<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1996
REGISTRATION NO. 333-05191
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TWINLAB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2833 11-3317986
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
2120 SMITHTOWN AVENUE
RONKONKOMA, NEW YORK 11779
(516) 467-3140
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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COPY TO:
PHILIP M. KAZIN, ESQ. HOWARD A. SOBEL, ESQ. NICHOLAS P. SAGGESE, ESQ.
GENERAL COUNSEL KRAMER, LEVIN, NAFTALIS & MARK C. SMITH, ESQ.
TWINLAB CORPORATION FRANKEL SKADDEN, ARPS, SLATE,
2120 SMITHTOWN AVENUE 919 THIRD AVENUE MEAGHER & FLOM
RONKONKOMA, NEW YORK 11779 NEW YORK, NEW YORK 10022 300 SOUTH GRAND
(516) 467-3140 (212) 715-9100 AVENUE
LOS ANGELES,
(NAME, ADDRESS, INCLUDING ZIP CALIFORNIA 90017
CODE, AND TELEPHONE NUMBER, (213) 687-5000
INCLUDING AREA CODE, OF AGENT
FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE AMOUNT OF
TITLE OF SECURITIES OFFERING REGISTRATION
TO BE REGISTERED PRICE(1) FEE(2)
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<S> <C> <C>
Common Stock, $1.00 par value.................. $156,400,000 $53,932(3)
</TABLE>
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(1) Estimated solely for purposes of calculating the registration fee.
(2) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.
(3) Includes $44,828.00 previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
TWINLAB CORPORATION
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS IN PART I OF FORM S-1
<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
-------- ----------------------
<C> <S>
1.Forepart of the Registration
Statement and Outside Front Cover
Page of Prospectus................. Facing Page; Outside Front Cover
Page
2.Inside Front and Outside Back Cover
Pages of Prospectus................ Inside Front Cover Page, Outside
Back Cover Page
3.Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges. Prospectus Summary; Risk Factors
4.Use of Proceeds...................... Prospectus Summary; Use of Proceeds
5.Determination of Offering Price...... Outside Front Cover Page; Risk
Factors; Underwriting
6.Dilution............................. Risk Factors; Dilution
7.Selling Security Holders............. Not Applicable
8.Plan of Distribution................. Outside Cover Page; Underwriting
9.Description of Securities to be Reg-
istered ........................... Outside Cover Page; Prospectus
Summary; Risk Factors; Dividend
Policy; Capitalization;
Description of Capital Stock;
Shares Eligible for Future Sale
10.Interests of Named Experts and Coun-
sel ............................... Experts; Legal Matters
11.Information with Respect to the Reg-
istrant ........................... Outside Cover Page; Prospectus
Summary; Risk Factors; Dividend
Policy; Dilution; Selected
Historical Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Certain
Relationships and Related
Transactions; Principal
Stockholders; Description of
Certain Indebtedness; Description
of Capital Stock; Shares Eligible
for Future Sale; Consolidated
Financial Statements
12.Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................ Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 22, 1996
PROSPECTUS
, 1996 [LOGO OF TWINLAB]
8,000,000 SHARES
TWINLAB CORPORATION
COMMON STOCK
All of the 8,000,000 shares of common stock, $1.00 par value per share (the
"Common Stock"), offered hereby are being sold by Twinlab Corporation ("TLC" or
the "Company"). Of the 8,000,000 shares of Common Stock offered by the Company,
6,400,000 shares are being offered for sale in the United States and Canada by
the U.S. Underwriters (the "U.S. Offering") and 1,600,000 shares are being
offered for sale outside the United States and Canada in a concurrent offering
by the International Managers (the "International Offering" and, together with
the U.S. Offering, the "Offerings"), subject to transfers between the U.S.
Underwriters and the International Managers. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol TWLB, subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
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.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
THE PUBLIC COMMISSIONS (1) COMPANY (2)
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<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the several U.S. Underwriters and the
International Managers (collectively, the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to an aggregate of 1,200,000 additional shares of Common Stock
on the same terms as set forth above solely for the purpose of covering
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, and Proceeds
to the Company will be $ , $ , and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters,
when, as and if delivered to and accepted by the Underwriters against payment
therefor and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of the
certificates representing the shares will be made in New York, New York, on or
about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
<PAGE>
[COMPANY PRODUCTS]
<PAGE>
IN CONNECTION WITH THE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete and in each instance reference is made
to such contract or other document filed with the Commission as an exhibit to
the Registration Statement, each such statement being qualified by and subject
to such reference in all respects.
As a result of the Offerings, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance therewith will file reports and other information with the
Commission. Reports, registration statements, proxy statements and other
information filed by the Company with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549,
and at the Commission's Regional Offices: 500 West Madison Avenue, 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 from
the Public Reference Section of the Commission, 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 Company intends to furnish holders of the Common Stock with annual
reports containing among other information, audited financial statements
certified by an independent public accounting firm and quarterly reports
containing unaudited condensed financial information for the first three
quarters of each fiscal year. The Company also intends to furnish such other
reports as it may determine or as may be required by law.
3
<PAGE>
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) TLC and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. and Advanced Research Press, Inc. ("ARP"),
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.
On June 7, 1996, the name of the Company was changed from TLG Laboratories
Holding Corp. to Twinlab Corporation. Except where otherwise indicated, the
information in this Prospectus (i) assumes that the over-allotment option
granted to the Underwriters will not be exercised and (ii) gives effect to an
18.5 for 1 stock split effected as a stock dividend with respect to the Common
Stock which will be effected prior to the consummation of the Offerings.
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 income from operations 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 income from operations
of 22.0% and 37.8%, respectively. For the fiscal year ended December 31, 1995,
the Company achieved net sales growth of 26.8% to $148.7 million and growth in
income from operations of 31.3% to $31.6 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 income from operations of $19.2 million, representing an
increase of 17.2% and 37.0%, 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
4
<PAGE>
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 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.
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
5
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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 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 income from operations 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)
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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. 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. In connection with the
Offerings, the Company expects to enter into an amendment and restatement of
its existing credit facility (as amended and restated, the "Amended and
Restated Revolving Credit Facility"), which is expected to provide for a
revolving credit facility of $50.0 million, up to $35.0 million of which is
expected to be available to fund acquisitions, subject to certain conditions.
See "Risk Factors--Risks of Future Acquisitions" and "Description of Certain
Indebtedness--The Amended and Restated Revolving Credit Facility."
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 May 7, 1996 (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. (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-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 entered into
its existing 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 "Existing Credit Facility") and issued $100.0 million principal
amount of 10 1/4% Senior Subordinated Notes due 2006 (the "Note Offering"; and
collectively with the Acquisition and the Existing Credit Facility, the
"Transactions"). The net cash proceeds of the Note Offering were used, together
with borrowings under the Existing 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 Certain Indebtedness" and "Description
of Capital Stock." In connection with the Acquisition, Natur-Pharma Inc.'s name
was changed to Twin Laboratories Inc.
7
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THE OFFERINGS
Common Stock offered by
the Company:
U.S. Offering.... 6,400,000 shares
International 1,600,000 shares
Offering..........
Total.......... 8,000,000 shares
Common Stock to be
outstanding after the
Offerings..............
26,500,000 shares
Use of proceeds ... The net proceeds of the Offerings and, to the extent
necessary, available cash resources of the Company
will be used to prepay all of the $50.0 million of
outstanding indebtedness under the term loan facility
contained in the Existing Credit Facility (plus
accrued and unpaid interest thereon; the
"Prepayment") and to redeem all of the outstanding
shares of Senior Preferred Stock and Junior Preferred
Stock, which together have an aggregate liquidation
preference of $67.0 million (plus accrued and unpaid
dividends thereon; together with the Prepayment, the
"Repayments"). The balance, if any, of the net
proceeds of the Offerings will be used for general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market
symbol............ TWLB
8
<PAGE>
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 audited and unaudited financial
statements of the Company. 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 (i) the Note Offering and the Existing Credit Facility and the application
of the net proceeds therefrom, (ii) the Acquisition (including the Company's
conversion of tax status from an "S" corporation to a "C" corporation and other
tax consequences related to the Acquisition) and related transactions, and
(iii) the Offerings and the Repayments, as if each of the Transactions, the
Offerings and the Repayments had been consummated as of January 1, 1995. The
pro forma balance sheet data give effect to the Offerings and the Repayments as
if the Offerings and the Repayments had been consummated on June 30, 1996. See
"Unaudited Pro Forma Condensed Consolidated Financial Data" and the notes
thereto. The pro forma financial data set forth below may not necessarily be
indicative of the results that would have been achieved had the Transactions,
the Offerings and the Repayments 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 the
Company and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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 trans-
action 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 be-
fore provision for in-
come 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)
======= ======= ======= ======== ======== ======= =======
Pro forma net income
(loss) per share...... $ 1.13 $ (0.34)(c)
======== =======
Weighted average shares
outstanding(d)........ 16,325 19,344
======== =======
OTHER DATA:
Capital expenditures... $ 1,472 $ 1,304 $ 4,904 $ 1,786 $ 2,641 $ 2,073 $ 483
Net sales growth....... 17.4% 18.3% 20.3% 17.5% 26.8% -- % 17.2%
Income from operations
growth................ 37.7 31.2 16.1 44.7 31.3 -- 37.0
Pro forma net income
growth................ -- 35.8 19.7 25.2 43.2 -- --
Income from operations
margin(e)............. 15.6 17.3 16.7 20.5 21.3 20.0 23.4
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
YEAR ENDED ---------------
DECEMBER 31, 1995 1995 1996
----------------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
PRO FORMA DATA:
Net sales................................ $148,735 $69,820 $81,837
Income from operations................... 31,212 13,795 19,028
Net income............................... 12,210 5,049 8,079
Net income per share..................... 0.46 -- 0.30
Weighted average shares outstanding(d)... 26,500 -- 26,500
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and marketable securities.. $ 8,185 $ 6,928
Net working capital (excluding cash and cash equiva-
lents, marketable securities and current debt) ..... 37,252 39,009
Total assets......................................... 141,163 137,682
Total debt (including current debt).................. 150,735 100,735
Senior and junior redeemable preferred stock......... 67,000 --
Shareholders' equity (deficit)....................... (94,721) 20,555
</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) Pro forma net loss per share for the six months ended June 30, 1996 has
been computed by dividing pro forma net loss, after reduction for Preferred
Stock dividends of $1.2 million, by the weighted average shares outstanding.
(d) Weighted average shares outstanding represents the number of equivalent
shares outstanding after giving retroactive effect to TLC's 18.5 for 1 stock
split (effected in the form of a stock dividend) and assumes that the
8,000,000 shares of Common Stock offered hereby are outstanding during each
of the periods indicated. See Notes to the Consolidated Financial Statements
of the Company included elsewhere in this Prospectus.
(e) Income from operations margin equals income from operations as a percentage
of net sales.
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
following risk factors, as well as the other information contained, and
incorporated by reference, in this Prospectus before making an investment in
the Common Stock. 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.
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 upon
completion of the Offerings each of the Blechman Brothers will own
approximately 6.3% of the outstanding Common Stock. 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 effects, including the
deaths of several individuals. 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. 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. The FDA is currently considering whether it should prohibit, limit
potencies or place other restrictions on the sale of products containing Ma
Huang. There can be no assurance that the FDA will not seek to impose
additional regulations on products which contain Ma Huang, including those
marketed by the Company.
While 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, certain 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
10
<PAGE>
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.
There is a risk that 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 regulation, 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 an 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 July 1, 1996, 129 of a
total of 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 manufacturer of
the allegedly contaminated L-Tryptophan. As of July 1, 1996, Twin Laboratories
Inc. was a named defendant in three such actions.
To date, the amount of damages sought in each of the three 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 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 fully awarded
against the Company 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 the Company, 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 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."
11
<PAGE>
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. See "--Certain Government Action and Adverse
Publicity Regarding Certain Products Containing Ephedrine." 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.
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.
The most recent draft of the Consent Order, which the Company received in May
1996, provides for, among other things: (1) injunctive relief prohibiting the
Company from making muscle building and fat burning claims for its
bodybuilding, sports nutrition and certain weight loss products without
scientific substantiation and from misrepresenting the nature of tests or
studies in connection with its bodybuilding, sports nutrition and weight loss
products, and requiring the Company to have prior substantiation for all
claims made with respect to such products 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 and
anticipates possible further negotiations with the FTC. The Company cannot at
this time predict whether it will be able to reach a negotiated settlement of
this matter.
In May 1996, the FTC staff informed the Company that unless a settlement is
reached in the very near future, 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.
12
<PAGE>
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 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."
LEVERAGE
The Company is highly leveraged. On a pro forma basis after giving effect to
the Offerings and the Repayments, as of June 30, 1996, the Company would have
had (i) approximately $100.7 million of outstanding debt and (ii)
shareholders' equity of $20.6 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
Certain Indebtedness." Required payments of principal and
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<PAGE>
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,
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.
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture (as defined herein) and the Existing Credit Facility impose
(and the Amended and Restated Revolving Credit Facility is expected to 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 Certain Indebtedness."
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. In connection with the
Offerings, the Company expects to enter into the Amended and Restated
Revolving Credit Facility, which is expected to provide for a revolving credit
facility of $50.0 million, up to $35.0 million of which is expected to be
available to fund acquisitions, subject to certain conditions. 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 Certain Indebtedness." 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. In addition, such acquisitions could result in substantial equity
dilution to existing stockholders. 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
14
<PAGE>
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."
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
Upon completion of the Offerings, GEI will own 33.5% and the Continuing
Stockholders will own 31.4%, of the Common Stock of TLC. As a result, GEI and
the Continuing Stockholders will have significant influence over all matters
requiring approval by the Company's stockholders without the approval of
minority
15
<PAGE>
stockholders. In addition, if they choose to act together, GEI and the
Continuing Stockholders will be able to elect all of the members of the Board
of Directors of the Company, thereby significantly controlling the affairs and
management of the Company. Such control could adversely affect the market
price of the Common Stock or delay or prevent a change in control of the
Company. In addition, pursuant to TLC's By-laws, GEI and the Continuing
Stockholders may, if they choose to act together, effect most corporate
matters requiring stockholder approval by written consent, without the need
for a duly-noticed and duly-held meeting of stockholders. See "Principal
Stockholders."
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. Consequently, the initial public offering price per share of the Common
Stock has been determined by negotiations among management of the Company and
the representatives of the Underwriters (the "Representatives"). See
"Underwriting" for factors considered in determining the initial public
offering price per share. There can be no assurance that an active trading
market will develop and be sustained subsequent to the Offerings. The Common
Stock may be subject to wide fluctuations in price in response to variations
in quarterly operating results and other factors, including acquisitions and
general economic or market conditions. In addition, broad market trading and
valuation fluctuations have adversely affected the valuation of industry
participants and may adversely affect the market price of the Common Stock.
See "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price per share of Common Stock is substantially
higher than the net tangible book value per share of the Common Stock.
Purchasers of shares of Common Stock in the Offerings will experience
immediate and substantial dilution of $15.49 in net tangible book value per
share of Common Stock (based on an assumed initial public offering price of
$16.00 per share, the mid-point of the range shown on the cover page of this
Prospectus.) See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Immediately after completion of the Offerings, TLC will have 26,500,000
shares of Common Stock outstanding, of which the 8,000,000 shares sold
pursuant to the Offerings will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), except those shares acquired by "affiliates" of the Company
as that term is defined under the Securities Act. Holders of the remaining
shares will be eligible to sell such shares pursuant to Rule 144 ("Rule 144")
under the Securities Act at prescribed times and subject to the manner of
sale, volume, notice and information restrictions of Rule 144. The Company has
granted certain institutional investors and their transferees, GEI and the
Continuing Stockholders certain demand and piggyback registration rights
covering an aggregate of 18,500,000 shares of Common Stock. The Company, its
officers, directors and certain other stockholders who collectively are the
beneficial holders of an aggregate of 17,205,000 shares of Common Stock, have
agreed with the Underwriters, subject to certain exceptions, not to directly
or indirectly, offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), any Common Stock, or any securities
convertible into or exchangeable or exercisable for, or warrants, options or
rights to purchase or acquire Common Stock or in any other manner transfer all
or a portion of the economic consequences associated with the ownership of any
Common Stock, or enter into any agreement to do any of the foregoing, for a
period of 180 days after the date of this Prospectus. Upon the expiration of
such 180 day period, such holders will in general be entitled to dispose of
their shares, although the shares of Common Stock held by affiliates of the
Company will continue to be subject to the restrictions of Rule 144 under the
Securities Act. Sales of substantial amounts of such shares in the public
market or the perception that such sales could occur could adversely affect
the market price of the shares of Common Stock and the Company's ability to
raise additional capital at a price favorable to the Company. See "Shares
Eligible for Future Sale" and "Underwriting."
16
<PAGE>
ANTI-TAKEOVER PROVISIONS
Prior to the consummation of the Offerings, the Company will amend its
Amended and Restated Certificate of Incorporation (as amended, the
"Certificate of Incorporation") and By-laws. The Certificate of Incorporation
and By-laws, as well as Delaware corporate law, contain certain provisions
that could have the effect of making it more difficult for a third party to
acquire, or discouraging a third party from attempting to acquire, control of
the Company. Certain of these provisions impose various procedural and other
requirements, including advance notice and other provisions, that could make
it more difficult for stockholders to effect certain corporate actions. The
Company's Board of Directors has the authority to issue additional shares of
preferred stock and to determine the designations, preferences and rights and
the qualifications or restrictions of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate actions, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. Furthermore, certain provisions of the Existing Credit Facility and the
Indenture provide, and certain provisions of the Amended and Restated
Revolving Credit Facility are expected to provide, for the acceleration of the
indebtedness evidenced thereby upon the occurrence of certain change in
control events (as defined in such debt instruments), which provisions could
also tend to prevent or discourage the acquisition of the Company by a third
party. See "Description of Certain Indebtedness."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
TLC conducts its business through its direct and indirect subsidiaries and
has no operations of its own. The principal assets of TLC are the capital
stock of its direct and indirect subsidiaries, Twin Laboratories Inc. and ARP.
Accordingly, TLC has no independent means of generating revenues. As a holding
company, TLC's internal sources of funds to meet its cash needs, including
payment of expenses, are dividends and other permitted payments from its
direct and indirect subsidiaries. Financing arrangements under which Twin
Laboratories Inc. is the borrower restrict the payment of dividends and the
making of loans, advances or other distributions to TLC except in certain
limited circumstances. See "Dividend Policy" and "Description of Certain
Indebtedness."
