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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X|
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number: 0-21003
TWINLAB CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 11-3317986
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2120 Smithtown Avenue 11779
Ronkonkoma, New York (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (516) 467-3140
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates based on the closing sale price of the Common Stock on
March 19, 1998 as reported on the Nasdaq National Market was $393,116,829.
As of March 19, 1998, the registrant had 27,321,500 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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Portions of the registrant's definitive proxy statement for the 1998
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
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NOTE
Twinlab Corporation's Report on Form 10-K filed with the Securities and Exchange
Commission includes all exhibits required to be filed with the Report. Copies of
this Report on Form 10-K, not including any of the exhibits listed under Item
14(c) of this Report, are available without charge upon written request. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the exhibits
and to request copies of such exhibits:
Corporate Secretary
Twinlab Corporation
2120 Smithtown Avenue
Ronkonkoma, NY 11779
(i)
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TWINLAB CORPORATION
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................13
Item 3. Legal Proceedings...................................................14
Item 4. Submission of Matters to a Vote of Security Holders ................14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters ............................................................15
Item 6. Selected Financial Data ............................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................18
Item 8. Financial Statements and Supplementary Data.........................22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ...........................................22
PART III
Item 10. Directors and Executive Officers of the Registrant..................22
Item 11. Executive Compensation..............................................22
Item 12. Security Ownership of Certain Beneficial Owners
and Management .....................................................22
Item 13. Certain Relationships and Related Party Transactions................22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.....23
Signatures
(ii)
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Information contained or incorporated by reference in this report contains
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), which represent the Company's
expectations or beliefs, including, but not limited to, statements concerning
industry performance, the Company's operations, performance, financial
condition, growth and acquisition strategies, margins and growth in sales of the
Company's products. For this purpose, any statements contained in this Annual
Report that are not statements of historical fact may be deemed to be
forward-looking statements. Such statements 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" and
"Business -- Business Strategy." No assurance can be given that the future
results covered by the forward-looking statements will be achieved. These
statements by their nature involve substantial risks and uncertainties, certain
of which are beyond the Company's control. 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.
PART I
Item 1. BUSINESS
Unless the context otherwise requires, the terms "Company" and "Twinlab"
refer to Twinlab Corporation and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. ("Twin"), Advanced Research Press, Inc.
("ARP"), and Changes International of Fort Walton Beach, Inc. ("Changes
International").
General
The Company is one of the leading manufacturers and marketers of brand
name nutritional supplements sold through domestic health food stores and is
also engaged in the sale of its products through national and regional drug
store chains, supermarkets, mass market retailers and Changes International, its
recently acquired network marketing company. The Company produces a full line of
nutritional supplements and offers the broadest product line in the industry
with more than 940 products and 1,700 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, a full line of herbal supplements and phytonutrients marketed under
the Nature's Herbs(R) and HealthCare Naturals(R) trademarks and herb teas
marketed under the Alvita(R) trademark. In addition, the Company markets a line
of nutritional supplements exclusively through Changes International. The
Company emphasizes the development and introduction of high-quality, unique
nutraceuticals and other products in response to emerging trends in the
nutritional supplement industry. 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 and widely- recognized brands in the
nutritional supplement industry.
Under the leadership of the Blechman family, Twinlab has achieved
increased net sales and income from operations every year since 1990. Since
1993, the Company's net sales and income from operations have grown at compound
annual growth rates of 20.9% and 30.9%, respectively. For the year ended
December 31, 1997, the Company generated net sales, net income and net income
per share of $213.2 million, $22.7 million and $0.84, respectively.
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. To reach the broadest possible
consumer market, the Company has developed a multi-branded and multi-channel
distribution strategy, consisting of the following categories:
o Health Food Stores -- The Company's TWINLAB, Nature's Herbs and
Alvita brand products are sold through a network of approximately 60
distributors to nearly 11,000 health food stores and other selected
retail outlets. The health food store channel of distribution has
continued to experience significant growth in recent years as
national chains, including those which sell the Company's products,
such as General Nutrition Companies, Inc. ("GNC"), Whole Foods
Markets, Inc. (" WFM"), Wild Oats Markets, Inc. ("Wild Oats") and
other industry participants continue to add stores in new and
existing markets. The Company believes that it has a competitive
advantage in the health food store channel due to the high quality
of its products which is a direct result of its use of premium
ingredients, its modern manufacturing facilities and its
comprehensive quality control procedures. Sales to the health food
store channel, primarily through distributors, continue to represent
the Company's largest market, totaling approximately $171.6 million,
or approximately 80.5%, of the Company's net sales in 1997. The
Company believes that its products have a presence in over 90% of
the health food stores in the United States, but that only
approximately 12% of such stores carry
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a comprehensive line of the Company's products. Management believes
that the continued expansion of health food store retail outlets and
the strong growth characteristics of the nutritional supplement
industry, combined with health food retailers' success with the
Company's product lines, provide Twinlab with significant
opportunities to increase sales in the health food store channel.
