of added
manufactured L-Tryptophan or products containing added manufactured L-Tryptophan
are or were defendants in various legal actions brought in federal and state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
added manufactured L-Tryptophan. As of January 31, 1996, Twin was a named
defendant in three of these actions. Although Twin believes that few new
lawsuits are likely to be brought because of applicable statutes of limitations,
the possibility of future such actions cannot be excluded. Twin and certain
other companies in the industry (the "Indemnified Group") have each entered into
a Defense and Indemnification Agreement with Showa Denko America, Inc. ("SDA")
(the "Indemnification Agreement"), under which SDA has agreed to assume the
defense of all claims against any of the Indemnified Group arising out of the
ingestion of L-Tryptophan products and to pay all legal fees incurred and
indemnify Twin against liability in any action if it is determined that a
proximate cause of the injury sustained by the plaintiff was a constituent of
the raw material sold by SDA to Twin or was a factor for which SDA or any of its
affiliates was responsible, except to the extent that action by Twin proximately
contributed to the injury, and except for certain claims relating to punitive
damages. SDA appears to have been the supplier of all of the allegedly
contaminated L-Tryptophan. SDA has posted a revolving irrevocable letter of
credit for the benefit of the Indemnified Group if SDA is unable or unwilling to
satisfy any claims or judgments. Showa Denko, K.K. ("SDK"), the Japanese parent
of SDA and manufacturer of the relevant L-Tryptophan, has unconditionally
guaranteed the payment obligations of SDA under the Indemnification Agreement.
As of January 31, 1996, 129 lawsuits in which Twin was a named defendant had
been dismissed or settled by SDA at no cost to Twin.
The total of all damages alleged in each of the remaining three
L-Tryptophan actions has not been specified. Twin's available product liability
insurance coverage of $3 million for L-Tryptophan matters in respect of claims
made prior to December 31, 1993, is only available with respect to one of the
three actions. There can be no assurance that when damages are specified in
these actions that the total amount thereof, if
F-13
<PAGE> 114
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fully awarded against Twin alone and ignoring the existence of the
Indemnification Agreement, would not exceed such insurance coverage and would
not have a material adverse effect on the Company's results of operations and
financial condition. However, the Indemnification Agreement, the defense and
resolution to date of numerous lawsuits by SDA without cost to Twin, the
multitude of defendants and the possibility that liability could be assessed
against or paid by other parties or by insurance carriers have led management,
after consultation with outside legal counsel, to believe that the prospect for
a material adverse effect on the Company's consolidated financial condition or
results of operations is remote and no provision in the consolidated financial
statements has been made for any loss that may result from these actions. During
the year ended December 31, 1993, SDA reimbursed Twin approximately $461
primarily for unsalable L-Tryptophan related merchandise.
In 1989, Twin received an informal inquiry from the New York Regional
Office of the Federal Trade Commission ("FTC") seeking substantiation for
certain advertising claims made for a segment of its "Fuel" bodybuilding/sports
nutrition line of products. In response, Twin submitted scientific
substantiation and financial information to the FTC. Twin is currently
negotiating this matter with the FTC and has received from the FTC a revised
proposed Complaint and Consent Decree (the "Decree") seeking, among other
things, injunctive relief restricting certain muscle building, fat loss and
other marketing claims in connection with the sale of Twin's weight control,
bodybuilding and sports nutrition products. In addition, the Decree seeks
payment of $200. If a settlement is not reached, the FTC could pursue injunctive
relief and other remedies beyond those currently specified in the Decree. The
FTC could also pursue remedies against Twin in federal court. The Company
believes that it has adequate scientific substantiation for the claims at issue,
and it intends to vigorously defend the matter if a settlement is not reached.
The Company has reserved $200 for this matter.
The Company is also engaged in various other litigation in the ordinary
course of business. Management is of the opinion that the amounts which may be
awarded or assessed in connection with these matters, if any, will not have a
material effect on the consolidated financial statements.