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
8,000,000 shares of Common Stock offered hereby are estimated to be
approximately $117.5 million, assuming an initial public offering price of
$16.00 per share and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company. Such net proceeds
and, to the extent necessary, available cash resources of the Company will be
used to repay all of the Company's outstanding indebtedness under the term
loan facility contained in the Existing Credit Facility, plus accrued and
unpaid interest thereon, and to redeem all of the outstanding shares of Senior
Preferred Stock and Junior Preferred Stock having an aggregate liquidation
preference of $67.0 million, plus accrued and unpaid dividends thereon.
Subsequent to the Transactions, the Company repaid approximately $3.0 million
of outstanding indebtedness under the term loan facility contained in the
Existing Credit Facility. The term loan facility generally bears interest at
alternative rates ranging from 2.5% over LIBOR to 1.25% over the ABR (as
defined herein) and matures on May 7, 2002. The borrowings under the term loan
facility were used to effect the Acquisition. The balance, if any, of the net
proceeds of the Offerings will be used for general corporate purposes.
Affiliates of DLJ own $7.5 million in aggregate liquidation preference of the
Senior Preferred Stock and will receive approximately $7.5 million of the net
proceeds of the Offerings in connection with the redemption of such shares.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources," "Description of Certain
Indebtedness," "Description of Capital Stock" and "Underwriting."
17
<PAGE>
DIVIDEND POLICY
From 1993 until the consummation of the Acquisition, the Company consisted
solely of "S" corporations. While maintaining such status, the Company
periodically declared and paid dividends to its shareholders, including
amounts sufficient for its shareholders to pay their income taxes on the
earnings of the Company that were treated as having been earned by the
Company's shareholders. The Company terminated its "S" corporation status in
connection with the consummation of the Acquisition.
The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. TLC conducts its business through its
direct and indirect subsidiaries and has no operations of its own. The
principal assets of TLC are the capital stock of its direct and indirect
subsidiaries, Twin Laboratories Inc. and ARP. Accordingly, TLC has no
independent means of generating revenues. As a holding company, TLC's internal
sources of funds to meet its cash needs, including payment of expenses, are
dividends and other permitted payments from its direct and indirect
subsidiaries. Financing arrangements under which Twin Laboratories Inc. is the
borrower restrict the payment of dividends and the making of loans, advances
or other distributions to TLC, except in certain limited circumstances. See
"Description of Certain Indebtedness." The payment of cash dividends in the
future will depend upon, among other things, the Company's results of
operations, financial condition, cash requirements and other factors deemed
relevant by the Company's Board of Directors.
DILUTION
As of June 30, 1996, TLC's deficit in net tangible book value was $104.1
million or $(5.63) per share. Net tangible book value per share represents the
amount of TLC's total tangible assets less TLC's total liabilities and
Preferred Stock, divided by the number of shares of Common Stock outstanding.
Without taking into account any other changes in net tangible book value after
June 30, 1996, other than to give effect to the sale of 8,000,000 shares of
Common Stock offered by the Company at an assumed initial public offering
price of $16.00 per share (the assumed mid-point of the range shown on the
cover page of this Prospectus), the receipt of the proceeds therefrom after
deducting underwriting discounts and commissions and the estimated expenses of
the Offerings and the Repayments, the net tangible book value of TLC on June
30, 1996 would have been $13.4 million or $0.51 per share. This amount
represents an immediate increase in net tangible book value of approximately
$6.14 per share to the existing stockholders and an immediate dilution of
$15.49 per share to purchasers of the Common Stock. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share......................... $16.00
Deficit in net tangible book value per share as of June 30,
1996......................................................... $(5.63)
Increase in net tangible book value per share attributable to 6.14
new investors................................................ ------
Net tangible book value per share after giving effect to the
Offerings...................................................... 0.51
------
Dilution in net tangible book value per share to new
investors(a)................................................... $15.49
======
</TABLE>
(a) If the Underwriters' over-allotment option is exercised in full, the net
tangible book value per share will be $1.13, resulting in dilution to new
investors in the Offerings of $14.87 per share. See "Underwriting."
The following table summarizes as of June 30, 1996 the number of shares of
capital stock purchased from the Company and the total consideration paid and
the average price paid per share by existing stockholders and new investors at
the assumed initial public offering price of $16.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 18,500,000 69.8% $ 10,000,000 7.2% $ 0.54
New investors................. 8,000,000 30.2 128,000,000 92.8 $16.00
---------- ----- ------------ -----
Total....................... 26,500,000 100.0% $138,000,000 100.0%
========== ===== ============ =====
</TABLE>
18
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of June 30, 1996, and as adjusted to reflect the Offerings and the Repayments
at an assumed initial public offering price of $16.00 per share. The
capitalization of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto and the "Unaudited Pro
Forma Condensed Consolidated Financial Data" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30,
1996
------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents and marketable securities......... $ 8,185 $ 6,928
======== ========
Long-term debt (including current portion)
Existing Credit Facility.................................. $ 50,000 $ --
Notes..................................................... 100,000 100,000
Other debt................................................ 362 362
Capital lease obligations................................. 373 373
-------- --------
Total long-term debt.................................... 150,735 100,735
-------- --------
Senior redeemable cumulative preferred stock................ 30,000 --
-------- --------
Junior redeemable cumulative preferred stock................ 37,000 --
-------- --------
Shareholders' equity (deficit)
Common Stock.............................................. 18,500 26,500
Additional paid-in capital................................ 75,833 185,333
Accumulated deficit....................................... (189,054) (191,278)
-------- --------
Total shareholders' equity (deficit).................... (94,721) 20,555
-------- --------
Total capitalization.................................... $123,014 $121,290
======== ========
</TABLE>
19
<PAGE>
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 the Company
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, the Offerings and the Repayments had been
consummated and were effective as of January 1, 1995. The unaudited pro forma
condensed consolidated balance sheet as of June 30, 1996 gives effect to the
Offerings and the Repayments as if they had occurred on such date. See
"Prospectus Summary--The Acquisition."
The financial effects of the Transactions, the Offerings and the Repayments
as presented in the pro forma financial data are not necessarily indicative of
either the Company's financial position or the results of its operations which
would have been obtained had the Transactions, the Offerings and the
Repayments actually occurred on the dates described above, nor are they
necessarily indicative of the results of future operations. As used in the
"Unaudited Pro Forma Condensed Consolidated Financial Data," the term
Offerings includes the Repayments. 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 the Company and the notes
thereto included elsewhere in this Prospectus.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
ADJUSTMENTS PRO FORMA ADJUSTMENTS TRANSACTIONS
RELATED TO THE FOR THE RELATED TO THE AND THE
HISTORICAL TRANSACTIONS TRANSACTIONS OFFERINGS OFFERINGS
---------- -------------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............... $148,735 $ -- $148,735 $ -- $148,735
Cost of sales........... 89,932 -- 89,932 -- 89,932
-------- -------- -------- ------- --------
Gross profit............ 58,803 -- 58,803 -- 58,803
Operating expenses...... 27,191 400 (a) 27,591 -- 27,591
-------- -------- -------- ------- --------
Income from operations.. 31,612 (400) 31,212 -- 31,212
-------- -------- -------- ------- --------
Other (expense) income:
Interest income....... 313 (313)(b) -- -- --
Interest expense...... (866) (14,818)(c) (15,684) 4,621 (d) (11,063)
Transaction expenses.. (656) 656 (e) -- -- --
Other................. 61 -- 61 -- 61
-------- -------- -------- ------- --------
(1,148) (14,475) (15,623) 4,621 (11,002)
-------- -------- -------- ------- --------
Income before provision
for income taxes....... 30,464 (14,875) 15,589 4,621 20,210
Provision for income
taxes.................. 240 5,931 (f) 6,171 1,829 (g) 8,000
-------- -------- -------- ------- --------
Net income.............. 30,224 (20,806) 9,418 2,792 12,210
Preferred Stock divi- -- (8,767)(h) (8,767) 8,767 (i) --
dends.................. -------- -------- -------- ------- --------
Net income available for $ 30,224 $(29,573) $ 651 $11,559 $ 12,210
common shareholders.... ======== ======== ======== ======= ========
PRO FORMA
Historical income before
provision for income
taxes.................. $ 30,464
Pro forma provision for 12,060
income taxes (j)....... --------
Pro forma net income.... $ 18,404
========
Pro forma net income per $ 1.13 $ 0.46
common share........... ======== ========
Weighted average common 16,325 26,500
shares outstanding(k).. ======== ========
</TABLE>
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
ADJUSTMENTS PRO FORMA ADJUSTMENTS TRANSACTIONS
RELATED TO THE FOR THE RELATED TO THE AND THE
HISTORICAL TRANSACTIONS TRANSACTIONS OFFERINGS OFFERINGS
---------- -------------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales............... $81,837 $ -- $81,837 $ -- $81,837
Cost of sales........... 47,852 -- 47,852 -- 47,852
------- ------ ------- ------ -------
Gross profit............ 33,985 -- 33,985 -- 33,985
Operating expenses...... 14,816 141 (a) 14,957 -- 14,957
------- ------ ------- ------ -------
Income from operations.. 19,169 (141) 19,028 -- 19,028
------- ------ ------- ------ -------
Other (expense) income:
Interest income....... 315 (315)(b) -- -- --
Interest expense...... (2,591) (5,260)(c) (7,851) 2,311 (d) (5,540)
Transaction expenses . (400) 400 (e) -- -- --
Nonrecurring non-
competition agreement
expense.............. (15,300) 15,300 (e) -- -- --
Other................. (23) -- (23) -- (23)
------- ------ ------- ------ -------
(17,999) 10,125 (7,874) 2,311 (5,563)
------- ------ ------- ------ -------
Income before provision
for income taxes....... 1,170 9,984 11,154 2,311 13,465
Provision for income
taxes.................. 1,833 2,629 (f) 4,462 924 (g) 5,386
------- ------ ------- ------ -------
Net income (loss)....... (663) 7,355 6,692 1,387 8,079
Preferred Stock
dividends.............. (1,247) (3,000)(h) (4,247) 4,247 (i) --
------- ------ ------- ------ -------
Net income available for $(1,910) $4,355 $ 2,445 $5,634 $ 8,079
common shareholders.... ======= ====== ======= ====== =======
PRO FORMA
Historical income before
provision for income
taxes.................. $ 1,170
Pro forma provision for 6,588
income taxes (j)....... -------
Pro forma net income $(5,418)
(loss)................. =======
Pro forma net income
(loss) per common $ (0.34)(l) $ 0.30
share.................. ======= =======
Weighted average common 19,344 26,500
shares outstanding (k). ======= =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
FOR THE
ADJUSTMENTS PRO FORMA ADJUSTMENTS TRANSACTIONS
RELATED TO THE FOR THE RELATED TO THE AND THE
HISTORICAL TRANSACTIONS TRANSACTIONS OFFERINGS OFFERINGS
---------- -------------- ------------ -------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales............... $69,820 $ -- $69,820 $ -- $69,820
Cost of sales........... 42,046 -- 42,046 -- 42,046
------- -------- ------- ------ -------
Gross profit............ 27,774 -- 27,774 -- 27,774
Operating expenses...... 13,779 200 (a) 13,979 -- 13,979
------- -------- ------- ------ -------
Income from operations.. 13,995 (200) 13,795 -- 13,795
------- -------- ------- ------ -------
Other (expense) income:
Interest income....... 147 (147)(b) -- -- --
Interest expense...... (417) (7,427)(c) (7,844) 2,311 (d) (5,533)
Other................. 96 -- 96 -- 96
------- -------- ------- ------ -------
(174) (7,574) (7,748) 2,311 (5,437)
------- -------- ------- ------ -------
Income before provision
for income taxes....... 13,821 (7,774) 6,047 2,311 8,358
Provision for income
taxes.................. 92 2,302 (f) 2,394 915 (g) 3,309
------- -------- ------- ------ -------
Net income.............. 13,729 (10,076) 3,653 1,396 5,049
Preferred Stock
dividends.............. -- (4,247)(h) (4,247) 4,247 (i) --
------- -------- ------- ------ -------
Net income available for
common shareholders.... $13,729 $(14,323) $ (594) $5,643 $ 5,049
======= ======== ======= ====== =======
PRO FORMA
Historical income before
provision for income
taxes.................. $13,821
Pro forma provision for
income taxes (j)....... 5,471
-------
Pro forma net income.... $ 8,350
=======
</TABLE>
22
<PAGE>
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 relating to the Transactions is as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, --------------
1995 1995 1996
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense on the Notes and the
Existing 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) The interest expense adjustment relating to the Offerings is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
YEAR ENDED 30,
DECEMBER 31, -------------
1995 1995 1996
------------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest expense relating to borrowings
under Existing Credit Facility repaid.... $4,240 $2,120 $2,120
Amortization of deferred financing costs
relating to borrowings under Existing
Credit Facility repaid................... 381 191 191
------ ------ ------
Interest expense adjustment............... $4,621 $2,311 $2,311
====== ====== ======
</TABLE>
(e) Represents a reduction in nonrecurring expenses incurred which are
directly attributable to the Transactions.
(f) 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 (e) above.
(g) Represents an increase in the provision for income taxes as a result of
the decrease in interest expense described in note (d).
(h) Represents dividends paid on the Preferred Stock.
(i) Represents the elimination of the dividends paid on the Preferred Stock
due to the redemption of the Preferred Stock in connection with the
Offerings.
(j) The Company consisted of "S" corporations prior to the consummation of the
Acquisition on May 7, 1996. The pro forma income statement information
reflects adjustments to historical net income as if the Company had not
elected "S" corporation status for income tax purposes.
(k) Weighted average shares outstanding represents the number of equivalent
shares outstanding after giving retroactive effect to TLC's 18.5 for 1
stock split (effected in the form of a stock dividend) and assumes that
the 8,000,000 shares of Common Stock offered hereby are outstanding during
each of the periods indicated. See Notes to the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
(l) Pro forma net income (loss) per common share has been computed by dividing
pro forma net income (loss), after reduction for Preferred Stock
dividends, by the weighted average shares outstanding.
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
-------------------------------------------
ADJUSTMENTS
RELATED TO PRO FORMA
THE FOR THE
ACTUAL OFFERINGS OFFERINGS
----------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 7,984 $(1,257)(a) $ 6,727
Marketable securities............... 201 -- 201
Accounts receivable, net of
allowance for bad debts............ 22,701 -- 22,701
Inventories......................... 30,953 -- 30,953
Deferred tax assets................. 417 -- 417
Prepaid expenses and other current
assets............................. 1,330 -- 1,330
--------- ------- --------
Total current assets.............. 63,586 (1,257) 62,329
Property, plant and equipment, net.... 12,960 -- 12,960
Deferred tax assets................... 55,155 -- 55,155
Other assets.......................... 9,462 (2,224)(b) 7,238
--------- ------- --------
Total assets.......................... $ 141,163 $(3,481) $137,682
========= ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt... $ 1,500 $(1,414)(c) $ 86
Current portion of capital lease
obligations........................ 141 -- 141
Accounts payable.................... 8,678 -- 8,678
Accrued expenses and other current
liabilities........................ 9,471 (1,757)(d) 7,714
--------- ------- --------
Total current liabilities........... 19,790 (3,171) 16,619
Long-term debt, less current portion.. 48,862 (48,586)(c) 276
Capital lease obligations, less
current portion...................... 232 -- 232
Notes................................. 100,000 -- 100,000
--------- ------- --------
Total liabilities................... 168,884 (51,757) 117,127
--------- ------- --------
Senior redeemable cumulative preferred 30,000 (30,000)(c) --
stock................................ --------- ------- --------
Junior redeemable cumulative preferred 37,000 (37,000)(c) --
stock................................ --------- ------- --------
Shareholders' equity (deficit):
Common Stock........................ 18,500 8,000 (e) 26,500
Additional paid-in capital.......... 75,833 109,500 (e) 185,333
Accumulated deficit................. (189,054) (2,224)(b) (191,278)
--------- ------- --------
Total shareholders' equity (94,721) 115,276 20,555
(deficit)........................ --------- ------- --------
Total liabilities and shareholders'
equity (deficit)..................... $ 141,163 $(3,481) $137,682
========= ======= ========
</TABLE>
24
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(a) Represents the use of available cash of Twin Laboratories Inc. to make a
portion of the Repayments (see note (c) below).
(b) Represents a $2,224 decrease in other assets relating to the elimination
of deferred financing costs associated with the repayment of the term loan
facility contained in the Existing Credit Facility which will be recorded
as an extraordinary item upon the consummation of the Offerings.
(c) Represents the application of the net proceeds of the Offerings to make a
portion of the Repayments. See "Use of Proceeds."
(d) Represents the elimination of accrued interest of $510 relating to
borrowings under the term loan facility contained in the Existing Credit
Facility and the elimination of accrued dividends payable of $1,247
relating to the Senior Preferred Stock and the Junior Preferred Stock.
(e) Represents a $117,500 increase to Common Stock and additional paid-in
capital relating to the net proceeds of the Offerings.
25
<PAGE>
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 the Company. 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 the Company. 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 the
Company and the notes thereto and the other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
STATEMENT OF INCOME DA-
TA: (IN THOUSANDS, EXCEPT PER SHARE 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 169 651 230 245 240 92 1,833
taxes................. ------- ------- ------- -------- -------- ------- -------
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)
======= ======= ======= ======== ======== ======= =======
Pro forma net income
(loss) per share...... $ 1.13 $ (0.34)(b)
======== =======
Weighted average shares
outstanding (c)....... 16,325 19,344
======== =======
OTHER DATA:
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
Net sales growth....... 17.4% 18.3% 20.3% 17.5% 26.8% -- % 17.2%
Income from operations
growth................ 37.7 31.2 16.1 44.7 31.3 -- 37.0
Pro forma net income
growth................ -- 35.8 19.7 25.2 43.2 -- --
Income from operations
margin (d)............ 15.6 17.3 16.7 20.5 21.3 20.0 23.4
</TABLE>
(continued on following page)
26
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
<CAPTION>
(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) Pro forma net loss per share for the six months ended June 30, 1996 has
been computed by dividing pro forma net loss, after reduction for Preferred
Stock dividends of $1.2 million, by the weighted average shares outstanding.
(c) Weighted average shares outstanding represents the number of equivalent
shares outstanding after giving retroactive effect to TLC's 18.5 for 1 stock
split (effected in the form of a stock dividend) and assumes that the
8,000,000 shares of Common Stock offered hereby are outstanding during each
of the periods indicated. See Notes to the Consolidated Financial Statements
of the Company included elsewhere in this Prospectus.
(d) Income from operations margin equals income from operations as a
percentage of net sales.
27
<PAGE>
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 the Company 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
</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.
28
<PAGE>
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.