o Mass Market Retailers -- The Company continues to increase its
penetration of the fast growing mass market retail channel, which
consists of drug store chains, supermarkets and other mass
merchandisers. The Company is currently a provider of private label
herbal products to Wal-Mart Stores, Inc. ("Wal-Mart"), which are
being sold under Wal-Mart's proprietary Spring Valley brand name.
The Company also sells its products through national and regional
drug store and supermarket chains, such as Rite Aid Corporation,
Duane Reade Inc., American Stores, Inc. and Albertson's, Inc., under
its established TWINLAB, HealthCare Naturals and Alvita brand names.
The Company believes that the mass market distribution channel
affords significant growth opportunities and intends to continue to
introduce new products and new brands designed specifically for
customers in this channel. During 1998, the Company plans to
introduce a line of sports nutrition products under a new
proprietary brand name which will be sold exclusively in the mass
market channel. Approximately $14.0 million or 6.6% of the Company's
1997 net sales were attributable to mass market retailers compared
to $3.4 million or 2.0% in 1996. Due to a variety of recent programs
initiated by the Company, Twinlab expects to experience significant
growth in this category during fiscal 1998.
o Network Marketing -- Through Changes International, a network
marketing company which the Company acquired in November 1997,
Twinlab develops, markets and sells vitamins, herbs and nutritional
supplements exclusively under the Changes(R)brand name. Changes
International operates through a large sales force of independent
distributors located throughout the United States and Canada who
sell directly to consumers. Changes International's products include
Changes Relief, an advanced supplement that nutritionally supports
healthy bone and joint functions, and Perfor-Max, an antioxidant
formula containing grapeseed extract, pine bark extract and tumeric.
All of Changes International's products are specially formulated and
packaged exclusively for the network marketing channel and are not
intended for sale to retail outlets. The Company is making a
significant investment to enhance Changes International's management
team, infrastructure and management information systems in an effort
to expand its distributor and customer base and to increase sales in
this distribution channel. During 1998, the Company intends to more
than double the size of Changes International's nutritional
supplement line, beginning with the introduction of eight new
products during the first half of 1998. Changes International was
founded in 1994 and generated gross sales of $41.5 million in 1997
($7.0 million in fiscal 1997 after its acquisition by the Company).
Twinlab 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.
Recent Developments
Public Offering -- On March 17, 1998, the Company filed a registration
statement with the Securities and Exchange Commission to sell up to 8 million
shares of Common Stock (the "Offering"). Of the Common Stock to be sold in the
Offering, 4 million shares will be sold by the Company and 4 million shares will
be sold by certain stockholders of the Company. There can be no assurance that
the Offering will be consummated.
Bronson Acquisition -- On March 17, 1998, the Company entered into a
definitive agreement to acquire substantially all of the assets and assume
certain liabilities of the Bronson division ("Bronson") of Jones Medical
Industries, Inc. ("Jones") (the "Bronson Acquisition"). The Company expects that
the closing of the Bronson Acquisition will occur during the second quarter of
fiscal 1998. Bronson's net sales and operating income for the fiscal year ended
December 31, 1997, were approximately $32.1 million, and $9.5 million,
respectively. The purchase price is $55.0 million in cash, subject to certain
adjustments, which the Company intends to finance with a portion of the net
proceeds of the Offering. In the event the Offering is not consummated, the
Company would seek to amend its Revolving Credit Facility (as hereinafter
defined) to increase the permitted borrowings and to finance the Bronson
Acquisition with borrowings thereunder.
Bronson manufactures, markets and distributes a line of over 350 vitamins,
herbs, nutritional supplements and health and beauty aids, which are sold under
the Bronson(R) name through catalogs and direct mailings to customers, including
healthcare and nutritional professionals and mail order and retail customers.
Bronson also markets its MD Pharmaceuticals(R) brand exclusively to United
States military commissaries. Bronson's products are manufactured in a 30,000
square foot facility in Tempe, Arizona, which the Company will acquire and
operate after the closing. This facility also manufactures private label
nutritional supplements for other companies on a contract manufacturing basis.