13. INVESTMENT IN LIMITED PARTNERSHIP
As a result of investments in certain limited partnerships, Hambrose 3 and
4 ("Partnerships"), Twin entered into an agreement with the Partnerships wherein
Twin subscribed to additional limited interests in the Partnerships. Twin also
agreed to contribute a total of $360 as "Additional Capital Contribution" to the
Partnerships, which consists of a nonrecourse note of $240 and another
noninterest-bearing note due in the year 2010 in the amount of $120. In lieu of
making the Additional Capital Contribution in cash or subscription note, Twin
has assigned 100 percent of certain distribution rights until such time as the
assignee has recovered the full amount of the Additional Capital Contribution.
Twin is contingently liable to the Partnerships in the amount of approximately
$3,450. Management is of the opinion that there will be sufficient income
generated from the Partnerships' leasing operations to repay all the debt due
and Twin will not be required to make any further cash payments. These
investments have not been assigned any value on the accompanying consolidated
balance sheets.
The Hambrose 3 limited partnership has been audited by the Internal Revenue
Service ("IRS") for the years ended December 31, 1985 and 1986, at which time
Twin was a "C" corporation. A settlement was reached during 1995 in which Twin
paid approximately $2,082, including interest. In addition, Twin was responsible
for additional state taxes, inclusive of interest of approximately $28. Twin
recorded an estimated settlement amount during 1994 totaling $1,982 which was
reflected as a nonrecurring charge to operations. An additional $128 of interest
was recorded in 1995, and was included in operating expenses in the accompanying
consolidated statement of income.
F-14
<PAGE> 115
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. RELATED PARTY TRANSACTIONS
Natur-Pharma had outstanding notes payable to certain shareholders totaling
$1,500 and $500 as of December 31, 1994 and 1995, respectively. Such notes bear
interest at ten percent per annum, which is payable semi-annually. Interest
expense on such notes was approximately $179, $150 and $100 for the years ended
December 31, 1993, 1994 and 1995, respectively. Alvita had outstanding notes
payable to certain shareholders totaling $250 as of December 31, 1993. Such
notes were repaid in the year ended December 31, 1994. Interest expense on such
notes was approximately $23 and $5 for the years ended December 31, 1993 and
1994, respectively. ARP had outstanding notes payable to certain shareholders
totaling $346 as of December 31, 1994 and 1995. Such notes are non-interest
bearing.
15. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company has two significant customers which accounted for approximately
27 and 19 percent, respectively, of net sales for 1993; 28 and 20 percent,
respectively, of net sales for 1994; and 28 and 22 percent, respectively, of net
sales for 1995. No other customer accounted for more than 10 percent of net
sales in any of the three years ended December 31, 1995.
The Company's customers are primarily large independent distributors of
health food products. At December 31, 1994 and 1995, approximately 69 and 73
percent, respectively, of accounts receivable related to two customers.
16. SUBSEQUENT EVENTS
a. Acquisition Agreement and related transactions -- The shareholders of
the Companies entered into the Acquisition Agreement, which is dated as of March
5, 1996 and which was consummated on May 7, 1996, pursuant to which, among other
things, (i) TLC acquired all of the outstanding capital stock of Natur-Pharma,
(ii) Green Equity Investors II L.P. ("GEI") acquired 480,000 shares (48%) of the
common stock of TLC for aggregate consideration of $4,800, and shares of
non-voting junior redeemable preferred stock of TLC for aggregate consideration
of $37,000, (iii) certain other investors acquired 70,000 shares (7%) of the
common stock of TLC (however, each of these other investors own less than 5% of
the common stock of TLC) for aggregate consideration of $700 and shares of
non-voting senior redeemable preferred stock of TLC for aggregate consideration
of $30,000, (iv) certain of the shareholders of the Companies (the "Continuing
Shareholders") received from TLC, in exchange for certain of their shares of
common stock of Natur-Pharma, 450,000 shares (45%) of the outstanding shares of
common stock of TLC, valued at $4,500, and (v) the shareholders of the Companies
received a total of $212,500 in consideration of the balance of their shares of
common stock of Natur-Pharma and for all of their shares of capital stock of
Twin, Alvita, Export, Specialty, B. Bros., and ARP. Of the total cash
consideration to the shareholders, approximately $15,300 represented
consideration for non-competition agreements entered into by the shareholders of
the Companies, which was recognized as a non-recurring expense upon the
consummation of the Acquisition Agreement.