Income from Operations. Income from operations was $19.2 million in first
half 1996, representing an increase of $5.2 million, or 37.0%, as compared to
$14.0 million for first half 1995. Income from operations margin increased to
23.4% of net sales in first half 1996, as compared to 20.0% of net sales in
first half 1995. The increase in income from operations and income from
operations margin was primarily due to the Company's higher sales volume in
first half 1996 together with higher gross margins and lower 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.
29
<PAGE>
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.
Income from Operations. Income from operations was $31.6 million in fiscal
1995, representing an increase of $7.5 million, or 31.3%, as compared to $24.1
million for fiscal 1994. Income from operations margin increased to 21.3% of
net sales in fiscal 1995, as compared to 20.5% of net sales in fiscal 1994.
The increase in income from operations and income from operations margin 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, which
was partially offset by a reduction in gross margin as discussed above.
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 decrease 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.
Income from Operations. Income from operations was $24.1 million in fiscal
1994, an increase of $7.5 million, or 44.7%, as compared to $16.6 million for
fiscal 1993. Income from operations margin increased to
30
<PAGE>
20.5% of net sales in 1994, as compared to 16.7% of net sales in fiscal 1993.
The increase in income from operations and income from operations margin was
due to increased sales volumes together with higher gross margins and lower
operating expenses as a percent of net sales.
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 Existing Credit Facility and borrowed $53.0 million
thereunder, and issued $100.0 million principal amount of 10-1/4% Senior
Subordinated Notes due 2006. The net proceeds of the Offerings and, to the
extent necessary, available cash resources of the Company will be used to
repay all of the Company's outstanding indebtedness under the term loan
facility contained in the Existing Credit Facility, plus accrued and unpaid
interest thereon, and to redeem all of the outstanding shares of Senior
Preferred Stock and all of the outstanding shares of Junior Preferred Stock
having an aggregate liquidation preference of $67.0 million, plus accrued and
unpaid dividends thereon. See "Prospectus Summary--The Acquisition" and "Use
of Proceeds."
TLC has no operations of its own and accordingly has no independent means of
generating revenue. As a holding company, TLC's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. Financing
arrangements under which Twin Laboratories Inc. is the borrower contain, and
the Amended and Restated Revolving Credit Facility is expected to 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 Certain Indebtedness."
Management believes that, following the consummation of the Offerings, the
Company will have 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 Amended and Restated Revolving Credit
Facility. In connection with the Acquisition, the Company entered into the
Existing Credit Facility. A portion of the net proceeds of the Offerings will
be used to repay the Company's outstanding indebtedness under the term loan
facility contained in the Existing Credit Facility. See "Use of Proceeds."
31
<PAGE>
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. In connection with the
Offerings, the Company expects to enter into the Amended and Restated
Revolving Credit Facility, which is expected to provide for a revolving credit
facility of $50.0 million, up to $35.0 million of which is expected to be
available to fund acquisitions, subject to certain conditions. 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 Certain Indebtedness." 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. In addition, such acquisitions could result in substantial equity
dilution to existing stockholders. 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 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 $57,300 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.
32
<PAGE>
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 income from operations 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 income from operations
of 22.0% and 37.8%, respectively. For the fiscal year ended December 31, 1995,
the Company achieved net sales growth of 26.8% to $148.7 million and growth in
income from operations of 31.3% to $31.6 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 income from operations of $19.2 million, representing an
increase of 17.2% and 37.0%, 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 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
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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.
TLC was incorporated under the laws of the State of Delaware in 1996 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 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.
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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
income from operations 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. 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. In connection with the
Offerings, the Company expects to enter into the Amended and Restated Revolving
Credit Facility, which is expected to provide for a revolving credit facility
of $50.0 million, up to $35.0 million of which is expected to be available to
fund acquisitions, subject to certain conditions. See "Risk Factors--Risks of
Future Acquisitions" and "Description of Certain Indebtedness--The Amended and
Restated Revolving Credit Facility."
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 Whole Foods
Market. 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 and 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>
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
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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/1//0/, 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. 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.
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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/1//0/; 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 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
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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 elite athletes, including Shelly Beattie, Michael Mentzer and
John Romano, and nutritional experts such as Dr. James Duke, 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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<PAGE>
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'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. 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
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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.
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
41
<PAGE>
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 labeling 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, 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.
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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.
The most recent draft of the Consent Order, which the Company received in May
1996, provides for, among other things: (1) injunctive relief prohibiting the
Company from making muscle building and fat burning claims for its
bodybuilding, sports nutrition and certain weight loss products without
scientific substantiation and from misrepresenting the nature of tests or
studies in connection with its bodybuilding, sports nutrition and weight loss
products and requiring the Company to have prior substantiation for all claims
made with respect to such products 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 and anticipates
possible further negotiations with the FTC. The Company cannot at this time
predict whether it will be able to reach a negotiated settlement of this
matter.
In May 1996, the FTC staff informed the Company that unless a settlement is
reached in the very near future, 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.
43
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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.
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 effects, including the
deaths of several individuals. 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. 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. The FDA is currently considering whether
it should prohibit, limit potencies or place other restrictions on the sale of
products containing Ma Huang. There can be no assurance that the FDA will not
seek to impose additional regulations on products which contain Ma Huang,
including those marketed by the Company.
While 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, certain 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.
There is a risk that 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 regulation, the Company may elect to reformulate
and/or relabel its products which contain Ma Huang. While the Company believes
that its Ma Huang
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products could be reformulated and relabeled, there can be no assurance in
that regard or that reformulation and/or relabeling would not have an 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. See "--Legal Matters." 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.
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, and 5,000 square feet of office space
in Ronkonkoma. 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 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.
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 July
1, 1996, Twin Laboratories Inc. was a named defendant in three 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
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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 July 1, 1996,
129 of a total of 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 three 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 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 fully awarded
against the Company alone and ignoring the existence of the Indemnification
Agreement, would not exceed such insurance coverage and 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 could be
assessed against or paid by other parties or by insurance carriers, 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 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. 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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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................... 45 Executive Vice President, Treasurer and Director
Dean Blechman.................... 39 Executive Vice President and Director
Neil Blechman.................... 45 Executive Vice President, Secretary and Director
Ross Blechman.................... 43 Chairman of the Board, Chief Executive Officer,
President and Director
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 joined 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.
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
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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
of Natur-Pharma Inc. 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 has been a director of the Company since its
formation in February 1996. 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 will provide for the
Company's Board of Directors to be comprised of such number of directors as
determined from time to time by the Board of Directors, but in no event less
than eight members. The Board is currently comprised of eight members. Each
Director holds office until his successor is duly 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 Stockholder Agreement (as
hereinafter defined) as designees of GEI and the Continuing Stockholders,
respectively. See "Principal Stockholders--Terms of the Stockholders
Agreement." Upon the closing of the Offerings, this provision of the
Stockholders Agreement will terminate and there will be no voting agreements
in effect regarding the election of Directors. 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.
BOARD COMMITTEES
The Board of Directors intends to establish an audit committee and a
compensation committee at or prior to the consummation of the Offerings. The
audit committee, the majority of whose members will be independent directors
(i.e. non-executive directors), will oversee actions taken by the Company's
independent auditors, recommend the engagement of auditors and review the
scope and results of the Company's accounting and control procedures and the
accuracy of its system of internal accounting and control procedures. The
compensation committee will review and approve the compensation of executives
of the Company and make recommendations to the Board of Directors with respect
to standards for setting compensation levels.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not currently have a compensation committee, however as
stated above, the Company intends to establish a compensation committee at or
prior to the consummation of the Offerings.
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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
---------------------
NAME AND PRINCIPAL FISCAL ALL OTHER
POSITION YEAR SALARY($) BONUS($)(A) COMPENSATION($)(B)
------------------ ------ --------- ----------- ------------------
<S> <C> <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) Includes: (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 Twin
Laboratories Inc.'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 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. The consummation of the Offerings will constitute a
Public Offering Event.
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
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<PAGE>
be employed as an executive of the Company for a term of three years,
renewable for terms 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 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.
STOCK INCENTIVE PLAN
The Company expects that, prior to the consummation of the Offerings, the
Board of Directors and stockholders of the Company will approve and adopt the
Twinlab Corporation 1996 Stock Incentive Plan (the "1996 Plan"), the expected
terms of which are summarized below.
General. 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 (incentive and nonqualified stock
options are collectively referred to as "options"), (iii) stock appreciation
rights, (iv) restricted stock and (v) performance shares. Awards may be made
to such officers and other key employees of the Company and its subsidiaries
(including prospective employees who become employees), and to such
consultants to the Company and its subsidiaries, as the Committee shall in its
discretion select (collectively, "key persons"). No individuals who are
directors of the Company are eligible to receive awards under the 1996 Plan.
Administration. The 1996 Plan will be administered by the Board of
Directors. The Board may designate a committee, comprised of not less than two
directors, to carry out its functions under the 1996 Plan. The Board
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<PAGE>
of Directors is authorized to construe, interpret and implement the provisions
of the 1996 Plan, to select the key persons to whom awards will be granted, to
determine the terms and provisions of such awards, and to amend outstanding
awards. The determinations of the Board of Directors are made in its sole
discretion and are binding and conclusive.
Grants Under the 1996 Plan. Unless the Board of Directors expressly provides
otherwise, an option will become exercisable as to 20% of the shares subject
thereto on each of the first through fifth anniversaries of the grant. The
purchase price per share payable upon the exercise of an option (the "option
exercise price") will be established by the Board of Directors, provided that
the option exercise shall be no less than 100% of the fair market value of a
share of the Common Stock on the date of grant.
It is presently anticipated that prior to the consummation of the Offerings,
a portion of the authorized options will be granted pursuant to the 1996 Plan
to certain key persons at an exercise price equal to the initial public
offering price set forth on the cover page of this Prospectus.
Other features of the 1996 Plan. Awards granted under the 1996 Plan and
shares acquired pursuant thereto are subject to a number of rights and
restrictions, including provisions relating to the termination of employment
or service of the grantee.
The Board of Directors may, without stockholder approval, suspend,
discontinue, revise or amend the 1996 Plan at any time, or from time to time;
provided, however, that stockholder approval shall be obtained for any
amendment for which such approval is required by Rule 16b-3 promulgated under
the 1934 Act or by Section 422 of the Internal Revenue Code of 1986, as
amended. Unless sooner terminated by the Board of Directors, the provisions of
the 1996 Plan respecting the grant of incentive stock options shall terminate
on the tenth anniversary of the adoption of the 1996 Plan by the Board of
Directors. All awards made under the 1996 Plan prior to its termination shall
remain in effect until they are satisfied or terminated.
In the event of a merger or consolidation of the Company with or into any
other corporation or entity, outstanding awards shall be assumed or an
equivalent option or right shall be substituted by such successor corporation
or a parent or subsidiary of such successor corporation, unless the Board of
Directors determines, in the exercise of its sole discretion, to accelerate
the date on which an award becomes exercisable or fully vested. In the absence
of an assumption or substitution, awards shall, to the extent not exercised,
terminate as of the date of the closing of the merger or consolidation.
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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."
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 the transactions described above 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 owned 48% of the outstanding
shares of Common Stock of TLC. Following consummation of the Offerings, GEI
will own 33.5% 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 Note 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.
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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>
PRINCIPAL STOCKHOLDERS
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, and as adjusted at that date to reflect
the sale by the Company of the shares of Common Stock offered hereby. Except
as noted below, each person or entity has sole voting and investment power
with respect to the shares shown. The following table assumes an 18.5 for 1
stock split (effected as a stock dividend) to be effected prior to the
consummation of the Offerings.
<TABLE>
<CAPTION>
PERCENT
----------------------
PRIOR AFTER
NUMBER OF TO THE
SHARES OFFERINGS OFFERINGS(A)
---------- --------- ------------
<S> <C> <C> <C>
Green Equity Investors II, L.P. ............. 8,880,000 48.0% 33.5%
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
John G. Danhakl (b).......................... 8,880,000 48.0 33.5
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Jennifer Holden Dunbar (b)................... 8,880,000 48.0 33.5
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Jonathan D. Sokoloff (b)..................... 8,880,000 48.0 33.5
c/o Leonard Green & Partners, L.P.
333 South Grand Avenue, Suite 5400
Los Angeles, CA 90071
Brian Blechman............................... 1,659,246 9.0 6.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Dean Blechman................................ 1,659,246 9.0 6.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Neil Blechman................................ 1,659,246 9.0 6.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Ross Blechman................................ 1,659,246 9.0 6.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Steve Blechman............................... 1,659,246 9.0 6.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Stephen Welling.............................. 28,770 * *
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
All directors and executive officers as a
group (9 persons) (c)....................... 17,205,000 93.0 64.9
</TABLE>
(footnotes on following page)
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- --------
(a) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters exercise their over-allotment option in full, the persons or
entities set forth in the above table will beneficially own, in the
aggregate, 17,205,000 shares, or 62.1%, of the outstanding shares of Common
Stock after the Offerings.
(b) The shares shown as beneficially owned by Messrs. Danhakl and Sokoloff and
Ms. Holden Dunbar represent 8,880,000 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.
(c) Includes the shares referred to in Note (b) 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. The Stockholders
Agreement contains certain transfer restrictions, pre-emptive rights and
voting provisions which will terminate upon the closing of the Offerings.
Pursuant to the Stockholders Agreement, each of GEI and the Continuing
Stockholders is granted certain demand registration rights which commence nine
months after the Offerings. The Stockholders Agreement also contains certain
"piggyback" registration rights arising in the event that TLC registers its
securities under the Securities Act. Subject to the early termination of
certain provisions of the Stockholders Agreement upon the occurrence of the
Offerings, 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 were granted certain rights of transfer of their shares and
certain rights of first refusal, which will terminate upon the closing of the
Offerings. 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
the Company. Subject to the early termination of certain provisions of the
Secondary Stockholders Agreement upon the occurrence of the Offerings, the
Secondary Stockholders Agreement terminates on the tenth anniversary of the
date thereof.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE EXISTING CREDIT FACILITY
The Existing Credit Facility, agented by Chemical Bank ("Chemical") 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 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 Chemical 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 Chemical in the interbank eurodollar market in the
approximate amount of Chemical'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 proceeds of the Term Loan were used, together with proceeds of the Note
Offering and the issuance of shares of 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 and for general corporate purposes,
including, without limitation, the payment of transaction fees and tax
adjustments.
The Existing Credit Facility is secured by first priority security interests
in all of the tangible and intangible assets of Twin Laboratories Inc. and its
direct and indirect subsidiaries. In addition, the loans under the Existing
Credit Facility are guaranteed by TLC, ARP and certain of Twin Laboratories
Inc.'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 Existing 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 Existing
Credit Facility.
The Existing 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 Existing 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
Existing Credit Facility, including the covenants included therein, such
noncompliance would result in an event of default under the Existing Credit
Facility and could result in acceleration of the payment of the indebtedness
outstanding under the Existing Credit Facility.
The Company intends to repay in full the $50.0 million of outstanding
indebtedness under the Term Loan, plus accrued and unpaid interest thereon,
with a portion of the net proceeds of the Offerings. Subsequent to the
Transactions, the Company repaid approximately $3.0 million of outstanding
indebtedness under the Term Loan.
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<PAGE>
THE AMENDED AND RESTATED REVOLVING CREDIT FACILITY
In connection with the consummation of the Offerings, it is expected that
Twin Laboratories Inc. will enter into the Amended and Restated Revolving
Credit Facility to be agented by The Chase Manhattan Bank. The Amended and
Restated Revolving Credit Facility is expected to provide for a revolving
credit facility (the "Amended Facility") of $50.0 million expiring on May 7,
2002. The Amended Facility will 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"). With respect
to the Amended Facility, "Applicable Margin" means (a) 0%, in the case of ABR
Loans and (b) 1.25%, in the case of Eurodollar Loans. Interest rates on the
Amended Facility are subject to increase or reduction based on Twin
Laboratories Inc.'s meeting certain financial tests.
The proceeds of the Amended Facility will be available for the working
capital requirements of the Company and for general corporate purposes,
including up to $35.0 million of which will be available to fund permitted
acquisitions. For the purposes of the Amended Facility, "permitted
acquisitions" is generally defined as the acquisition of an entity involved in
the manufacturing and/or marketing of goods sold in health food or other
similar stores, which acquisition will not cause Twin Laboratories Inc. to fail
to be in compliance with the financial covenants contained in the Amended
Facility after giving pro forma effect to the relevant acquisition. A portion
of the Amended Facility not to exceed $15.0 million will be available for the
issuance of letters of credit which generally will have an initial term of one
year or less.
The Amended Facility is expected to be 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 Amended
Facility will be guaranteed by TLC, ARP and certain of Twin Laboratories Inc.'s
future subsidiaries. Additionally, the Company will be required to apply
various percentages of the net proceeds of (i) certain issuances or sales of
equity (provided that in the case of a public offering by TLC of its common
stock, the net proceeds thereof may be used, at the Company's discretion, to
redeem or retire any of its outstanding preferred stock, the Notes and/or to
reduce the Amended Facility), (ii) the incurrence of certain indebtedness by
TLC or its direct or indirect subsidiaries, or (iii) any disposition of any
material assets (other than inventory in the ordinary course of business), to
the repayment of the Amended Facility.
The Amended Facility is expected to contain certain financial and operating
covenants, including a maximum leverage ratio, a minimum fixed charge coverage
ratio and restrictions on the amount of capital lease obligations the Company
may incur.
The operating covenants of the Amended Facility are expected to 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 investment 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 are also expected to 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, amendments or waivers of
certain specified agreements, and the issuance of preferred stock, guarantees
or other credit enhancements.
DESCRIPTION OF NOTES
The 10 1/4% Senior Subordinated Notes due 2006 (the "Notes") were issued in a
transaction (the "Notes Offering") pursuant to which Twin Laboratories Inc.
issued an aggregate of $100,000,000 principal amount of
57
<PAGE>
the Notes to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and
Chase Securities Inc. (together with DLJ, the "Initial Notes Purchasers") on
May 7, 1996 (the "Note Offering Closing Date"). The Initial Notes Purchasers
subsequently resold the Notes in reliance on Rule 144A and certain other
exemptions under the Securities Act. The Company and the Initial Notes
Purchasers also entered into a Registration Rights Agreement, pursuant to
which the Company granted certain registration rights for the benefit of the
holders of the Notes. The Company intends to consummate a registered exchange
offer under the Securities Act for the Notes (the "Exchange Offer") to satisfy
certain of the Company's obligations under the Registration Rights Agreement
with respect to the Notes. If the Exchange Offer is not filed or consummated
within certain time periods specified in the Registration Rights Agreement (a
"Registration Default"), the Company is obligated to pay liquidated damages to
each holder of the Notes, in an amount equal to $.05 per week per $1,000
principal amount of Notes with respect to the first 90-day period following
such default. This amount will increase by an additional $.05 per week per
$1,000 principal amount of Notes per Registration Default up to a maximum of
$.30 per week per $1,000 principal amount of Notes.