Pursuant to a Transition Services Agreement, Jones will continue to provide
sales services and packaging and distribution operations for Bronson's products
through December 31, 1998.
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The Bronson Acquisition is subject to certain customary conditions, and
there can be no assurance that the Bronson Acquisition will be consummated. The
Offering is not contingent upon the consummation of the Bronson Acquisition.
First Quarter Trends -- In the first quarter of 1998, the Company received
a substantial increase in orders for its herbal supplement products, including a
significant increase in orders from Wal-Mart for herbal products which are being
sold under Wal- Mart's proprietary Spring Valley brand name. This increase is
due to increased demand at the retail level and to the fact that the number of
SKU's sold under this brand name at Wal-Mart more than doubled during the first
quarter of 1998. The Company has made several adjustments to its operations to
accommodate this increased demand for its herbal products, including the use of
production capacity at the New York Facility (as hereinafter defined) to produce
herbal supplement products and the installation of additional manufacturing
equipment at both the New York Facility and the Utah Facility (as hereinafter
defined). As a result of these operational adjustments and the Company's
decision to reduce promotions offered to distributors during the first quarter
of 1998, the Company's mix of product sales during the first quarter of 1998
will differ substantially from the product mix in the comparable period in 1997.
For the first quarter of 1998, herbal supplements will represent a substantially
greater portion of the Company's total net sales, and sales of vitamins,
minerals and nutritional supplements products will represent a smaller
percentage of total net sales and decline significantly from the comparable
period in 1997. Nevertheless, the Company anticipates that its overall growth
rate in net sales in the first quarter of 1998 will be comparable to that
achieved in the first quarter of 1997, as the increased sales of herbal products
will more than offset the decreased sales of vitamins, minerals and nutritional
supplements (all of the foregoing first quarter comparisons exclude the impact
of Changes International). The Company believes that there has been no material
decline in retail sales of its vitamin, mineral and nutritional supplement
products during the first quarter of 1998, as there has been adequate inventory
of its products in the distribution channel. The Company plans to adjust its
production mix during the second quarter of 1998 to increase the production of
vitamins, minerals and nutritional supplements compared to the first quarter of
1998, as additional capacity comes on line and production schedules are
adjusted, and expects to realize increased sales of these products during the
second quarter of 1998 as compared to the first quarter of 1998.
Business Strategy
The Company's strategy is to continue to increase sales and profits by
furthering its leadership position in the sale of vitamins, herbs and
nutritional supplements to the health food store channel while continuing to
increase sales and market share in the mass market and network marketing
channels. The Company also intends to seek opportunities to enter other channels
of distribution, including catalog distribution. Twinlab plans to implement this
strategy both by capitalizing on the strength of its established brands as well
as through the development and introduction of new brands. In addition, the
Company expects to continue to develop and introduce new products and product
innovations for each of its distribution channels, to increase its penetration
of foreign markets and to provide the advertising, marketing, operational and
personnel support necessary to grow its businesses. Twinlab intends to achieve
these goals while continuing its past emphasis on its financial performance and
the overall efficiency of its operations. Specifically, the Company seeks to:
Further Develop Portfolio of Brands -- Twinlab has developed a portfolio
of core brands which are among the most recognized in the vitamin and
nutritional supplement industry. The Company intends to continue to nurture and
extend the reach of its TWINLAB, Nature's Herbs and Alvita brands in the health
food distribution channel while furthering the development of its portfolio of
private label and proprietary brands, including the HealthCare Naturals and
Changes brands, targeted to the mass market retail and network marketing
channels. During 1998, the Company plans to introduce a line of sports nutrition
products under a new proprietary brand name which will be sold exclusively in
the mass market channel. As in the past, the Company will continue to promote
its brands through strong marketing and advertising programs. Management
believes that Twinlab has one of the largest marketing and advertising budgets
as a percentage of sales in the nutraceutical industry and that the strong brand
name recognition of its products is, in part, a direct result of this support.
In fiscal 1997, the Company spent $15.9 million, an increase of 25.1% over
fiscal 1996, on marketing and advertising to promote its products. The Company
has budgeted $20.5 million for marketing and advertising expenses in fiscal
1998, a 29.2% increase over fiscal 1997.