Pursuant to the terms of the Acquisition Agreement, Twin, Alvita, Export,
Specialty, and B. Bros. were merged into Natur-Pharma. ARP was merged with
Natur-Pharma II, Inc., a wholly owned subsidiary of Natur-Pharma, and
Natur-Pharma became a wholly owned subsidiary of TLC. Natur-Pharma changed its
name to Twin Laboratories Inc. ("New Twin"). TLC's initial board of directors
consists of five of the Continuing Shareholders and three designees of GEI. A
majority of TLC's shareholders have the ability to elect a majority of its
directors. However, regardless of the composition of the board of directors,
pursuant to the terms of the TLC shareholders agreement, a wide range of actions
to be taken by TLC require the affirmative approval of both a majority of the
Continuing Shareholder directors and a majority of the GEI designee directors.
These actions include, but are not limited to, payment of certain dividends,
engagement in new businesses, acquisition of other businesses, entering certain
contracts, incurring certain debt or obligations, making certain investments,
relocation of executive offices, selection of location and date of the annual
F-15
<PAGE> 116
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shareholders meeting, termination or material modification of any employee
benefit plan, selection of auditors or legal counsel, adoption or amendment of
strategic plans or operating budgets, and election or termination of any
executive officers. In addition, certain fundamental corporate actions,
including but not limited to, amendments to the certificate of incorporation,
the sale of substantially all of the assets of the Company, and the merger or
combination of the Company with another entity additionally require an
affirmative vote of holders of at least 80% of the issued and outstanding stock
of TLC. Such voting rights are generally effective until such time as the common
stock of TLC is publicly held. Because the transactions contemplated by the
Acquisition Agreement do not result in a change in control as defined in
Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout
Transactions" ("EITF 88-16"), the transactions were accounted for as a
recapitalization under the guidance of EITF 88-16 and the Companies' historical
basis of accounting were applied to the consolidated financial statements of
TLC.
Upon consummation of the Acquisition Agreement, the Companies terminated
their S Corporation status. The mergers of Twin, Alvita, Export, Specialty and
B. Bros. into Natur-Pharma were treated as taxable asset purchases for federal
and state income tax purposes and as a recapitalization for financial accounting
purposes. For federal and state income tax purposes, the purchase price was
allocated among the various corporations and their respective assets and
liabilities based on the respective fair values as of the closing of the
Acquisition Agreement. This resulted in different book and tax asset bases for
the assets of these companies, which resulted in deferred tax assets of
approximately $57,300.
Cumulative dividends on the preferred stock accrue at a rate of 14% per
annum (in the case of the senior preferred stock) and 11.25% per annum (in the
case of the junior preferred stock) and are payable quarterly, if declared by
the board of directors. Such dividends are payable in additional shares of
preferred stock (valued at the liquidation preference of $1,000 per share plus
accrued and unpaid dividends) unless the board of directors, upon a majority
vote of directors not affiliated with Leonard Green & Partners, L.P., determines
that any such dividends will be paid in cash.
The redemption price of the preferred stock, as well as the liquidation
preference, is $1,000 per share plus accrued and unpaid dividends. The preferred
stock may be redeemed, in whole or in part, by TLC at any time, except that (1)
no partial redemption can be made by TLC unless all cumulative dividends have
been paid on all shares, (2) TLC may not redeem shares of preferred stock at any
time when it is making, or is required to make, an offer to purchase preferred
stock upon a change of control and (3) so long as any shares of senior preferred
stock are outstanding, no shares of junior preferred stock may be redeemed
without the consent of the holders of a majority of the outstanding shares of
senior preferred stock.