The Notes were issued under an indenture, dated as of the Note Offering
Closing Date (the "Indenture"), among TLC, Twin Laboratories Inc., ARP and
Fleet National Bank as trustee. The Notes are not redeemable, in whole or in
part, prior to May 15, 2001. Thereafter, the Notes are redeemable at the
redemption prices set forth in the Indenture, plus interest accrued thereon to
the redemption date. Notwithstanding the foregoing, at any time on or before
May 15, 1999, Twin Laboratories Inc. may redeem up to 35% of the original
aggregate principal amount of the Notes, in whole or in part, with the net
proceeds of one or more Equity Offerings (as defined therein) 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 therein), Twin Laboratories Inc. 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.
The Notes are general unsecured obligations of Twin Laboratories Inc.
subordinated in right of payment to all existing and future Senior Debt (as
defined therein) of Twin Laboratories Inc., including borrowings under the New
Credit Facility. The payment of the principal of, premium, if any, and
interest on the Notes are guaranteed (the "Guarantees") by TLC and ARP (the
"Guarantors"). The Guarantees are subordinated in right of payment to all
existing and future Senior Debt of the Guarantors. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Indenture permits the Company to incur
additional indebtedness, including additional Senior Debt. The Indenture
contains certain covenants with respect to Twin Laboratories Inc. and the
Subsidiary Guarantors (as defined therein) that limit the ability of Twin
Laboratories Inc. and the Subsidiary Guarantors to, among other things, (i)
incur additional Indebtedness (as defined therein) 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 consolidations involving Twin Laboratories Inc.
The form and terms of the notes to be issued under the Exchange Offer will
be identical in all material respects to the form and terms of the Notes.
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DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of the Offerings, TLC will amend 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, of which 26,500,000 shares will be
outstanding upon completion of the Offerings, and 2,000,000 shares of
preferred stock, $.01 par value per share, none of which shares will be
outstanding upon consummation of the Offerings and the Repayments. See "Use of
Proceeds."
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 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 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. Immediately following the Offerings, GEI will own 33.5%
and the Continuing Stockholders will own 31.4% of the Common Stock of TLC. 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
the Company. See "Risk Factors--Control by Principal Stockholders."
Holders of 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. See "Dividend Policy."
Upon the liquidation, dissolution or winding up of the Company, each holder of
Common Stock will be entitled to share ratably in any distribution of the
Company'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 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 Common Stock are, and the shares of Common Stock offered hereby will
be when issued, fully paid and non-assessable.
Special meetings of stockholders may be called by the Company's Board of
Directors, the Chairman of the Board of Directors, the President or the
holders of twenty-five (25%) of the then outstanding Common Stock.
Stockholders of the Company 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 the Company'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
The Company's Board of Directors has authority (without action by the
stockholders) to issue the 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. Under certain circumstances, the Company could issue the
preferred stock as a method of discouraging, delaying or preventing a change
of control of the Company.
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In connection with the consummation of the Acquisition and the Note
Offering, TLC issued the Senior Preferred Stock and Junior Preferred Stock,
the terms of which are described below. All outstanding shares of Senior
Preferred Stock and Junior Preferred Stock will be redeemed in connection with
the Offerings and the Repayments.
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 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 By-laws 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
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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 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 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 PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW ("DGCL")
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to
be taken without a meeting with the written consent of holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted, provided that the certificate of
incorporation of such corporation does not contain a provision to the
contrary. The Certificate of Incorporation contains no such provision, and
therefore, pursuant to Section 228 and the By-laws, stockholders holding a
majority of the voting power of the Common Stock will be able to effect most
corporate matters requiring stockholder approval by written consent, without
the need for a duly-noticed and duly-held meeting of stockholders. See "Risk
Factors--Control by Principal Stockholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Securities
Transfer, Incorporated. American Securities Transfer, Incorporated is located
at 1825 Lawrence Street, Suite 444, Denver, Colorado 80202-1817, and its
telephone number is (303) 298-5370.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, TLC will have 26,500,000 shares of Common
Stock outstanding. Of these shares, the 8,000,000 shares sold in the Offerings
will be freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the
Company, as that term is defined under the Securities Act ("Affiliates"), may
generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 18,500,000 shares of Common Stock (the "Restricted Shares")
constitute restricted securities under Rule 144 and were issued by the Company
in private transactions in reliance upon one or more exemptions under the
Securities Act. Such restricted securities may be resold in a public
distribution only if registered under the Securities Act (which registration
is contemplated with respect to all of such restricted securities as described
below) or pursuant to an exemption therefrom, including Rule 144. The Company,
its officers, directors and certain other stockholders who collectively are
the beneficial owners of an aggregate of 17,205,000 shares of Common Stock,
have agreed with the Underwriters not to directly or indirectly without the
prior written consent of DLJ offer, sell, contract to sell, grant any option
to purchase or otherwise dispose of any Common Stock or any securities
convertible into or exchangeable or exercisable for, or warrants, options or
rights to purchase or acquire Common Stock or in any other manner transfer all
or a portion of the economic consequences associated with the ownership of any
Common Stock, or enter into any agreement to do any of the foregoing, for a
period of 180 days after the date of this Prospectus (the "Lock-Up Period"),
except (i) offers to sell and sales to the Underwriters pursuant to the
Offerings and (ii) the issuance of shares of Common Stock pursuant to employee
benefit arrangements of the Company. Upon the expiration of such 180 day
period, such
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<PAGE>
holders will in general be entitled to dispose of their shares, although the
shares of Common Stock held by affiliates of the Company will continue to be
subject to the restrictions of Rule 144 under the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the Offerings, a person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least two
years, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three-month period a number of shares of Common
Stock that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume in the Common Stock during
the four calendar weeks preceding the date on which notice of such sale is
filed pursuant to Rule 144. Sales under Rule 144 are subject to certain
restrictions relating to manner of sale, notice and the availability of
current public information about the Company. In addition, under Rule 144(k),
a person who is not an Affiliate of the Company at any time 90 days preceding
a sale, and who has beneficially owned shares for at least three years, would
be entitled to sell such shares immediately following the Offerings without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144.
The Company has granted certain institutional investors and their
transferees certain demand and piggyback registration rights covering an
aggregate of 1,295,000 shares. These registration rights will become
exercisable on May 7, 2001. The Company has also granted GEI and the
Continuing Stockholders certain demand and piggyback registration rights
covering an aggregate of 17,205,000 shares. The demand registration rights for
GEI and the Continuing Stockholders are not exercisable until nine months from
the date on which the Offerings are consummated. When and as these rights are
exercised, additional shares will become available for sale upon the
effectiveness of a registration statement filed pursuant to exercise of such
rights. See "Principal Stockholders--Terms of the Stockholders Agreement."
It is presently anticipated that prior to the consummation of the Offerings,
options will be granted pursuant to the 1996 Plan to certain employees at an
exercise price equal to the initial public offering price set forth on the
cover page of this Prospectus. The Company intends to file a Registration
Statement on Form S-8 ("S-8") to cover the 400,000 authorized shares of Common
Stock which have been reserved for issuance pursuant to grants of options to
purchase Common Stock under the Company's 1996 Plan. Shares issued on exercise
of options after the effective date of the S-8 will be eligible for sale by
non-affiliates in the public market without limitation and by affiliates
subject to the provisions of Rule 144, except for the holding period
limitation of Rule 144.
Prior to the Offerings there has been no public market for the Common Stock
and any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock by a "Non-United States Holder." For the purpose of this summary,
a "Non-United States Holder" is any person or entity that is not (a) a citizen
or resident of the United States, (b) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof or (c) an estate or trust that is subject to
United States federal taxation on its income regardless of its source. An
individual may be deemed to be a resident of the United States for federal
income tax purposes in several circumstances, including being present in the
United States on at least 31 days in the calendar year and for an aggregate of
183 days during the three-year period ending with the current calendar year.
For purposes of this determination, all of the days present in the United
States during the current year, one-third of the days present during the
immediately preceding year and one-sixth of the days present during the second
preceding year are taken into account. Resident aliens are subject to U.S.
federal income tax as if they were U.S. citizens and residents.
This summary does not deal with all aspects of United States federal income
and estate taxation that may be relevant to Non-United States Holders in light
of their personal circumstances and does not address tax consequences under
the laws of any U.S. state, municipality, or other taxing jurisdiction or
under the laws of any country other than the United States. Furthermore, this
summary is based on current provisions of the Internal Revenue Code, existing,
temporary and proposed regulations promulgated thereunder and administrative
and judicial interpretations, all of which are subject to change, possibly
with retroactive effect. Prospective Non-United States Holders are urged to
consult their tax advisors regarding the United States federal, state, local
and non-United States income and other tax consequences of owning and
disposing of the Common Stock.
DIVIDENDS
The Company does not expect to pay dividends on its Common Stock in the
foreseeable future. See "Dividend Policy." Generally, any dividends paid with
respect to the Common Stock to a Non-United States Holder will be subject to
withholding of United States federal income tax at a 30% tax rate (or such
lower tax rate as may be specified by an applicable income tax treaty).
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder (and attributable to a U.S. permanent establishment of the Non-
United States Holder, if any income tax treaty applies) are exempt from such
withholding tax. However, such effectively connected dividends, net of certain
deductions and credits, are taxed at the same graduated rates applicable to
United States persons. Effectively connected dividends received by a corporate
Non-United States Holder may be subject to an additional "branch profits tax"
at a 30% tax rate (or such lower rate as may be specified by an applicable
income tax treaty). A Non-United States Holder may claim exemption from
withholding under the effectively connected income exception by filing Form
4224 (Statement Claiming Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of Business in the United States) with
the Company or its paying agent.
Under current United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of
a tax treaty rate. Treasury regulations proposed to be effective for payments
made after December 31, 1997, which have not been finally adopted, however,
would require Non-United States Holders to file certain new forms to obtain
the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. Such forms would contain the holder's name,
address and certain other information.
DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain recognized upon the sale or other disposition
of Common Stock unless (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder and is attributable
to such holder's office
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or other fixed place of business within the United States, (ii) in the case of
a Non-United States Holder who is a non-resident alien individual and holds
the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of disposition and either (a)
has a "tax home" in the United States for United States federal income tax
purposes or (b) has an office or other fixed place of business in the United
States to which the gain is attributable and no treaty exemption applies,
(iii) the Non-United States Holder is subject to tax pursuant to the
provisions of United States federal income tax laws applicable to certain
expatriates or (iv) the Company is or has been a "United States real property
holding corporation" ("USRPHC") at any time within the shorter of the five-
year period preceding such disposition or such Non-United States Holder's
holding period and, provided that the Common Stock continues to be "regularly
traded on an established securities market" for tax purposes, the Non-United
States Holder held, directly or indirectly, at any time during the five-year
period ending on the date of disposition, more than 5% of the outstanding
Common Stock. The Company has determined that it has not been and is not
currently and does not believe that it will become a USRPHC for federal income
tax purposes. If a Non-United States Holder falls under clause (i) above, the
holder will be subject to United States federal income tax on the same basis
as United States persons generally (and, with respect to corporate Non-United
States Holders, may also be subject to the branch profits tax described
above). If an individual Non-United States Holder falls under clause (ii)
above, the holder generally will be subject to a 30% tax on the gain derived
from the sale, which gain may be offset by U.S. capital losses recognized
within the same taxable year of such sale or disposition.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In the event the Company decides, contrary to its present intention, to pay
dividends with respect to its Common Stock, the Company must report to the IRS
the amount of dividends paid, the name and address of the recipient and the
amount, if any, of tax withheld. A similar report is sent to the Non-United
States Holder. See "Dividend Policy." Pursuant to tax treaties or other
agreements, the IRS may make such reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the Non-United
States Holder fails to establish that it is entitled to an exemption or to
provide a correct taxpayer identification number and other information to the
payor.
The payment of the proceeds of the disposition of Common Stock by or through
the United States office of a broker is subject to information reporting and
backup withholding at a rate of 31% unless the holder certifies its name,
address and non-United States status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds by or through a
foreign office of (a) a United States broker, (b) a foreign broker that is a
controlled foreign corporation for United States federal income tax purposes
or (c) a foreign broker 50% or more of whose gross income for certain periods
is effectively connected with the conduct of a trade or business, unless such
broker has documentary evidence in its files of the owner's foreign status and
has no actual knowledge to the contrary. Generally, United States information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the payment is made outside the United States by or through a
foreign office of a non-U.S. broker.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident of the United States (as defined for United States federal estate
tax purposes) at the time of death will be subject to United States federal
estate tax unless an applicable estate tax treaty provides otherwise. Estates
of non-resident aliens are generally allowed a statutory credit which is the
equivalent of an exclusion of $60,000 of assets from the U.S. estate tax. Tax
treaties may permit a larger credit.
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UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement"), the United States Underwriters named below
(the "U.S. Underwriters"), for whom DLJ, Bear, Stearns & Co. Inc. ("Bear
Stearns"), Merrill Lynch, Pierce, Fenner & Smith Incorporated and Montgomery
Securities are acting as representatives (the "U.S. Representatives"), and the
international managers named below (the "International Managers" and, together
with the U.S. Underwriters, the "Underwriters"), for whom DLJ, Bear, Stearns
International Limited, Merrill Lynch International and Montgomery Securities
are acting as representatives (the "International Representatives" and,
together with the U.S. Representatives, the "Representatives"), have severally
agreed to purchase from the Company the number of shares of Common Stock set
forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Bear, Stearns & Co. Inc...............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................................
Montgomery Securities.................................................
---------
U.S. Offering subtotal..............................................
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...................
Bear, Stearns International Limited...................................
Merrill Lynch International...........................................
Montgomery Securities.................................................
---------
International Offering subtotal.....................................
---------
Total.............................................................
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions. If any of the shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares (other than those covered by the over-allotment option described below)
must be so purchased. The offering price and underwriting discounts and
commissions per share for the U.S. Offering and the International Offering are
identical.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public initially at the price to
the public set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price, less a concession
not in excess of $ per share. The Underwriters may allow, and such dealers
may re-allow, discounts not in excess of $ per share to any other
Underwriter and certain other dealers. After the Offerings, the offering price
and other selling terms may be changed by the Underwriters.
The Company has granted to the U.S. Underwriters an option to purchase up to
an aggregate of 1,200,000 additional shares of Common Stock, at the initial
public offering price less underwriting discounts and commissions, solely to
cover over-allotments. Such option may be exercised at any time until 30 days
after the date of this Prospectus. To the extent that the U.S. Representatives
exercise such option, each of the U.S. Underwriters will be committed, subject
to certain conditions, to purchase a number of shares proportionate to such
U.S. Underwriter's initial commitment as indicated in the preceding tables.
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The Company, its officers, directors, and certain other stockholders, who
collectively are the beneficial owners of an aggregate of 17,205,000 shares of
Common Stock, have agreed, subject to certain exceptions, with the
Underwriters not to, directly or indirectly, offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, without the prior
written consent of DLJ, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for, or warrants, options or
rights to purchase or acquire, Common Stock or in any other manner transfer
all or a portion of the economic consequences associated with the ownership of
any Common Stock, or enter into any agreement to do any of the foregoing, for
a period of 180 days after the date of this Prospectus. See "Shares Eligible
for Future Sale."
Pursuant to an Agreement Between U.S. Underwriters and International
Managers (the "Agreement Between U.S. Underwriters and International
Managers"), each U.S. Underwriter has represented and agreed that, with
respect to the shares included in the U.S. Offering and with certain
exceptions, (a) it is not purchasing any Common Stock for the account of
anyone other than a United States or Canadian Person (as defined below) and
(b) it has not offered or sold, and will not offer or sell, directly or
indirectly, any Common Stock or distribute this Prospectus outside of the
United States or Canada or to anyone other than a United States or Canadian
Person. Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented and agreed that, with
respect to the shares included in the International Offering and with certain
exceptions, (a) it is not purchasing any Common Stock for the account of any
United States or Canadian Person and (b) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Common Stock or distribute this
Prospectus within the United States or Canada or to any United States or
Canadian Person. The foregoing limitations do not apply to stabilization
transactions and to certain other transactions among the International
Managers and the U.S. Underwriters. As used herein, "United States or Canadian
Person" means any national or resident of the United States or Canada or any
corporation, pension, profit-sharing or other trust or other entity organized
under the laws of the United States or Canada or of any political subdivision
thereof (other than a branch located outside the United States or Canada of
any United States or Canadian Person) and includes any United States or
Canadian branch of a person who is not otherwise a United States or Canadian
Person, and "United States" means the United States of America, its
territories, its possessions and all areas subject to its jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, sales may be made between the U.S. Underwriters and the
International Managers of any number of shares of Common Stock to be purchased
pursuant to the Underwriting Agreement as may be mutually agreed. The per
share price and currency of settlement of any shares so sold shall be the
public offering price set forth on the cover page hereof, in United States
dollars, less an amount not greater than the per share amount of the
concession to dealers set forth above.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each U.S. Underwriter has represented that it has not offered or
sold, and has agreed not to offer or sell, any Common Stock, directly or
indirectly, in Canada in contravention of the securities laws of Canada or any
province or territory thereof and has represented that any offer of Common
Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer is made. Each U.S. Underwriter has further agreed to send any
dealer who purchases from it any Common Stock a notice stating in substance
that, by purchasing such Common Stock, such dealer represents and agrees that
it has not offered or sold, and will not offer or sell, directly or
indirectly, any of such Common Stock in Canada in contravention of the
securities laws of Canada or any province or territory thereof and that any
offer of Common Stock in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of
Canada in which such offer is made, and that such dealer will deliver to any
other dealer to whom it sells any of such Common Stock a notice to the
foregoing effect.
Pursuant to the Agreement Between U.S. Underwriters and International
Managers, each International Manager has represented and agreed that (i) it
has not offered or sold and during the period of six months from the date of
this Prospectus will not offer or sell any Common Stock to persons in the
United Kingdom except to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances
which do not constitute an
66
<PAGE>
offer to the public in the United Kingdom for the purposes of the Public
Offers of Securities Regulations 1995 (the "Regulations"); (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 of Great Britain and the Regulations with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom; and (iii) it has only issued or passed on and
will only issue or pass on in the United Kingdom any document in connection
with the issue or sale of the Common Stock to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 of Great Britain or is a person to
whom the document may otherwise lawfully be issued or passed on.