Further Develop Multiple Channels of Distribution -- The Company intends
to continue to increase its penetration of the health food store channel, expand
its mass market retail and network marketing businesses, and enter additional
distribution channels, such as catalog distribution, through internal growth and
selective acquisitions. By utilizing a multiple distribution channel approach,
the Company believes it will be well positioned to also reach customers who
historically have not shopped in health food stores.
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. 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. The Company's geographically diverse network of
distributors allows Twinlab to achieve immediate and broad distribution for new
product launches. From
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1991 through 1997, the Company introduced over 560 products, with over 100 new
products introduced in 1997 alone. Net sales during 1997 from new products
introduced in 1997 were approximately $17.7 million, or approximately 8.3% of
net sales. In 1998, the Company expects to introduce over 100 new products in
the health food store and mass market retail channels, 18 of which have already
been introduced, and plans to more than double the number of products offered by
Changes International.
Increase Penetration of Foreign Markets -- Management believes that there
are substantial opportunities for the Company to expand its presence in foreign
markets. As part of its continuing efforts to increase international sales, the
Company recently hired a Director of International Sales. The Company's
international sales force is supported by a network of 37 overseas distributor
organizations, serving 56 foreign countries. Approximately 5.1%, or $10.9
million, of the Company's net sales in 1997 were derived from international
sales originating from overseas distributor organizations. The Company presently
has distribution agreements covering fourteen western European countries,
including Great Britain, France, Belgium, the Netherlands and the Scandinavian
countries; six eastern European countries, including Russia; nine Latin American
countries, including Mexico, Brazil and Argentina; eight Middle Eastern
countries, including Israel and Saudi Arabia; and several other countries in the
Far East and the Caribbean. The Company has also initiated new programs to
qualify distributors in Italy and China.
Supplement Internal Growth Through Strategic Acquisitions -- The Company
actively pursues acquisition opportunities that will complement or extend its
existing product line, expand its distribution channels or would be compatible
with its business philosophy and strategic goals. The Company believes that its
leading and widely recognized brand names, broad distribution capabilities and
proven ability to generate sales of its products through successful marketing
programs provide it with a strategic advantage in identifying potential
acquisition candidates. In addition, the Company's success with past
acquisitions provides it with the knowledge to successfully integrate future
acquisitions into its operations.
Ongoing Investment in Personnel and Infrastructure -- The Company
continues to make significant investments in developing its management team and
building its infrastructure to support the growth of its businesses. The Company
recently hired several key individuals, including a new Chief Financial Officer,
a President of Mass Market Sales and a Director of International Sales, to
enhance its senior management team. As part of its ongoing efforts to maintain
its reputation for providing the highest quality products and services to its
customers, the Company continues to invest in its manufacturing and distribution
facilities and management information systems. The Company recently broke ground
on an approximately $13.0 million expansion of its state-of-the-art
manufacturing, distribution and warehouse facility in American Fork, Utah (the
"Utah Facility"). The total size of the Utah Facility will increase from 57,000
square feet to approximately 143,000 square feet and will substantially increase
the Company's production capacity.
There can be no assurance that the Company will successfully implement all
or any part of its strategy.
Industry
Based on estimates in 1997 market reports conducted by Packaged Facts (the
"Packaged Facts Report"), an independent research firm, the retail market for
vitamins, minerals and other supplements (excluding sports nutrition and diet
products; the "VMS Products") has grown at a compound annual rate of 15% from
$3.7 billion in 1992 to $6.5 billion in 1996. A large portion of this growth is
attributable to an increase in sales of supplements (primarily herbal products),
which grew from $570 million in 1992 to $2.3 billion in 1996. Growth in this
category has been fueled by the popularity of such herbs as echinacea, garlic,
ginseng, gingko and, more recently, saw palmetto and St. John's wort. Packaged
Facts forecasts 13.6% compound annual growth in the market for VMS Products,
including 25% compound annual growth in the market for supplements, through the
year 2001. In addition, according to Packaged Facts, the retail market for
sports nutrition products has grown at a compound annual rate of 10.7% from
approximately $585 million in 1992 to $880 million in 1996.