The preferred stock is subject to mandatory redemption, at the redemption
price, including accrued and unpaid dividends, eleven years after the issuance
thereof (in the case of the senior preferred stock) or twelve years after the
issuance thereof (in the case of the junior preferred stock). In addition, upon
a change in control TLC is required to offer to purchase the preferred stock at
101 percent of the liquidation preference thereof, plus accrued and unpaid
dividends.
New Twin obtained additional financing necessary to effect the transactions
contemplated by the Acquisition Agreement, repay certain existing indebtedness
of the Company, and pay the fees and expenses incurred in connection with the
Acquisition Agreement through the incurrence of debt which totalled $153,000.
Such debt included: (1) borrowings of $53,000 under a term loan credit facility
provided by certain banks, financial institutions and other entities, and (2)
gross proceeds of $100,000 from the private placement of subordinated debt. A
six-year $15,000 revolving credit facility was also obtained from the term loan
lenders, to provide for working capital requirements.
The term loan is payable in defined percentages over a six-year period.
Borrowings under the term loan and revolving credit facilities bear interest, at
the borrower's discretion, at either the Alternative Base Rate, as defined, plus
a margin of 1.25 percent, or at the Eurodollar Rate, as defined, plus a margin
of 2.5 percent. Such
F-16
<PAGE> 117
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
margins are subject to reduction based upon the achievement of certain
performance targets, as defined. New Twin also must pay a commitment fee of .5
percent per annum (subject to reduction based on the achievement of certain
performance targets, as defined) on the average daily unused portion of the
revolving credit facility. These credit facilities are secured by all tangible
and intangible assets of New Twin and are subject to certain restrictive
covenants including, among other things, the maintenance of defined levels of
earnings and certain debt coverage rates, as well as restrictions on additional
indebtedness, dividends, investments and certain other significant transactions.
The subordinated debt matures in ten years and bears interest at a rate of
10 1/4% per annum. The subordinated debt is callable after five years at a
premium to par which will decline to par after eight years. During the first
three years, New Twin has the option to redeem up to 35 percent of the
subordinated debt with the proceeds of a public offering at a redemption price
of 109 1/2%. Upon a change of control, as defined, New Twin is required to offer
to redeem the subordinated debt at 101 percent of the principal amount plus
accrued and unpaid interest. Restrictive covenants on the subordinated debt
include, among other things, limitations on additional indebtedness,
investments, dividends and certain other significant transactions.
Borrowings of New Twin under the term loan and revolving credit facilities
and the subordinated debt restrict the payment of dividends and the making of
loans, advances or other distributions to TLC, except in certain limited
circumstances. All assets relating to New Twin and ARP are restricted as to the
transfer thereof to TLC as loans, advances and other distributions.
The subordinated debt is jointly and severally guaranteed by TLC and ARP on
a full and unconditional unsecured senior subordinated basis. The assets,
results of operations and shareholders' equity of New Twin comprise
substantially all of the assets, results of operations and shareholders' equity
of TLC on a consolidated basis. TLC has no separate operations and has no
significant assets other than TLC's investment in New Twin and, through New
Twin, in ARP. New Twin has no direct or indirect subsidiaries other than ARP;
and neither New Twin nor ARP has any stockholder other than, respectively, TLC
and New Twin. Accordingly, the Company has determined that separate financial
statements of New Twin and ARP would not be material to investors and,
therefore, are not included herein.