No action has been taken in any jurisdiction by the Company or the
Underwriters that would permit a public offering of the Common Stock offered
pursuant to the Offerings in any jurisdiction where action for that purpose is
required, other than the United States. The distribution of this Prospectus
and the offering or sale of the shares of Common Stock offered hereby in
certain jurisdictions may be restricted by law. Accordingly, the shares of
Common Stock offered hereby may not be offered or sold, directly or
indirectly, and neither this Prospectus nor any other offering material or
advertisements in connection with the Common Stock may be distributed or
published, in or from any jurisdiction, except under circumstances that will
result in compliance with applicable rules and regulations of any such
jurisdiction. Such restrictions may be set out in applicable Prospectus
supplements. Persons into whose possession this Prospectus comes are required
by the Company and the Underwriters to inform themselves about and to observe
any applicable restrictions. This Prospectus does not constitute an offer of,
or an invitation to subscribe for purchase of, any shares of Common Stock and
may not be used for the purpose of an offer to, or solicitation by, anyone in
any jurisdiction or in any circumstances in which such offer or solicitation
is not authorized or is unlawful.
The Representatives have informed the Company that the Underwriters do not
expect sales to discretionary accounts to exceed five percent of the total
number of shares of Common Stock offered by them and the sales to
discretionary accounts by the Representatives will be less than one percent of
the total number of shares of Common Stock offered by them.
A portion of the shares offered hereby will be reserved for sale to certain
retailers and distributors with whom the Company does business and other
persons designated by the Company. The price per share of the shares to be
sold to these persons will be the same as the price to the public in the
Offerings. The maximum investment of any such person may be limited by the
Company in its sole discretion. This program will be administered by DLJ.
Prior to the Offerings, there has been no public market for the shares of
Common Stock. The initial public offering price has been negotiated among the
Company and the Representatives. Among the factors considered in determining
the initial public offering price of the Common Stock, in addition to
prevailing market conditions, were the Company's historical performance,
estimates of the business potential and earnings prospects of the Company, an
assessment of the Company's management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
DLJ and Bear Stearns each have in the past provided, and may in the future
provide, investment banking services for LGP and its affiliates. Affiliates of
DLJ and affiliates of Bear Stearns each own 1.61% of the limited partnership
interest in GEI. Affiliates of DLJ own $7.5 million in aggregate liquidation
preference of the Senior Preferred Stock and will receive approximately $7.5
million of the net proceeds of the Offerings in connection with the redemption
of such shares. See "Use of Proceeds." Affiliates of DLJ also own 323,750
shares of Common Stock of TLC.
This Offering is being made pursuant to Rule 2720 ("Rule 2720") of the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD"), because DLJ Investment Partners, L.P. and DLJ Investment Funding,
Inc., affiliates of DLJ, own more than 10% of the preferred equity of the
Company. Rule 2720 provides that, among other things, when an NASD member
participates in the underwriting of equity securities of a company in which it
owns more than 10% of the preferred equity of the company, the price at which
such equity securities are to be distributed to the public can be no higher
than that recommended by a "qualified independent underwriter" meeting certain
standards ("QIU"). One of the U.S. Representatives, other than DLJ, will
assume the responsibilities of acting as the QIU in pricing the Offerings and
conducting due diligence.
67
<PAGE>
Pursuant to the provisions of Rule 2720, NASD members may not execute
transactions in the shares of Common Stock in discretionary accounts without
the prior written approval of the customer.
The Company's Common Stock has been approved for quotation and trading on
the Nasdaq National Market under the symbol TWLB, subject to notice of
issuance.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Kramer, Levin, Naftalis & Frankel, New York, New York. Certain
legal matters will be passed upon for the Underwriters by Skadden, Arps,
Slate, Meagher & Flom, New York, New York.
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
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.
68
<PAGE>
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>
INDEPENDENT AUDITORS' REPORT
The accompanying consolidated financial statements of Twinlab Corporation
(formerly TLG Laboratories Holding Corp.) and subsidiaries have been prepared
to give effect to the changes in authorized capital and the 18.5 for 1 stock
split (effected in the form of a stock dividend) described in Note 16 to the
consolidated financial statements to be completed prior to the consummation of
the public offering contemplated by the Registration Statement of which this
Prospectus is a part. On the effective date of the Registration Statement, we
expect to be able to issue the following 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.
Jericho, New York
February 9, 1996
(May 7, 1996 as to Notes
1 and 16a and June 4,
1996 as to Note 16b)"
Deloitte & Touche LLP
F-2
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
1994 1995 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; 75,000,000 shares
authorized; 8,325,000 shares outstanding as of
December 31, 1994 and 1995 and 18,500,000 as of
June 30, 1996................................... 8,325 8,325 18,500
Additional paid-in capital....................... -- -- 75,833
Retained earnings (deficit)...................... 40,346 47,080 (189,054)
------- ------- --------
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>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------------------- ----------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <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)
======= ======== =======
Senior and junior preferred
stock dividends............ -- (1,247)
-------- -------
Pro forma net income (loss)
applicable to common stock. $ 18,404 $(6,665)
======== =======
Pro forma net income (loss) $ 1.13 $ (0.34)
per share.................. ======== =======
Weighted average shares 16,325 19,344
outstanding (Note 2)....... ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------- ---------- --------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1993............. $ 8,177 $ -- $ 25,003 $ 33,180
Issuance of capital stock--B. Bros..... 148 -- (73) 75
Net income............................. -- -- 16,676 16,676
Distributions to shareholders.......... -- -- (9,388) (9,388)
------- ------- --------- --------
Balance at December 31, 1993........... 8,325 -- 32,218 40,543
Net income............................. -- -- 21,693 21,693
Distributions to shareholders.......... -- -- (13,565) (13,565)
------- ------- --------- --------
Balance at December 31, 1994........... 8,325 -- 40,346 48,671
Net income............................. -- -- 30,224 30,224
Distributions to shareholders.......... -- -- (23,490) (23,490)
------- ------- --------- --------
Balance at December 31, 1995........... 8,325 -- 47,080 55,405
Net loss (unaudited)................... -- -- (663) (663)
Distributions to shareholders
(unaudited)........................... -- -- (8,929) (8,929)
Issuance of common stock (Note 16)
(unaudited)........................... 10,175 -- (4,675) 5,500
Repurchase of shareholders' common
stock and recapitalization including
income tax effects (Note 16)
(unaudited)........................... -- 24,647 (169,434) (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 -- -- (1,247) (1,247)
(unaudited)........................... ------- ------- --------- --------
Balance at June 30, 1996 (unaudited)... $18,500 $75,833 $(189,054) $(94,721)
======= ======= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(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>
Cash flows from operating
activities:
Net income (loss).............. $16,676 $21,693 $30,224 $13,729 $ (663)
Adjustment to reconcile net
income 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>
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>
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.
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. Pro forma net income (loss) per share--Pro forma net income per share for
the year ended December 31, 1995 has been computed by dividing pro forma net
income by 16,325,000 shares, which represents the number of equivalent shares
outstanding after giving retroactive effect to the issuance of TLC common
shares to the Continuing Shareholders pursuant to the Acquisition Agreement
and after giving retroactive effect to the Company's 18.5 for 1 stock split
(effected in the form of a stock dividend) and assumes as outstanding the
8,000,000 shares being offered in the IPO (as hereinafter defined). Pro forma
net loss per share for the six months ended June 30, 1996 has been computed by
dividing pro forma net loss, after reduction for senior and junior preferred
stock dividends, by the number of weighted average shares outstanding after
giving retroactive effect to the Company's 18.5 for 1 stock split (effected in
the form of a stock dividend) and assumes as outstanding, the 8,000,000 shares
being offered in the IPO (see Note 16).
F-8
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
k. 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.
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.
l. 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.
m. 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.
n. 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
======= ======= =======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<CAPTION>
DECEMBER 31,
---------------
1994 1995
------- -------
<S> <C> <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>
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> <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 canceled in
May 1996 (see Note 16).
F-10
<PAGE>
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, respectively. Accumulated amortization on these assets at December
31, 1994 and 1995 was $34 and $103, respectively.
F-11
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-12
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
To date, the amount of damages sought 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 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
F-13
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-14
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 8,880,000 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 1,295,000
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, 8,325,000 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 nonrecurring 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 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
F-15
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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
F-16
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 and certain other significant transactions.
The subordinated debt is guaranteed by TLC and ARP. TLC had no assets or
liabilities until the consummation of the Acquisition.
Summarized financial information of New Twin is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current assets................................... $40,178 $ 48,716 $ 58,663
Noncurrent assets................................ 15,409 15,990 16,646
Current liabilities.............................. 10,481 10,480 14,233
Noncurrent liabilities........................... 4,563 5,555 5,671
Shareholders' equity............................. 40,543 48,671 55,405
Net sales........................................ 99,897 117,342 148,735
Gross profit..................................... 37,766 47,095 58,803
Net income....................................... 16,676 21,693 30,224
Summarized financial information of ARP is as follows:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current assets................................... $ 763 $ 1,339 $ 1,266
Noncurrent assets................................ 173 168 168
Current liabilities.............................. 1,051 1,155 1,211
Noncurrent liabilities........................... -- -- --
Total shareholders' equity (deficit)............. (116) 350 222
Net sales........................................ 3,188 3,930 5,200
Gross profit..................................... 68 711 259
Net income (loss)................................ (94) 466 (128)
</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-17
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
b. Proposed initial public offering--On June 4, 1996, TLC filed a
registration statement on Form S-1 in respect of an offering by TLC for sale
to the public (the "IPO") of shares of its common stock, $1.00 par value. The
registration statement, as subsequently amended, states that the maximum
aggregate offering price of the securities to be registered is $156,400. The
expected use of the net proceeds of the IPO and, to the extent necessary,
available cash resources of the Company will be to redeem all of the
outstanding shares of senior preferred stock and all of the outstanding shares
of junior preferred stock, which together have an aggregate liquidation
preference of $67,000 (plus accrued and unpaid dividends thereon); and to
prepay all of the $50,000 of remaining outstanding indebtedness under the term
loan facility, plus accrued and unpaid interest thereon. The balance, if any,
of the net proceeds of the IPO will be used for general corporate purposes.
c. Changes in authorized capital and stock split--Prior to the consummation
of the IPO, the Board of Directors (the "Board") and the stockholders will
authorize 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. In addition, the Board will authorize a
stock split (effected in the form of a stock dividend), of all issued and
outstanding common shares at the rate of 18.5 for 1, which will increase the
number of issued and outstanding shares from 1,000,000 to 18,500,000. The
stock split and the change in authorized common stock has been retroactively
reflected for all periods presented herein.
d. Stock incentive plan--Prior to the consummation of the IPO, the Board and
stockholders of the Company will approve and adopt 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.
e. Amended revolving credit facility--In connection with the consummation of
the IPO, New Twin expects to enter into a $50,000 amended revolving credit
facility which will expire on May 7, 2002. Borrowings under the amended
revolving credit facility will bear interest, at the borrower's discretion, at
either the Alternative Base Rate, as defined, or at the Eurodollar Rate, plus
a margin of 1.25%, as defined. Interest rates are subject to increases or
reduction based upon New Twin's meeting certain financial tests. The proceeds
of the amended revolving credit facility will be available for working capital
requirements and for general corporate purposes, including up to $35,000 of
which will be available to fund permitted acquisitions, as defined. A portion
of the amended revolving credit facility not to exceed $15,000 will be
available for the issuance of letters of credit which generally will have an
initial term of one year or less. The amended revolving credit facility is
expected to be secured by first priority secured interests in all of the
tangible and intangible assets of New Twin and its direct subsidiary and will
be guaranteed by TLC, ARP and certain of New Twin's future subsidiaries. In
addition, the amended revolving credit facility will be subject to certain
restrictive covenants including, among other things, the maintenance of
certain debt coverage rates, as well as restrictions on additional
indebtedness, dividends and certain other significant transactions.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE 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 OR ANY OF THE UNDER-
WRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDIC-
TION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IM-
PLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO ITS DATE.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information.................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Dilution.................................................................. 18
Capitalization............................................................ 19
Unaudited Pro Forma Condensed Consolidated
Financial Data........................................................... 20
Selected Historical Financial Data........................................ 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 33
Management................................................................ 47
Certain Relationships and Related Transactions............................ 52
Principal Stockholders.................................................... 54
Description of Certain Indebtedness....................................... 56
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Certain United States Tax Consequences to Non-United States Holders....... 63
Underwriting ............................................................. 65
Legal Matters............................................................. 68
Experts................................................................... 68
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF TWINLAB]
8,000,000 SHARES
TWINLAB CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE INTERNATIONAL COVER PAGE]
SUBJECT TO COMPLETION, DATED JULY 22, 1996
PROSPECTUS
, 1996 [LOGO OF TWINLAB]
8,000,000 SHARES
TWINLAB CORPORATION
COMMON STOCK
All of the 8,000,000 shares of common stock, $1.00 par value per share (the
"Common Stock"), offered hereby are being sold by Twinlab Corporation ("TLC" or
the "Company"). Of the 8,000,000 shares of Common Stock offered by the Company,
1,600,000 shares are initially being offered for sale outside the United States
and Canada by the International Managers (the "International Offering") and
6,400,000 shares are initially being offered for sale in the United States and
Canada in a concurrent offering by the U.S. Underwriters (the "U.S. Offering,"
and together with the International Offering, the "Offerings"), subject to
transfers between the International Managers and the U.S. Underwriters. See
"Underwriting."
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price will be
between $15.00 and $17.00 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price.
The Company's Common Stock has been approved for quotation and trading on the
Nasdaq National Market under the symbol TWLB, subject to notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO THE
THE PUBLIC COMMISSIONS (1) COMPANY (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.............................. $ $ $
Total (3).............................. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the International Managers and the U.S.
Underwriters (collectively, the "Underwriters") against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to an aggregate of 1,200,000 additional shares of Common Stock
on the same terms as set forth above solely for the purpose of covering
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, and Proceeds
to the Company will be $ , $ , and $ , respectively. See
"Underwriting."
The shares of Common Stock are being offered by the several Underwriters,
when, as and if delivered to and accepted by the Underwriters against payment
therefor and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of the
certificates representing the shares will be made in New York, New York, on or
about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
<PAGE>
[ALTERNATE INTERNATIONAL BACK COVER PAGE]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SHARES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAK-
ING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
THERE ARE RESTRICTIONS ON THE OFFER AND SALE OF THE COMMON STOCK OFFERED
HEREBY IN THE UNITED KINGDOM. ALL APPLICABLE PROVISIONS OF THE FINANCIAL SERV-
ICES ACT 1986 AND THE PUBLIC OFFERS OF SECURITIES REGULATIONS 1995 WITH RESPECT
TO ANYTHING DONE BY ANY PERSON IN RELATION TO THE COMMON STOCK IN, FROM OR OTH-
ERWISE INVOLVING THE UNITED KINGDOM MUST BE COMPLIED WITH. SEE "UNDERWRITING."
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information.................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Dilution.................................................................. 18
Capitalization............................................................ 19
Unaudited Pro Forma Condensed Consolidated
Financial Data........................................................... 20
Selected Historical Financial Data........................................ 26
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 28
Business.................................................................. 33
Management................................................................ 47
Certain Relationships and Related Transactions............................ 52
Principal Stockholders.................................................... 54
Description of Certain Indebtedness....................................... 56
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Certain United States Tax Consequences to Non-United States............... 63
Underwriting ............................................................. 65
Legal Matters............................................................. 68
Experts................................................................... 68
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF TWINLAB]
8,000,000 SHARES
TWINLAB CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by the Registrant in
connection with the offering described in this Registration Statement (other
than the underwriting discounts and commissions) will be as follows:
<TABLE>
<CAPTION>
TOTAL
-------
<S> <C>
SEC registration fee (actual)....................................... $53,932
NASD filing fee (actual)............................................ 13,500
Nasdaq National Market filing fee (actual).......................... *
Blue Sky fees and expenses (including counsel fees)................. *
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Printing and engraving expenses..................................... *
Transfer Agent and Registrar fees and expenses...................... *
Miscellaneous expenses.............................................. *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty,
except (i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Registrant's Amended and Restated Certificate of Incorporation
contains provisions permitted by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such director, officer, employee or agent
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests and, with respect to any criminal
actions or proceedings, had no reasonable cause to believe that his conduct
was unlawful. A Delaware corporation may indemnify directors and/or officers
in an action or suit by or in the right of the corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the director or officer is adjudged to be liable to the
corporation. Where a director or officer is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him or her against the expenses which such director or officer
actually and reasonably incurred.
The Registrant's Amended and Restated Certificate of Incorporation and its
By-laws filed as Exhibit 3.1 and 3.2 respectively, to this Registration
Statement provide for the indemnification of directors and officers of the
Registrant to the fullest extent permitted by the DGCL.
II-1
<PAGE>
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the
directors, officers and controlling persons of the Registrant against certain
civil liabilities that may be incurred in connection with the Offering,
including certain liabilities under the Securities Act of 1933, as amended
(the "Securities Act").
The Registrant maintains liability insurance for each director and officer
for certain losses arising from claims or charges made against them while
acting in their capacities as directors or officers of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 7, 1996, Twin Laboratories Inc. sold $100,000,000 aggregate principal
amount of its 10 1/4% Senior Subordinated Notes due 2006 (the "Old Notes") to
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and Chase
Securities Inc. ("Chase," collectively the "Initial Notes Purchasers") for
$100,000,000 in cash (less the Initial Notes Purchasers' discount of
$3,000,000). Of the total amount sold, DLJ purchased $60,000,000 aggregate
principal amount of the Old Notes and Chase purchased $40,000,000 aggregate
principal amount of the Old Notes. Such securities were sold in a transaction
that was exempt from registration under Section 4(2) of the Securities Act.
On May 7, 1996, TLC sold an aggregate of 30,000 shares of its 14% Non-Voting
Senior Cumulative Preferred Stock to five investors (the "Initial Senior
Preferred Stock Purchasers") for $30,000,000 in cash. Such securities were
sold in transactions that were exempt from registration under Section 4(2) of
the Securities Act.
On May 7, 1996, TLC sold 37,000 shares of its 11.25% Non-Voting Junior
Cumulative Preferred Stock to Green Equity Investors II, L.P. ("GEI II") for
$37,000,000 in cash. Such securities were sold in a transaction that was
exempt from registration under Section 4(2) of the Securities Act.
On May 7, 1996, TLC sold 1,295,000 shares of its Common Stock to the Initial
Senior Preferred Stock Purchasers for $700,000 in cash. Such securities were
sold in transactions that were exempt from registration under Section 4(2) of
the Securities Act.
On May 7, 1996, TLC sold 8,880,000 shares of its Common Stock to GEI II for
an aggregate of $4,800,000 in cash. Such securities were sold in a transaction
that was exempt from registration under Section 4(2) of the Securities Act.