US Retail Sales of VMS Products and Sports Nutrition Products 1992-1996
(in millions of dollars)
<TABLE>
<CAPTION>
Category 1992 1996 CAGR
-------- ---- ---- ----
<S> <C> <C> <C>
Vitamins ............... $2,570 $3,500 8.0%
Supplements ............ 570 2,300 41.7
Minerals ............... 590 725 5.3
------ ------ ----
Total VMS Products 3,730 6,525 15.0
------ ------ ----
Sports Nutrition ....... 585 880 10.7
------ ------ ----
Total ........ $4,315 $7,405 14.5%
====== ====== ====
</TABLE>
Source: Packaged Facts
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Management believes this continued growth 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 supporting the positive health effects of certain
nutrients; (iii) the nationwide trend toward preventive medicine in response to
rising health care costs; (iv) increased consumer interest in herbs and
herb-related supplements; and (v) the heightened understanding and awareness of
healthier lifestyles and 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, herbs and nutritional supplements on a regular basis.
Vitamin and nutritional supplements are sold through several channels of
distribution: health food stores, mass market retailers (drug store chains,
supermarkets and other mass merchandisers), and direct sales channels (including
network marketing and catalog distribution). In 1996, according to Packaged
Facts, the mass market channel accounted for approximately 45.8% of sales of VMS
Products, health food stores accounted for 38.2% of sales and the remaining
16.0% of sales were generated through direct selling, mail order and the
internet.
The United States health food store market is comprised of approximately
11,000 stores, which are generally either independently owned or associated with
one of several regional or national chains, including GNC and WFM. According to
the Packaged Facts Report, nutritional supplements account for over 38% of a
typical health food store's sales. The health food store channel of distribution
has continued to experience growth in recent years as national chains, including
those which sell the Company's products, such as GNC, WFM 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.
In the mass market channel, sales of vitamins, herbs and nutritional
supplements have generally grown in line with the growth in all channels due to
the proliferation of retail outlets and the expansion of SKU's offered by these
stores. However, within the mass market channel, mass merchandisers have
captured increasing market share from traditional drug store chains and
supermarkets. According to Packaged Facts, these mass merchandisers accounted
for 14.8% of total retail sales of VMS Products in 1996 compared to 11.5% in
1994. This compares to traditional drug store chains and supermarkets which
accounted for 31.0% and 34.6% of total retail sales of VMS Products in 1996 and
1994, respectively.
Although growing, sales generated via direct selling, mail order and the
internet have not grown as quickly as sales in other channels of distribution.
According to Packaged Facts, sales via direct selling as a percentage of total
retail sales of VMS Products were 12.6% in 1996 compared to 13.1% in 1994. Sales
via mail order and the internet were 3.4% and 4.2% of total retail sales of VMS
Products in 1996 and 1994, respectively. It is expected that the market for
internet sales will increase in the future as consumers become more accustomed
to ordering products online.
Share of VMS Products Market -- Sales by Retail Outlets, 1994-1996
<TABLE>
<CAPTION>
Outlet 1994 1995 1996
------ ---- ---- ----
<S> <C> <C> <C>
Health and Natural Food
Stores ..............
36.6% 38.6% 38.2%
Mass Market
Drug Store Chains ... 23.1 21.2 20.2
Mass Merchandisers .. 11.5 13.5 14.8
Supermarkets ........ 11.5 10.4 10.8
------ ------ ------
Total Mass Market 46.1 45.1 45.8
------ ------ ------
Direct Selling ........ 13.1 12.6 12.6
Mail Order and Internet 4.2 3.7 3.4
------ ------ ------
Total .......
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
- - ----------
Source: Packaged Facts
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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 940 products and over 1,700 SKU's in five product
categories. 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, a full line of herbal supplements and
phytonutrients and herb teas marketed under the Nature's Herbs, HealthCare
Naturals and Alvita trademarks, respectively, and a line of nutritional
supplements marketed through Changes International. The Company also sells its
products under Wal-Mart's proprietary Spring Valley label and plans to introduce
a line of sports nutrition products under a new proprietary brand name which
will be sold exclusively in the mass market channel in 1998. The Company also
publishes health, fitness and nutrition-related publications.
The following table sets forth certain information concerning each of the
Company's product categories:
<TABLE>
<CAPTION>
Four-Year
Number of Percentage of Compound Annual
Product Category SKU's 1997 Gross Sales Gross Sales Growth
---------------- ----- ---------------- ------------------
<S> <C> <C> <C>
TWINLAB Division ................. 967 73.9% 18.9%
Herbal Supplements and Phytonuents 590 17.4 36.2
Herb Teas ........................ 190 3.5 29.4
Network Marketing ................ 10 3.0 NA
Publishing ....................... NA 2.2 17.2
----- ----- ----
1,757 100.0% 21.6%
===== ===== ====
</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 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 consists of a wide variety
of nutritional supplements designed for and targeted to athletes. These products
are specially formulated to help athletes achieve their personal physical goals
and enhance performance. Sports nutrition products include Hydra Fuel and Ultra
Fuel drinks, which replenish glucose and electrolytes depleted during strenuous
exercise; DietFuel, RxFuel and Ripped Fuel, which are marketed for the
preservation of lean body mass and the building of muscle mass, in conjunction
with a low fat diet and exercise program; Creatine Fuel, a university tested
supplement designed to increase body mass and muscular performance; and
Metabolift, a successful thermogenic formula. The Company plans to introduce a
line of sports nutrition products under a new proprietary brand name in the mass
market channel during fiscal 1998. 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,
are likely to shift their buying patterns to include the Company's vitamins,
herbs and other nutraceuticals.