After giving retroactive effect, in a manner similar to a pooling of
interests, to the merger of the Companies pursuant to the Acquisition Agreement,
the condensed financial information of TLC on a stand-alone basis, is as follows
(because TLC had no cash prior to the consummation of the Acquisition Agreement,
no condensed statements of cash flows are presented):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
------- -------
<S> <C> <C> <C>
ASSETS
Investment in subsidiaries.................................... $48,671 $55,405
======= =======
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value: 1,000,000 shares authorized;
450,000 shares outstanding)................................. $ 450 $ 450
Additional paid-in capital.................................... 68 68
Retained earnings............................................. 48,153 54,887
------- -------
$48,671 $55,405
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Equity interest in net income of subsidiaries................. $16,676 $21,693 $30,224
======= ======= =======
</TABLE>
F-17
<PAGE> 118
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Summarized financial information of New Twin is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Current assets.................... $40,178 $ 48,716 $ 58,663 $ 51,402 $ 63,586
Noncurrent assets................. 15,409 15,990 16,646 17,307 77,577
Current liabilities............... 10,481 10,480 14,233 17,447 18,543
Noncurrent liabilities............ 4,563 5,555 5,671 5,359 149,094
Shareholders' equity (deficit).... 40,543 48,671 55,405 45,903 (26,474)
Net sales......................... 99,897 117,342 148,735 69,820 81,837
Gross profit...................... 37,766 47,095 58,803 27,774 33,985
Net income (loss)................. 16,676 21,693 30,224 13,729 (663)
</TABLE>
Summarized financial information of ARP is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ -------- -------- ------
<S> <C> <C> <C> <C> <C>
Current assets......................... $ 763 $1,339 $ 1,266 $ 1,431 $1,563
Noncurrent assets...................... 173 168 168 171 172
Current liabilities.................... 1,051 1,155 1,211 955 1,292
Noncurrent liabilities................. -- -- -- -- --
Total shareholders' equity (deficit)... (116) 350 222 647 443
Net sales.............................. 3,188 3,930 5,200 2,726 3,038
Gross profit........................... 68 711 259 456 467
Net income (loss)...................... (94) 466 (128) 297 276
</TABLE>
The following unaudited pro forma results of operations assume the
transactions contemplated by the Acquisition Agreement occurred as of January 1,
1995. The pro forma operations data has been prepared for comparative purposes
only and does not purport to represent what the Company's actual results of
operations would have been had the transactions contemplated by the Acquisition
Agreement in fact occurred at January 1, 1995.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------- ----------------
<S> <C> <C>
Net sales............................................. $ 148,735 $ 81,837
Interest expense...................................... 15,684 7,851
Net income............................................ 9,418 6,692
</TABLE>
F-18
<PAGE> 119
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b. Changes in authorized capital -- In August 1996, the Board of Directors
(the "Board") and the stockholders authorized an increase in the number of
common shares authorized to 75,000,000 and an increase in the number of shares
of preferred stock authorized to 2,000,000, which preferred stock may be issued
by the Board on such terms and with such rights, preferences and designations as
the Board may determine, without further stockholder action.
c. Stock incentive plan -- In July 1996, the Board and stockholders of the
Company approved and adopted the Twinlab Corporation 1996 Stock Incentive Plan
(the "1996 Plan"). The 1996 Plan provides for the issuance of a total of up to
400,000 authorized and unissued shares of common stock, treasury shares and/or
shares acquired by the Company for purposes of the 1996 Plan. Awards under the
1996 Plan may be made in the form of (i) incentive stock options, (ii)
nonqualified stock options, (iii) stock appreciation rights, (iv) restricted
stock and (v) performance shares. Options become exercisable over five years
from the date of grant at the rate of 20% of the grant each year.
F-19
<PAGE> 120
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ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Mail:
FLEET NATIONAL BANK
777 MAIN STREET
MSN CT/MO/0224
HARTFORD, CONNECTICUT 06115
ATTENTION: CORPORATE TRUST OPERATIONS
By Hand/Overnight Express:
FLEET NATIONAL BANK
777 MAIN STREET
MSN CT/MO/0224
HARTFORD, CONNECTICUT 06115
ATTENTION: CORPORATE OPERATIONS
Facsimile Transmission:
(860) 986-7908
To confirm receipt:
TEL. (860) 986-1271
(ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL)
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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OFFER TO EXCHANGE ALL OUTSTANDING 10 1/4%
SENIOR SUBORDINATED NOTES DUE 2006
($100,000,000 PRINCIPAL AMOUNT) FOR 10 1/4%
SENIOR SUBORDINATED NOTES DUE 2006.
TWIN
LABORATORIES
INC.
------------------------
PROSPECTUS
------------------------
September 24, 1996
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