On May 7, 1996, TLC sold an aggregate of 8,325,000 shares of its Common
Stock valued at $4,500,000 to certain members of its senior management in
exchange for certain of their shares of common stock of Natur-Pharma Inc. Such
securities were sold in transactions that were exempt from registration under
Section 4(2) of the Securities Act promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
2.1 Form of Stock Purchase and Sale Agreement, dated as of March 5,
1996, among David Blechman, Jean Blechman, Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman, Stephen
Welling, the Registrant, Natur-Pharma Inc. and Green Equity
Investors II, L.P. ("GEI II") (the "Stock Purchase and Sale
Agreement").*
2.1.1 Form of Amendment to the Stock Purchase and Sale Agreement, dated
May 6, 1996.*
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 Form of By-laws of the Registrant.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1 Specimen form of stock certificate for Common Stock.***
4.2 Indenture, dated May 7, 1996, among Twin Laboratories Inc. ("Twin"),
Advanced Research Press, Inc. ("ARP"), the Registrant (together with
ARP, the "Guarantors") and Fleet National Bank, as Trustee,
Registrar, Paying Agent and Securities Agent, regarding Twin's 10
1/4% Senior Subordinated Notes due 2006.*
4.3 Form of Credit and Guarantee Agreement, dated May 7, 1996, among
Twin, the Registrant, the financial institutions named therein,
Chemical Bank as Administrative Agent and The Bank of New York as
Documentation Agent.*
5.1 Opinion re Legality of Kramer, Levin, Naftalis & Frankel.***
10.1 Form of Guarantee and Collateral Agreement, dated May 7, 1996, among
the Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent.*
10.2 Form of Term Note.*
10.3 Form of Revolving Credit Note.*
10.4 Form of Swing Line Note.*
10.5 Form of Mortgage and Security Agreement, dated May 7, 1996, from the
Registrant to Chemical Bank, as Administrative Agent.*
10.6 Form of Deed of Trust, dated May 7, 1996, from Twin to First
American Title Company of Utah, Trustee for the use and benefit of
Chemical Bank, as Administrative Agent, Beneficiary.*
10.8 Stockholders Agreement, dated May 7, 1996, among Brian Blechman,
Neil Blechman, Ross Blechman, Steve Blechman, Dean Blechman and
Stephen Welling, the Registrant and GEI.*
10.9 Secondary Stockholders Agreement among Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman and Stephen
Welling, the Registrant, GEI, DLJ Investment Funding, Inc., DLJ
Investment Partners, L.P., Chase Equity Associates, L.P., PMI
Mezzanine Fund, L.P. and State Treasurer of the State of Michigan,
Custodian of the Michigan Public School Employees' Retirement
System, State Employees' Retirement System, Michigan State Police
Retirement System, and Michigan Judges Retirement System.*
10.10 Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman.*
10.11 Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman.*
10.12 Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman.*
10.13 Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman.*
10.14 Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman.*
10.15 Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling.*
10.16 Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman.*
10.17 Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman.*
10.18 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
David Blechman.*
10.19 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Jean Blechman.*
10.20 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Brian Blechman.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.21 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Neil Blechman.*
10.22 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Ross Blechman.*
10.23 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Steve Blechman.*
10.24 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Dean Blechman.*
10.25 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and
Stephen Welling.*
10.26 Management Services Agreement, dated May 7, 1996, between Twin and
Leonard Green & Partners, L.P.*
10.27 Registration Rights Agreement, dated May 7, 1996, among Twin,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc.*
10.28 Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin Laboratories Inc. and Showa Denko America, Inc.*
10.29 Form of SDR Guaranty Agreement, dated August 1992, between Twin
Laboratories Inc. and Showa Denko K.K.*
21.1 List of Registrant's Subsidiaries (incorporated by reference to
Exhibit 21.1 to the Registration Statement on Form S-4, dated June
25, 1996, filed by Twin).
23.1 Consent of Deloitte & Touche LLP.**
23.4 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).
27 Financial Data Schedule.**
</TABLE>
- --------
* Previously filed.
** Filed herewith.
*** To be filed by Amendment.
(b) Financial Statement Schedule
(i) Schedule II--Valuation and Qualifying Accounts
All other schedules are omitted because the required information is not
present or is not present in amounts sufficient to require submission of the
schedule or because the information required is included in the consolidated
financial statements or notes therein.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to provisions described in Item 14 above, or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the Common Stock covered hereby, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT OR AMENDMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THERETO DULY AUTHORIZED, IN THE CITY
OF NEW YORK, NEW YORK, ON JULY 22, 1996.
TWINLAB CORPORATION
/s/ Ross Blechman
By: ________________________________________
ROSS BLECHMAN
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER
AND PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this
registration statement or amendment has been signed by the following persons
in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ Ross Blechman Chairman of the
- ------------------------------------- Board, Chief July 22, 1996
ROSS BLECHMAN Executive Officer,
President and
Director (Principal
Executive Officer)
/s/ Neil Blechman Executive Vice
- ------------------------------------- President and July 22, 1996
NEIL BLECHMAN Director
/s/ Brian Blechman Executive Vice
- ------------------------------------- President and July 22, 1996
BRIAN BLECHMAN Director (Principal
Financial and
Accounting Officer)
/s/ Steve Blechman Executive Vice
- ------------------------------------- President and July 22, 1996
STEVE BLECHMAN Director
/s/ Dean Blechman Executive Vice
- ------------------------------------- President and July 22, 1996
DEAN BLECHMAN Director
/s/ Jonathan D. Sokoloff Director
- ------------------------------------- July 22, 1996
JONATHAN D. SOKOLOFF
/s/ John G. Danhakl Director
- ------------------------------------- July 22, 1996
JOHN G. DANHAKL
/s/ Jennifer Holden Dunbar Director
- ------------------------------------- July 22, 1996
JENNIFER HOLDEN DUNBAR
II-6
<PAGE>
SCHEDULE II
TWINLAB CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- --------------------- ---------- ---------
ADDITIONS
---------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTIONS OF PERIOD EXPENSES - DESCRIBE - DESCRIBE PERIOD
------------ ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1995:
Allowance for bad debts.. $ 63 $169 $-- $ 55(1) $177
==== ==== === ==== ====
Reserve for excess and $100 $415 $-- $ -- $515
slow moving inventory... ==== ==== === ==== ====
YEAR ENDED DECEMBER 31,
1994:
Allowance for bad debts.. $123 $(59) $-- $ 1(1) $ 63
==== ==== === ==== ====
Reserve for excess and $-- $100 $-- $ -- $100
slow moving inventory... ==== ==== === ==== ====
YEAR ENDED DECEMBER 31,
1993:
Allowance for bad debts.. $126 $-- $-- $ 3(1) $123
==== ==== === ==== ====
Reserve for excess and $-- $-- $-- $-- $--
slow moving inventory... ==== ==== === ==== ====
</TABLE>
- --------
(1) Amounts written off.
S-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.**
2.1 Form of Stock Purchase and Sale Agreement, dated as of March 5, 1996,
among David Blechman, Jean Blechman, Brian Blechman, Neil Blechman,
Ross Blechman, Steve Blechman, Dean Blechman, Stephen Welling, the
Registrant, Natur-Pharma Inc. and Green Equity Investors II, L.P.
("GEI II") (the "Stock Purchase and Sale Agreement").*
2.1.1 Form of Amendment to the Stock Purchase and Sale Agreement, dated May
6, 1996.*
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 Form of By-laws of the Registrant.*
4.1 Specimen form of stock certificate for Common Stock.***
4.2 Indenture, dated May 7, 1996, among Twin Laboratories Inc. ("Twin"),
Advanced Research Press, Inc. ("ARP"), the Registrant (together with
ARP, the "Guarantors") and Fleet National Bank, as Trustee, Registrar,
Paying Agent and Securities Agent, regarding Twin's 10 1/4% Senior
Subordinated Notes due 2006.*
4.3 Form of Credit and Guarantee Agreement, dated May 7, 1996, among Twin,
the Registrant, the financial institutions named therein, Chemical
Bank as Administrative Agent and The Bank of New York as Documentation
Agent.*
5.1 Opinion re Legality of Kramer, Levin, Naftalis & Frankel.***
10.1 Form of Guarantee and Collateral Agreement, dated May 7, 1996, among
the Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent.*
10.2 Form of Term Note.*
10.3 Form of Revolving Credit Note.*
10.4 Form of Swing Line Note.*
10.5 Form of Mortgage and Security Agreement, dated May 7, 1996, from the
Registrant to Chemical Bank, as Administrative Agent.*
10.6 Form of Deed of Trust, dated May 7, 1996, from Twin to First American
Title Company of Utah, Trustee for the use and benefit of Chemical
Bank, as Administrative Agent, Beneficiary.*
10.8 Stockholders Agreement, dated May 7, 1996, among Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman and Stephen
Welling, the Registrant and GEI.*
10.9 Secondary Stockholders Agreement among Brian Blechman, Neil Blechman,
Ross Blechman, Steve Blechman, Dean Blechman and Stephen Welling, the
Registrant, GEI, DLJ Investment Funding, Inc., DLJ Investment
Partners, L.P., Chase Equity Associates, L.P., PMI Mezzanine Fund,
L.P. and State Treasurer of the State of Michigan, Custodian of the
Michigan Public School Employees' Retirement System, State Employees'
Retirement System, Michigan State Police Retirement System, and
Michigan Judges Retirement System.*
10.10 Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman.*
10.11 Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman.*
10.12 Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman.*
10.13 Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman.*
10.14 Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman.*
10.15 Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling.*
10.16 Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman.*
10.17 Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.18 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and David Blechman.*
10.19 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Jean Blechman.*
10.20 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Brian Blechman.*
10.21 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Neil Blechman.*
10.22 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Ross Blechman.*
10.23 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Steve Blechman.*
10.24 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Dean Blechman.*
10.25 Noncompetition Agreement, dated May 7, 1996, between the Registrant
and Stephen Welling.*
10.26 Management Services Agreement, dated May 7, 1996, between Twin and
Leonard Green & Partners, L.P.*
10.27 Registration Rights Agreement, dated May 7, 1996, among Twin,
Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc.*
10.28 Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin Laboratories Inc. and Showa Denko America, Inc.*
10.29 Form of SDR Guaranty Agreement, dated August 1992, between Twin
Laboratories Inc. and Showa Denko K.K.*
21.1 List of Registrant's Subsidiaries (incorporated by reference to
Exhibit 21.1 to the Registration Statement on Form S-4, dated June 25,
1996, filed by Twin).
23.1 Consent of Deloitte & Touche LLP.**
23.4 Consent of Kramer, Levin, Naftalis & Frankel (to be contained in the
opinion to be filed as Exhibit 5.1 hereto).
27 Financial Data Schedule.**
</TABLE>
- --------
* Previously filed.
** Filed herewith.
*** To be filed by Amendment.
<PAGE>
EXHIBIT 1.1
8,000,000 Shares
TWINLAB CORPORATION
Common Stock
UNDERWRITING AGREEMENT
----------------------
, 1996
--------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
As representatives of the
several underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
277 Park Avenue
New York, New York 10172
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
As representatives of the
several international
managers named in Schedule
II hereto
c/o Donaldson, Lufkin & Jenrette
Securities Corporation
Jupiter House
Trinton Court
14 Finsbury Square
London EC2A 1BR, England
Ladies and Gentlemen:
TWINLAB CORPORATION, a Delaware corporation (the "Company"), proposes
to sell an aggregate of 8,000,000 shares of Common Stock, par value $1.00 per
<PAGE>
share, of the Company (the "Firm Shares"), to the several underwriters named in
Schedules I and II hereto (the "Underwriters"). The Firm Shares consist of
8,000,000 shares to be issued and sold by the Company. The Company also
proposes to issue and sell to the several U.S. Underwriters (as defined herein)
not more than 1,200,000 additional shares of Common Stock, par value $1.00 per
share, of the Company (the "Additional Shares"), if requested by the U.S.
Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are herein collectively called the Shares. The shares of
common stock of the Company to be outstanding after giving effect to the sales
contemplated hereby are hereinafter referred to as the Common Stock.
It is understood that, subject to the conditions hereinafter stated
6,400,000 Firm Shares (the "U.S. Firm Shares") will be sold to the several U.S.
Underwriters named in Schedule I hereto (the "U.S. Underwriters") in connection
with the offering and sale of such U.S. Firm Shares in the United States and
Canada to United States and Canadian Persons (as such terms are defined in the
Agreement Between U.S. Underwriters and International Managers of even date
herewith), and 1,600,000 Firm Shares (the "International Shares") will be sold
to the several International Managers named in Schedule II hereto (the
"International Managers") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner &
Smith, Incorporated and Montgomery Securities shall act as representatives (the
"U.S. Representatives") of the several U.S. Underwriters, and DLJ, Bear, Stearns
International Limited, Merrill Lynch International and Montgomery Securities
shall act as representatives (the "International Representatives," and together
with the U.S. Representatives, the "Representatives") of the several
International Managers. The U.S. Underwriters and the International Managers
are hereinafter collectively referred to as the "Underwriters".
1. Registration Statement and Prospectus. The Company has prepared
-------------------------------------
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as
2
<PAGE>
amended, and the rules and regulations of the Commission thereunder
(collectively called the "Act"), a registration statement on Form S-1 (File No.
333-05191), which may be amended. The registration statement contains two
prospectuses to be used in connection with the offering and sale of the Shares:
the U.S. prospectus, to be used in connection with the offering and sale of
Shares in the United States and Canada to United States and Canadian Persons,
and the international prospectus, to be used in connection with the offering and
sale of Shares outside the United States and Canada to persons other than United
States and Canadian Persons. The international prospectus is identical to the
U.S. prospectus except for the outside front and back cover pages. The
registration statement as amended at the time when it becomes effective,
including a registration statement (if any) filed pursuant to Rule 462(b) under
the Act (the "Rule 462 Registration Statement") increasing the size of the
offering registered under the Act and information (if any) deemed to be part of
the registration statement at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the Act, is hereinafter referred to as the "Registration
Statement"; and the U.S. prospectus and the international prospectus (including
any prospectus subject to completion and any term sheet meeting the requirements
of Rule 434(b) under the Act, taken together as the prospectus provided by the
Company to meet the requirements of Section 10(a) of the Act) in the respective
forms first used to confirm sales of Shares are hereinafter referred to as the
"Prospectus". For purposes of this Agreement, all references to the
Registration Statement, any preliminary prospectus, the Prospectus or any term
sheet or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
2. Agreements to Sell and Purchase. On the basis of the
-------------------------------
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell the U.S. Firm Shares
to the several U.S. Underwriters named in Schedule I hereto and each of the U.S.
Underwriters agrees, severally and not jointly, to purchase from the Company at
a price per share of $__________ (the "Purchase Price") the number of U.S. Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto.
3
<PAGE>
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company hereby agrees to
issue and sell the International Shares to the several International Managers
named in Schedule II hereto, and each of the International Managers agrees,
severally and not jointly, to purchase from the Company at the Purchase Price
the respective number of International Shares set forth opposite the name of
such International Manager in Schedule II hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to issue
and sell to the U.S. Underwriters the Additional Shares and the U.S.
Underwriters shall have the right to purchase, severally and not jointly, up to
1,200,000 Additional Shares from the Company at the Purchase Price. Additional
Shares may be purchased solely for the purpose of covering over-allotments made
in connection with the offering of the U.S. Firm Shares. The U.S. Underwriters
may exercise their right to purchase Additional Shares in whole or in part from
time to time by giving written notice thereof to the Company within 30 days
after the date of this Agreement. The U.S. Representatives shall give any such
notice on behalf of the U.S. Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof. The date specified in any such
notice shall be a business day (i) no earlier than the Closing Date (as
hereinafter defined), (ii) no later than ten business days after such notice has
been given and (iii) no earlier than two business days after such notice has
been given. If any Additional Shares are to be purchased, each U.S.
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments to eliminate fractional
shares as the U.S. Representatives may determine) which bears the same
proportion to the total number of Additional Shares to be purchased from the
Company as the number of U.S. Firm Shares set forth opposite the name of such
U.S. Underwriter in Schedule I bears to the total number of U.S. Firm Shares.
4
<PAGE>
The Company hereby agrees and the Company shall, concurrently with the
execution of this Agreement, deliver an agreement executed by (i) each of the
directors and officers of the Company and (ii) each stockholder listed on Annex
I hereto, pursuant to which each such person agrees, not to offer, sell,
contract to sell, grant any option to purchase, or otherwise dispose of any
common stock of the Company or any securities convertible into or exercisable or
exchangeable for such common stock or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of any such
common stock, except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ").
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's existing stock option plan and (ii) the
Company may issue shares of its common stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof.
3. Terms of Public Offering. The Company is advised by you that the
------------------------
Underwriters propose (i) to make a public offering of their respective portions
of the Shares as soon after the effective date of the Registration Statement as
in your judgment is advisable and (ii) initially to offer the Shares upon the
terms set forth in the Prospectus. Each U.S. Underwriter hereby makes to the
Company the representations and agreements of such U.S. Underwriter contained in
the fifth paragraph of Section 3 of the Agreement Between U.S. Underwriters and
International Managers of even date herewith. Each International Manager hereby
makes to the Company the representations and agreements of such International
Manager contained in the seventh, eighth, ninth and tenth paragraphs of Section
3 of such Agreement.
4. Delivery and Payment. Delivery to the Underwriters of and
--------------------
payment for the Firm Shares shall be made at 10:00 A.M., New York City time, on
the third or fourth business day (the "Closing Date") unless otherwise permitted
by the Commission pursuant to Rule 15c6-1 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), at such place as you shall designate.
The Closing Date and the location of delivery of and the
5
<PAGE>
form of payment for the Firm Shares may be varied by agreement between you and
the Company.
Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters shall be made at such place as
the U.S. Representatives shall designate at 10:00 A.M., New York City time, on
the date specified in the applicable exercise notice given by you pursuant to
Section 2 (an "Option Closing Date"). Any such Option Closing Date and the
location of delivery of and the form of payment for such Additional Shares may
be varied by agreement between the U.S. Representatives and the Company.
Certificates for the Shares shall be registered in such names and
issued in such denominations as you shall request in writing not later than two
full business days prior to the Closing Date or an Option Closing Date, as the
case may be. Such certificates shall be made available to you for inspection
not later than 9:30 A.M., New York City time, on the business day next preceding
the Closing Date or an Option Closing Date, as the case may be. Certificates in
definitive form evidencing the Shares shall be delivered to you on the Closing
Date or an Option Closing Date, as the case may be, for the respective accounts
of the several Underwriters, against payment of the Purchase Price therefor by
certified or official bank checks payable in New York Clearing House funds to
the order of the applicable Company.
5. Agreements of the Company. The Company agrees with you:
-------------------------
(a) To use its best efforts to cause the Registration Statement
to become effective at the earliest possible time. The Company will comply
fully and in a timely manner with the applicable provisions of Rule 424 and
Rule 430A under the Act.
(b) To advise you promptly and, if requested by you, to confirm
such advice in writing, (i) if and when the Prospectus is sent for filing
pursuant to Rule 424 under the Act (including any term sheet within the
meaning of Rule 434 under the Act), when the Registration Statement has
become effective, when any Rule 462 Registration Statement is filed and
becomes effective, and when any post-
6
<PAGE>
effective amendment to it becomes effective, (ii) of the receipt of any
comments from the Commission that relate to the Registration Statement or
requests by the Commission for amendments to the Registration Statement or
amendments or supplements to the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction, or
the initiation of any proceeding for such purposes by the Commission or any
state securities commission or regulatory authority, and (iv) of the
happening of any event during the period referred to in paragraph (e) below
which makes any statement of a material fact made in the Registration
Statement (as amended or supplemented from time to time) untrue or which
requires the making of any additions to or changes in the Registration
Statement (as amended or supplemented from time to time) in order to make
the statements therein not misleading or that makes any statement of a
material fact made in the Prospectus (as amended or supplemented from time
to time) untrue or which requires the making of any additions to or
changes in the Prospectus (as amended or supplemented from time to time)
in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. If at any time the Commission
shall issue any stop order suspending the effectiveness of the Registration
Statement, or any state securities commission or other regulatory authority
shall issue an order suspending the qualification or exemption of the
Shares under any state securities or Blue Sky laws, the Company will make
every reasonable effort to obtain the withdrawal or lifting of such order
at the earliest possible time.
(c) To furnish to each of the U.S. Representatives, without
charge, one signed copy of the Registration Statement as first filed with
the Commission and of each amendment to it, including all exhibits, and to
furnish to each of the U.S. Representatives and each Underwriter designated
by the U.S. Representatives such number of conformed copies of the
Registration Statement as so filed and
7
<PAGE>
of each amendment to it, without exhibits, as the U.S. Representatives may
reasonably request.
(d) Not to file any amendment or supplement to the Registration
Statement, whether before or after the time when it becomes effective, or
to make any amendment or supplement to the Prospectus (including the
issuance or filing of any term sheet within the meaning of Rule 434 under
the Act) of which you shall not previously have been advised or to which
you shall reasonably object; and to prepare and file with the Commission,
promptly upon your reasonable request, any amendment to the Registration
Statement or supplement to the Prospectus (including the issuance or
filing of any term sheet within the meaning of Rule 434 under the Act)
which may be necessary or advisable in connection with the distribution of
the Shares by the Underwriters, and to use its best efforts to cause the
same to become promptly effective.
(e) Promptly after the Registration Statement becomes
effective, and from time to time thereafter for such period as in your
reasonable judgment a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish to each
Underwriter and each dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus) as such
Underwriter or such dealer may reasonably request.
(f) If during the period specified in paragraph (e) any event
shall occur as a result of which, in the opinion of counsel for the
Underwriters it becomes necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if it
is necessary to amend or supplement the Prospectus to comply with any law,
forthwith to prepare and file with the Commission an appropriate amendment
or supplement to the Prospectus so that the statements in the Prospectus,
as so amended or supplemented, will not in the light of the circumstances
when it is so delivered, be misleading, or so that the Prospectus will
comply with law, and to
8
<PAGE>
furnish to each Underwriter and to such dealers as the Underwriters shall
specify, without charge, such number of copies thereof as such Underwriter
or such dealers may reasonably request.
(g) Prior to any public offering of the Shares, to cooperate
with you and counsel for the Underwriters in connection with the
registration or qualification of the Shares for offer and sale by the
several Underwriters and by dealers under the state securities or Blue Sky
laws of such jurisdictions as you may request, to continue such
qualification in effect so long as required for distribution of the Shares
and to file such consents to service of process or other documents as may
be necessary in order to effect such registration or qualification.
(h) To mail and make generally available to its stockholders as
soon as reasonable practicable an earnings statement covering a period of
at least twelve months after the effective date of the Registration
Statement (but in no event commencing later than 90 days after such date)
which shall satisfy the provisions of Section 11(a) of the Act and Rule 158
promulgated thereunder, and to advise you in writing when such statement
has been so made available.
(i) To timely complete all required filings and otherwise comply
in all material respects in a timely manner with all provisions of the
Securities Exchange Act of 1934, as amended, including the rules and
regulations thereunder (collectively, the "Exchange Act"), in connection
with the registration of the Shares thereunder.
(j) During the period of five years after the date of this
Agreement, (i) to mail as soon as reasonably practicable after the end of
each fiscal year to the record holders of its Common Stock a financial
report of the Company and its subsidiaries on a consolidated basis (and a
similar financial report of all unconsolidated subsidiaries, if any), all
such financial reports to include a consolidated balance sheet, a
consolidated statement of operations, a consolidated statement of cash
flows and a
9
<PAGE>
consolidated statement of shareholders' equity as of the end of and for
such fiscal year, together with comparable information as of the end of and
for the preceding year, certified by independent certified public
accountants, and (ii) to mail and make generally available as soon as
practicable after the end of each quarterly period (except for the last
quarterly period of each fiscal year) to such holders, a consolidated
balance sheet, a consolidated statement of operations and a consolidated
statement of cash flows (and similar financial reports of all
unconsolidated subsidiaries, if any) as of the end of and for such period,
and for the period from the beginning of such year to the close of such
quarterly period, together with comparable information for the
corresponding periods of the preceding year.
(k) During the period referred to in paragraph (j), to furnish
to you as soon as available a copy of each report or other publicly
available information of the Company mailed to the holders of Common Stock
or filed with the Commission and such other publicly available information
concerning the Company and its subsidiaries as you may reasonably request.
(l) Whether or not the transactions contemplated hereby are
consummated or this Agreement becomes effective or is terminated, to pay
all costs, expenses, fees and taxes incident to (i) the preparation,
printing, filing and distribution under the Act of the Registration
Statement (including, without limitation, financial statements and
exhibits), each preliminary prospectus and all amendments and supplements
to any of them prior to or during the period specified in paragraph (e),
(ii) the printing and delivery of the Prospectus and all amendments or
supplements to it during the period specified in paragraph (e), (iii) the
printing and delivery of this Agreement, the Preliminary and Supplemental
Blue Sky Memoranda and all other agreements, memoranda, correspondence and
other documents printed and delivered in connection with the offering of
the Shares (including in each case any disbursements of counsel for the
Underwriters relating to such printing and delivery), (iv) the registration
or qualification of the Shares for offer and
10
<PAGE>
sale under the securities or Blue Sky laws of the several states
(including, without limitation, in each case the fees and disbursements of
counsel for the Underwriters relating to such registration or qualification
and memoranda relating thereto), (v) filings and clearance with the
National Association of Securities Dealers, Inc. in connection with the
offering, (vi) the quotation of the Shares on the Nasdaq National Market
("NASDAQ"), (vii) furnishing such copies of the Registration Statement, the
Prospectus and all amendments and supplements thereto as may be requested
for use in connection with the offering or sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold and (viii) the
performance by the Company of their other obligations under this Agreement.
(m) To use its best efforts to maintain the inclusion of the
Common Stock on NASDAQ (or on a national securities exchange) for a period
of five years after the effective date of the Registration Statement.
(n) To use its best efforts to do and perform all things
required or necessary to be done and performed under this Agreement by the
Company prior to the Closing Date or any Option Closing Date, as the case
may be, and to satisfy all conditions precedent to the delivery of the
Shares.
6. Representations and Warranties. The Company represents and
------------------------------
warrants to each Underwriter that:
(a) The Registration Statement has become effective; no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceeding for such purpose are pending before or threatened
by the Commission.
(b)(i) Each part of the Registration Statement, when such part
became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii)
the Registration Statement and the
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Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Act and (iii) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph (b) do not apply
to statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the Act; and did not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading.
(d) The Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation and has the corporate power
and authority to carry on its business as it is currently being conducted
and to own, lease and operate its properties, and each is duly qualified
and is in good standing as a foreign corporation authorized to do business
in each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole (a "Material Adverse
Effect").
(e) All of the outstanding shares of capital stock of, or other
ownership interests in,
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each of the Company's subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable, and are owned by the Company,
free and clear of any security interest, claim, lien, encumbrance or
adverse interest of any nature.
(f) All the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid, non-
assessable and not subject to any preemptive or similar rights; and the
Shares have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will
be validly issued, fully paid and non-assessable, and the issuance of such
Shares will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus.
(h) Neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws or in default in the
performance of any obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any other
agreement, indenture or instrument material to the conduct of the business
of the Company and its subsidiaries, taken as a whole, to which the Company
or any of its subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound.
(i) The execution, delivery and performance of this Agreement,
compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not require any
consent, approval, authorization or other order of any court, regulatory
body, administrative agency or other governmental body (except as such may
be required under the securities or Blue Sky laws of the various states)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Company or
any of its subsidiaries or any agreement, indenture or other
13
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instrument to which it or any of its subsidiaries is a party or by which it
or any of its subsidiaries or their respective property is bound, or
violate or conflict with any laws, administrative regulations or rulings or
court decrees applicable to the Company, any of its subsidiaries or their
respective property.
(j) Except as otherwise set forth in the Prospectus, there are no
material legal or governmental proceedings pending to which the Company or
any of its subsidiaries is a party or of which any of their respective
property is the subject, and, to the best of the Company's knowledge, no
such proceedings are threatened or contemplated. No contract or document
of a character required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration Statement
is not so described or filed as required.
(k) Except as would not, individually or in the aggregate, have a
Material Adverse Effect, the Company and its subsidiaries are neither in
violation of any Federal, state, local and foreign laws and regulations
relating to pollution or protection of human health or the environment
(including, without limitation, ambient air, surface water, ground water,
land surface or subsurface strata), including, without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products ("Materials of
Environmental Concern"), or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Materials of Environmental Concern in connection with
protection of human health or the environment (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or any of its
subsidiaries, under applicable Environmental Laws, or noncompliance with
the terms and conditions thereof, nor has the Company, received any
communication (written or
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oral), whether from a governmental authority, citizens group, employee or
otherwise, that alleges that the Company or any of its subsidiaries is in
violation and there are no circumstances, either past, present or that are
reasonably foreseeable, that will or could reasonably be expected to lead
to such violation in the future. In addition, except as disclosed in the
Registration Statement or the Prospectus, or as would not, individually or
in the aggregate, have a Material Adverse Effect: there is no claim,
action, cause of action, investigation or notice (written or oral) by any
person or entity alleging potential liability for investigatory costs,
cleanup costs, governmental responses costs, natural resources damages,
property damages, personal injuries, attorneys' fees or penalties arising
out of, based on or resulting from (a) the presence, or release into the
environment, of any Material of Environmental Concern at any location owned
or operated by the Company or any of its subsidiaries, now or in the past,
or (b) circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law (collectively, "Environmental Claims"),
pending or, to the knowledge of the Company, threatened against the Company
or any of its subsidiaries or, to the knowledge of the Company, against any
person or entity whose liability for any Environmental Claim the Company
has retained or assumed either contractually or by operation of law; to its
knowledge, there are no past or present actions, activities, circumstances,
conditions, events or incidents, including, without limitation, the
release, emission, discharge, presence or disposal of any Material of
Environmental Concern, that will or could reasonably be expected to result
in a violation of any Environmental Law or form the basis of any
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company has retained or assumed either contractually or by operation of
law.
(l) The Company and each of its subsidiaries has such licenses,
certificates, authorizations, approvals, franchises, permits and other
rights issued by local, state, Federal or foreign regulatory agencies or
bodies (collectively, "Per-
15
<PAGE>
mits"), including, without limitation, under any applicable Environmental
Law, as are necessary to own, lease and operate its respective properties
and to conduct the businesses now conducted by them except where the
failure to possess any such Permit would not have a Material Adverse
Effect; the Company and each of its subsidiaries has fulfilled and
performed all of its material obligations with respect to such Permits and
no event has occurred which allows, or after notice or lapse of time would
allow, revocation or termination of any such Permit that is reasonably
likely to have a Material Adverse Effect; and, except as described in the
Prospectus, such Permits contain no restrictions that are materially
burdensome to the Company or any of its subsidiaries.
(m) The Company has no knowledge of any actionable violation of
any Federal, state or local law relating to employment and employment
practices, discrimination in the hiring, promotion or pay of employees nor
any applicable wage or hour laws, except for any such violation which,
individually or in the aggregate, would not result in a Material Adverse
Effect. There is (A) no significant unfair labor practice complaint
pending against the Company or any of its subsidiaries or, to the knowledge
of the Company, threatened against any of them, before the National Labor
Relations Board or any state or local labor relations board, and no
significant grievance or significant arbitration proceeding arising out of
or under any collective bargaining agreement is pending against the Company
or any of its subsidiaries or, to the knowledge of the Company, threatened
against any of them, (B) no labor strike, dispute, slowdown or stoppage
("Labor Dispute") in which the Company or any of its subsidiaries is
involved nor, to the knowledge of the Company, is any Labor Dispute
imminent, other than routine disciplinary and grievance matters, the
Company is not aware of any existing or imminent Labor Dispute by the
employees of any of its principal suppliers, manufacturers or contractors
and (C) no question concerning union representation within the meaning of
the National Labor Relations Act existing with respect to the employees of
the Company and, to the knowledge of the Company, no union
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organizing activities are taking place, except (with respect to any matter
specified in clause (A), (B) or (C) above, singly or in the aggregate) such
as would not have a Material Adverse Effect.
(n) Except as otherwise set forth in the Prospectus, the Company
and each of its subsidiaries has good and marketable title, free and clear
of all liens, claims, encumbrances and restrictions except liens for taxes
not yet due and payable, to all property and assets described in the
Prospectus as being owned by it excluding any liens, claims, encumbrances
and restrictions that would not have a Material Adverse Effect. All leases
to which the Company or any of its subsidiaries is a party are valid and
binding and no default by the Company or any Subsidiary or, to the
Company's knowledge, any other party has occurred or is continuing
thereunder, except for any such defaults which, individually or in the
aggregate, would not result in a Material Adverse Effect, and the Company
and its subsidiaries enjoy peaceful and undisturbed possession under all
such leases to which any of them is a party as lessee with such exceptions
as do not materially interfere with the use made by the Company or such
subsidiary.
(o) The Company and its subsidiaries maintain adequate insurance
covering their properties, operations, personnel and businesses, including
without limitation product liability insurance, and the Company has not
received written notice from any insurer or agent of such insurer that
substantial capital improvements or other similar expenditures will have to
be made in order to continue such insurance.
(p) Deloitte & Touche LLP are independent public accountants with
respect to the Company and its subsidiaries as required by the Act.
(q) The financial statements of the Company, together with
related notes and schedules, set forth in the Registration Statement and
the Prospectus (and any amendments or supplements thereto) present fairly
the consolidated financial position, results of operations and changes in
financial
17
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position of the Company and its subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective
periods to which they apply; such statements and related schedules and
notes have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information and
data set forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is, in all material respects, accurately
presented and prepared on a basis consistent with such financial statements
and the books and records of the Company. The pro forma financial
statements, together with related notes, set forth under the caption
"Unaudited Pro Forma Condensed Consolidated Financial Data" in the
Registration Statement and the Prospectus have been prepared on a basis
consistent with such historical statements, except for the pro forma
adjustments specified therein, and give effect to assumptions made on a
reasonable basis and present fairly the transactions reflected thereby as
indicated in the Registration Statement and the Prospectus and comply as to
form in all material respects with the applicable accounting requirements
of rule 11-02 of Regulation S-X and the pro forma adjustments have been
properly applied to the historical amounts in the compilation of those
statements.
(r) All tax returns required to be filed by the Company and its
subsidiaries in any jurisdiction have been filed, other than those filings
that are being contested in good faith, except where failure to so file
would not have a Material Adverse Effect, and all taxes, including
withholding taxes, penalties and interest, assessments, fees and other
governmental charges due or claimed to be due from such entities have been
paid other than those being contested in good faith and for which adequate
reserves have been provided, except where failure to so pay would not have
a Material Adverse Effect.
(s) The Company and each of its subsidiaries will own or possess
all patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or
18
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unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names (collectively, the
"Intellectual Property") presently employed by it in connection with the
businesses now operated by them, except where the failure to so own or
possess would not, individually or in the aggregate, have a Material
Adverse Effect, and neither the Company nor any of its subsidiaries have
received any notice of infringement of or conflict with asserted rights of
others with respect to any of the foregoing, except where such infringement
or conflict would not individually, or in the aggregate, have a Material
Adverse Effect. To the Company's knowledge, the use of the Intellectual
Property in connection with the business and operations of the Company and
its subsidiaries does not infringe on the rights of any person, except
where such infringement does not individually or in the aggregate have a
Material Adverse Effect. The representations in this clause (s) exclude
Intellectual Property matters with respect to any foreign country that has
not accounted for more than 1% of the sales of the Company in either of the
last 2 fiscal years.
(t) The Company and each of its subsidiaries maintains a system
of internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for
inventory assets is compared with the existing inventory assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(u) The Company and its subsidiaries have not, directly or
indirectly, paid or delivered any fee, commission or other sum of money or
item of property, however characterized, to any finder, agent, government
official or other party, in the United States or any other country, which
is in any
19
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manner related to the business or operations of the Company or its
subsidiaries which the Company or any of its subsidiaries knows or has
reason to believe to have been illegal under any Federal, state or local
laws of the United States or any other country having jurisdiction; the
Company and its subsidiaries, have not participated, directly or
indirectly, in any boycotts or other similar practices in contravention of
law affecting any of its actual or potential customers.
(v) As of the Closing Date, the Company is not (i) an "investment
company" or a company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended, or (ii) a
"holding company" or a "subsidiary company" of a holding company, or an
"affiliate" thereof within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(x) There are no outstanding subscriptions, rights, warrants,
options, calls, convertible securities, commitments of sale or liens
related to or entitling any person to purchase or otherwise to acquire any
shares of the capital stock of, or other ownership interest in, the Company
or any subsidiary thereof, except as otherwise disclosed in the
Registration Statement.
(y) Except as disclosed in the Prospectus, there are no business
relationships or related party transactions required to be disclosed
therein by Item 404 of Regulation S-K of the Commission.
7. Indemnification. (a) The Company agrees to indemnify and hold
---------------
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
from and against any and all losses, claims, damages, liabilities and judgments
caused by any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or the Prospectus (as amended or
supplemented if the Company
20
<PAGE>
shall have furnished any amendments or supplements thereto) or any preliminary
prospectus, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages, liabilities or
judgments are caused by any such untrue statement or omission or alleged untrue
statement or omission based upon information relating to any Underwriters
furnished in writing to the Company by or on behalf of any Underwriter through
you expressly for use therein.
(b) In case any action shall be brought against any Underwriter or
any person controlling such Underwriter, based upon any preliminary prospectus,
the Registration Statement or the Prospectus or any amendment or supplement
thereto and with respect to which indemnity may be sought against the Company,
such Underwriter shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and expenses.
Any Underwriter or any such controlling person shall have the right to employ
separate counsel in any such action and participate in the defense thereof, but
the fees and expenses of such counsel shall be at the expense of such
Underwriter or such controlling person unless (i) the employment of such counsel
has been specifically authorized in writing by the Company, (ii) the Company
shall have failed to assume the defense and employ counsel or (iii) the named
parties to any such action (including any impleaded parties) include both such
Underwriter or such controlling person and the Company, as the case may be, and
such Underwriter or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to it which are
different from or additional to those available to the Company, as the case may
be, (in which case the Company shall not have the right to assume the defense of
such action on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company shall not, in connection with any one
such action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations
21
<PAGE>
or circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (in addition to any local counsel) for all such Underwriters
and controlling persons, which firm shall be designated in writing by DLJ and
that all such fees and expenses shall be reimbursed as they are incurred). The
Company shall not be liable for any settlement of any such action effected
without the written consent of such Company but if settled with the written
consent of such Company, such Company agrees to indemnify and hold harmless any
Underwriter and any such controlling person from and against any loss or
liability by reason of such settlement. Notwithstanding the immediately
preceding sentence, if in any case where the fees and expenses of counsel are at
the expense of the indemnifying party and an indemnified party shall have
requested the indemnifying party to reimburse the indemnified party for such
fees and expenses of counsel as incurred, such indemnifying party agrees that it
shall be liable for any settlement of any action effected without its written
consent if (i) such settlement is entered into more than ten business days after
the receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall have failed to reimburse the indemnified party in
accordance with such request for reimbursement prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement includes an unconditional release of such indemnified
party from all liability on claims that are the subject matter of such
proceeding.
(c) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person controlling the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent
as the foregoing indemnity from the Company to each Underwriter but only with
reference to information relating to such Underwriter furnished in writing by
or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any preliminary prospectus. In case
any action shall be brought against the Company, any
22
<PAGE>
of its directors, any such officer or any person controlling the Company based
on the Registration Statement, the Prospectus or any preliminary prospectus and
in respect of which indemnity may be sought against any Underwriter, the
Underwriter shall have the rights and duties given to the Company, except that
if the Company shall have assumed the defense thereof such Underwriter shall not
be required to do so, but may employ separate counsel therein and participate in
the defense thereof but the fees and expenses of such counsel shall be at the
expense of such Underwriter), and the Company, its directors, any such officers
and any person controlling the Company shall have the rights and duties given to
the Underwriter, by Section 8(b) hereof.
(d) If the indemnification provided for in this Section 7 is
unavailable to an indemnified party in respect of any losses, claims, damages,
liabilities or judgments referred to therein, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Underwriters in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company, and the total underwriting discounts and commissions received by the
Underwriters, bear to the total price to the public of the Shares, in each case
as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company and the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied by
the Company or the Underwriters, and the
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parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 7(d) are several in proportion to the respective number of Shares
purchased by each of the Underwriters hereunder and not joint.
(e) In connection with reservation and sale of up to shares
of Common Stock of the company to certain designated members of the Company's
and its affiliates' management and to certain other employees and persons, the
Company agrees to indemnify and hold harmless the Underwriters from and against
any and all losses, expenses and liabilities incurred by them as a result of the
failures of such designees to pay for and accept delivery of the shares which
are subject to a confirmation of sale.
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8. Conditions of Underwriters' Obligations. The several obligations
---------------------------------------
of the Underwriters to purchase the Firm Shares under this Agreement are subject
to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same
force and effect as if made on and as of the Closing Date.
(b) The Registration Statement shall have become effective not later
than 5:00 P.M. (and, in the case of a Registration Statement filed under
Rule 462(b) of the Act, not later than 10:00 P.M.), New York City time, on
the date of this Agreement or at such later date and time as you may
approve in writing, and at the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in the
Registration Statement and the Prospectus, there shall not have been any
material adverse change, or any development involving a prospective
material adverse change, in the condition, financial or otherwise, or in
the earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company, (ii) since the date of the
latest balance sheet included in the Registration Statement and the
Prospectus there shall not have been any change, or any development
involving a prospective material adverse change, in the capital stock or in
the long-term debt of the Company from that set forth in the Registration
Statement and Prospectus, (iii) the Company and its subsidiaries shall have
no liability or obligation, direct or contingent, which is material to the
Company and its subsidiaries, taken as a whole, other than those reflected
in the Registration Statement and the Prospectus and (iv) on the Closing
Date you shall have received a certificate dated the Closing Date, signed
by the President and Chief Executive Officer and the Chief Financial
Officer of the Company, confirming the matters set
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forth in paragraphs (a), (b) and (c) of this Section 8.
(d) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the Closing
Date, of Kramer, Levin, Naftalis & Frankel ("Kramer Levin") counsel for
the Company, to the effect that:
(i) the Company and each of its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority required to carry on its business as it
is currently being conducted and to own, lease and operate its
properties;
(ii) the Company and each of its subsidiaries is duly qualified
and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iii) all of the outstanding shares of capital stock of, or
other ownership interests in, each of the Company's subsidiaries have
been duly and validly authorized and issued and are fully paid and
non-assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature;
(iv) all the outstanding shares of Common Stock have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights;
(v) the Shares to be issued and sold by the Company hereunder
have been duly authorized, and when issued and delivered to the
Underwriters against payment therefor as pro-
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vided by this Agreement, will have been validly issued and will be
fully paid and non-assessable, and the issuance of such Shares is not
subject to any preemptive or similar rights;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company and enforceable in accordance with its terms (except as rights
to indemnity and contribution hereunder may be limited by applicable
law);
(vii) the authorized capital stock of the Company, including the
Common Stock, conforms as to legal matters to the description thereof
contained in the Prospectus;
(viii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and
no proceedings for that purpose are, to the knowledge of such counsel,
pending before or contemplated by the Commission;
(ix) the statements under the captions ["Shares Eligible for
Future Sale", "Description of Certain Indebtedness" and "Description
of the Capital Stock"] in the Prospectus and Items 14 and 15 of Part
II of the Registration Statement insofar as such statements constitute
a summary of legal matters documents or proceedings referred to
therein, fairly present the information called for with respect to
such legal matters, documents and proceedings;
(x) neither the Company nor any of its subsidiaries is in
violation of its respective charter or by-laws and, to the best of
such counsel's knowledge after due inquiry, neither the Company nor
any of its subsidiaries is in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company and its subsidiaries,
27
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taken as a whole, to which the Company or any of its subsidiaries is a
party or by which it or any of its subsidiaries or their respective
property is bound;
(xi) the execution, delivery and performance of this Agreement
by the Company, compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other
governmental body (except as such may be required under the Act or
other securities or Blue Sky laws) and will not conflict with or
constitute a breach of any of the terms or provisions of, or a default
under, the charter or by-laws of the Company or any of its
subsidiaries or any agreement, indenture or other instrument to which
the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective properties are
bound, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company or
any of its subsidiaries or their respective properties;
(xii) after due inquiry, such counsel does not know of any legal
or governmental proceeding pending or threatened to which the Company
or any of its subsidiaries is a party or to which any of their
respective property is subject which is required to be described in
the Registration Statement or the Prospectus and is not so described,
or of any contract or other document which is required to be described
in the Registration Statement or the Prospectus or is required to be
filed as an exhibit to the Registration Statement which is not
described or filed as required;
(xiii) to the best of such counsel's knowledge, after due
inquiry, neither the Company nor any of its subsidiaries has violated
any Environmental Laws, nor any federal or state law relating to
discrimination in the
28
<PAGE>
hiring, promotion or pay of employees nor any applicable federal or
state wages and hours laws, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations
promulgated thereunder, which in each case might result in any
material adverse change in the business, prospects, financial
condition or results of operation of the Company and its subsidiaries,
taken as a whole;
(xiv) the Company and each of its subsidiaries has such permits,
licenses, franchises and authorizations of governmental or regulatory
authorities ("permits"), including, without limitation, under any
applicable Environmental Laws, as are necessary to own, lease and
operate its respective properties and to conduct its business in the
manner described in the Prospectus; to the best of such counsel's
knowledge, after due inquiry, the Company and each of its subsidiaries
has fulfilled and performed all of its material obligations with
respect to such permits and no event has occurred which allows, or
after notice or lapse of time would allow, revocation or termination
thereof or results in any other material impairment of the rights of
the holder of any such permit, subject in each case to such
qualification as may be set forth in the Prospectus; and, except as
described in the Prospectus, such permits contain no restrictions that
are materially burdensome to the Company or any of its subsidiaries;
(xv) the Company is not an "investment company" or to the
knowledge of such counsel after reasonable inquiry a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xvi) to the best of such counsel's knowledge, after due
inquiry, no holder of any security of the Company has any right to
require registration of shares of Common Stock or any other security
of the Company;
29
<PAGE>
(xvii) to the best of such counsel's knowledge, after due
inquiry, except as otherwise set forth in the Registration Statement
or such as are not material to the business, prospects, financial
condition or results of operation of the Company and its subsidiaries,
taken as a whole, the Company and each of its subsidiaries has good
and marketable title, free and clear of all liens, claims,
encumbrances and restrictions except liens for taxes not yet due and
payable, to all property and assets described in the Registration
Statement as being owned by it;
(xviii) to the best of such counsel's knowledge, after due
inquiry, all leases to which the Company or any of its subsidiaries is
a party are valid and binding and no default has occurred or is
continuing thereunder, which might result in any material adverse
change in the business, prospects, financial condition or results of
operation of the Company and its subsidiaries taken as a whole, and
the Company and its subsidiaries enjoy peaceful and undisturbed
possession under all such leases to which any of them is a party as
lessee with such exceptions as do not materially interfere with the
use made by the Company or such subsidiary;
(xix) (1) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for financial statements as to
which no opinion need be expressed) comply as to form in all material
respects with the Act, and (2) such counsel believes that (except for
financial statements, as aforesaid) the Registration Statement and the
prospectus included therein at the time the Registration Statement
became effective did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and that the
Prospectus, as amended or supplemented, if applicable (except for
financial statements, as aforesaid) does not contain any untrue
statement of a material fact
30
<PAGE>
or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
In giving such opinion with respect to the matters covered by clause
(xix) such counsel may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
The opinion of Kramer, Levin described in paragraph (d) above shall be
rendered to you at the request of the Company and shall so state therein.
(e) an opinion (in a form reasonably satisfactory to you and your counsel),
dated the Closing Date, of Piper & Marbury, regulatory counsel for the Company,
to the effect that:
(i) to such counsel's knowledge, there are no material legal
or governmental proceedings by the U.S. Food and Drug Administration
("FDA") or similar federal or state regulatory officials and bodies
pending that are not described or referred to in the Prospectus;
(ii) to such counsel's knowledge, the Company has, and
maintains in full force and effect, all necessary licenses, permits,
approvals, certificates, consents, orders and other authorizations of
and from the FDA and similar federal or state governmental regulatory
officials and bodies necessary to conduct its business as described in
the Prospectus; and
(iii) to the best of such counsel's knowledge, the
statements in the Prospectus under the captions "Risk Factors --
Governmental Regulation" and "Business -- Regulatory Matters" that
relate to matters of food and drug law insofar as such statements
constitute
31
<PAGE>
a summary of legal matters, documents or proceedings referred to
therein, are accurate in all material respects and provide a fair
summary of such matters;
(iv) the Company has certified to such counsel that it is
in substantial compliance with applicable decrees of the FDA, the
Federal Trade Commission and other state or local regulatory agencies
that have been brought to such counsel's attention and such counsel
does not know of any facts that contradict such representation; and
(v) the product labeling, advertising and other promotional
materials that the Company has submitted to such counsel for review do
not give rise to a substantial expectation that enforcement action
would be initiated against those products.
(e) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Skadden, Arps, Slate, Meagher & Flom, counsel for the
Underwriters, in form and substance reasonably satisfactory to you.
(f) You shall have received a letter on and as of the Closing Date, in
form and substance satisfactory to you, from Deloitte & Touche LLP,
independent public accountants, with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus and substantially in the form and substance of the
letter delivered to you by on the date of this Agreement.
(g) The Company shall not have failed at or prior to the Closing Date
to perform or comply with any of the agreements herein contained and
required to be performed or complied with by the Company at or prior to the
Closing Date.
(h) The Shares shall have been duly listed, subject to notice of
issuance, on NASDAQ.
32
<PAGE>
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such Additional
Shares and other matters related to the issuance of such Additional Shares.
9. Effective Date of Agreement and Termination. This Agreement
-------------------------------------------
shall become effective upon the later of (i) execution of this Agreement and
(ii) when notification of the effectiveness of the Registration Statement has
been released by the Commission.
This Agreement may be terminated at any time prior to the Closing Date
by you by written notice to the Company if any of the following has occurred:
(i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any adverse change or development
involving a prospective adverse change in the condition, financial or otherwise,
of the Company or any of its subsidiaries or the earnings, affairs, or business
prospects of the Company or any of its subsidiaries, whether or not arising in
the ordinary course of business, which would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (ii) any outbreak or escalation of hostilities or other
national or international calamity or crisis or change in economic conditions or
in the financial markets of the United States or elsewhere that, in your
judgment, is material and adverse and would, in your judgment, make it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus, (iii) the suspension or material limitation of trading in
securities on the New York Stock Exchange, the American Stock Exchange or the
NASDAQ National Market System or limitation on prices for securities on any such
exchange or National Market System, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order of
any court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business or
operations of the Company or any Subsidiary, (v) the declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local
33
<PAGE>
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused to
purchase on such date; provided that in no event shall the number of Firm Shares
--------
or Additional Shares, as the case may be, which any Underwriter has agreed to
purchase pursuant to Section 2 hereof be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date or an Option Closing Date, as the case may be, any
Underwriter or Underwriters shall fail or refuse to purchase Firm Shares, or
Additional Shares, as the case may be, and the aggregate number of Firm Shares
or Additional Shares, as the case may be, with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares to be purchased
on such date by all Underwriters and arrangements satisfactory to you and the
applicable Company for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the applicable Company. In any such case
which does not result in termination of this Agreement, either you or the
Company shall have the right to postpone the Closing Date or the applicable
Option Closing Date, as the case may be, but in no
34
<PAGE>
event for longer than seven days, in order that the required changes, if any, in
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any default of
any such Underwriter under this Agreement.
10. Miscellaneous. Notices given pursuant to any provision of this
-------------
Agreement shall be addressed as follows: (a) if to the Company, to Twinlab
Corporation, 2120 Smithtown Avenue, Ronkonkoma, New York 11779, Attention:
General Counsel, (b) if to any Underwriter or to you, to you c/o Donaldson,
Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York
10172, Attention: Syndicate Department, and in each case, with a copy to each
of Skadden, Arps, Slate, Meagher & Flom at 919 Third Avenue, New York, New York
10022, Attention: Mark C. Smith, Esq. and to Kramer, Levin, Naftalis & Frankel,
919 Third Avenue, New York, New York 10022, Attention: Howard A. Sobel, Esq., or
in any case to such other address as the person to be notified may have
requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, its officers and directors and
of the several Underwriters set forth in or made pursuant to this Agreement
shall remain operative and in full force and effect, and will survive delivery
of and payment for the Shares, regardless of (i) any investigation, or statement
as to the results thereof, made by or on behalf of any Underwriter or by or on
behalf of the Company, the officers or directors of the Company or any
controlling person of the Company, (ii) acceptance of the Shares and payment for
them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters because of
any failure or refusal on the part of the Company to comply with the terms or to
fulfill any of the conditions of this Agreement, the Company agrees to reimburse
the several Underwriters for all out-of-pocket expenses (including the fees and
disbursements of counsel) reasonably incurred by them.
35
<PAGE>
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
36
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company, and the several Underwriters.
Very truly yours,
TWINLAB CORPORATION
By______________________________
Title:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MONTGOMERY SECURITIES
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By__________________________
37
<PAGE>
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
MONTGOMERY SECURITIES
Acting severally on behalf of
themselves and the several
International Managers named in
Schedule II hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By__________________________
38
<PAGE>
SCHEDULE I
----------
Number of U.S. Firm
U.S. Underwriters Shares to be Purchased
----------------- -------------------------
______________________
Total
39
<PAGE>
SCHEDULE II
-----------
Number of International
International Managers Shares to be Purchased
---------------------- -----------------------
______________________
Total
40
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The consolidated financial statements of Twinlab Corporation (formerly TLG
Laboratories Holding Corp.) included in the Prospectus, which is part of this
Registration Statement, have been prepared to give effect to the changes in
authorized capital and the 18.5 for 1 stock split (effected in the form of a
stock dividend) described in Note 16 to the consolidated financial statements
to be completed prior to the consummation of the public offering contemplated
by the Registration Statement. On the effective date of this Registration
Statement, we expect to be able to issue the following consent and report on
schedule:
"Twinlab Corporation (formerly TLG Laboratories Holding Corp.)
Ronkonkoma, New York
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-05191 of Twinlab Corporation (formerly TLG Laboratories Holding Corp.) on
Form S-1 of our report dated February 9, 1996 (May 7, 1996 as to Notes 1 and
16a and June 4, 1996 as to Note 16b), appearing in the Prospectus, which is a
part of such Registration Statement, and to the references to us under the
heading "Selected Historical Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Twinlab Corporation
(formerly TLG Laboratories Holding Corp.) listed in Part II at Item 16(b).
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Jericho, New York
July 19, 1996"
Deloitte & Touche LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Twinlab
Corporation and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 JUN-30-1996
<CASH> 7945 7984
<SECURITIES> 201 201
<RECEIVABLES> 24372 22701
<ALLOWANCES> 177 228
<INVENTORY> 25273 30953
<CURRENT-ASSETS> 58663 63586
<PP&E> 13036 12960
<DEPRECIATION> 6263 0
<TOTAL-ASSETS> 75309 141163
<CURRENT-LIABILITIES> 14233 19790
<BONDS> 0 0
0 67000
0 0
<COMMON> 8325 18500
<OTHER-SE> 47080 (113221)
<TOTAL-LIABILITY-AND-EQUITY> 75309 141163
<SALES> 148735 81837
<TOTAL-REVENUES> 148735 81837
<CGS> 89932 47852
<TOTAL-COSTS> 89932 47852
<OTHER-EXPENSES> 61 (23)
<LOSS-PROVISION> 169 51
<INTEREST-EXPENSE> 866 2591
<INCOME-PRETAX> 30464 1170
<INCOME-TAX> 240 1833
<INCOME-CONTINUING> 30224 (663)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30224 (663)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