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 Plus with Lutein, which is formulated for nutritional
support for the eyes, Coenzyme Q10, which is designed for cardiovascular health,
MaxiLIFE Glucosamine Sulfate and Chondroitin Sulfate Formula, which
nutritionally supports healthy bone and joint function, and the MaxiLIFE
Protector Series, the first premium supplement line to target the body's most
aging-prone areas. 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 (produced from nutrients from botanical sources that are
considered to have medicinal properties) have become increasingly important
categories across all distribution channels. 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 600 herbal and botanical
supplements which are produced at the Company's modern FDA registered Utah
Facility and sold under the Nature's Herbs and HealthCare Naturals brand names.
Nature's Herbs products include single herbs, such as saw palmetto, garlic,
ginseng and golden seal; traditional combinations, such as echinacea-golden
seal; standardized extracts, such as St. John's Wort Power, Gingko Power,
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
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Herbs recently introduced the first line of time-release herbs ever developed.
This advanced technology includes a unique micro-encapsulation process that
permits the Company's finely granulated herbal extracts to dissolve gradually
and consistently throughout the day. 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. The HealthCare Naturals product line also
continues to gain strength and recognition in the mass market channel.
Herb Teas. Through its Alvita product line, the Company offers almost 200
herb teas in both single use bags and bulk. Alvita is a leading brand of herb
tea and is one of the most recognizable tea brands sold through health food
stores. Founded in 1922, Alvita 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. 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.
Beginning in 1996, Alvita 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.
Network Marketing. Through Changes International, a network marketing
company which was acquired in November 1997, the Company develops, markets and
sells vitamins, herbs and nutritional supplements exclusively under the Changes
brand name. Changes International operates through a large sales force of
independent distributors located throughout the United States and Canada.
Changes International's products include Changes Relief, an advanced supplement
that nutritionally supports healthy bone and joint functions, and Perfor-Max, an
antioxidant formula containing grapeseed extract, pine bark extract and tumeric.
All of Changes International's products are specially formulated and packaged
and are manufactured by an independent contractor pursuant to the Company's
specifications solely for the network marketing channel and are not intended for
sale to retail outlets. During 1998, the Company intends to more than double the
size of Changes International's nutritional product line, beginning with the
introduction of eight new products during the first half of 1998.
Publishing. Through ARP, the Company publishes All Natural Muscular
Development, a high-quality physique 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.
All Natural Muscular Development currently has a monthly paid circulation of
approximately 104,000 readers. ARP is planning to offer a line of All Natural
Muscular Development sports nutrition products which are expected to be
introduced in the second half of 1998. 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, lutein, lycopene, L-glutathione, N-acetyl cysteine (NAC), lipoic acid
and an entirely new class of antioxidants, including polyphenols, flavonoids and
isoflavones; concentrated Coenzyme Q10; chondroitin sulfate; 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 1997, the Company introduced
over 560 products, with over 100 new products introduced in 1997. Representative
products introduced in 1997 include MaxiLIFE SOY Cocktail, an advanced
nutraceutical drink rich in soy and isoflavones; Creatine Fuel Chews, chewable
wafers
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containing one gram of pure creatine monohydrate; St. John's Power 0.3%, a
concentrated extract of St. John's wort; and caffeine-free Chinese Green Tea, a
popular drink consumed worldwide for its health benefits. In 1998, the Company
expects to introduce over 100 new products in the health food and mass market
retail channels, 18 of which have already been introduced. Representative
products introduced in 1998 include MaxiLIFE Joint Food, an advanced
nutraceutical which supports healthy cartilage and joint function, and Triple
Whey Fuel, a product containing high biological value whey protein. The Company
also plans to more than double the number of products offered through Changes
International's distribution network. The Company's research and development
expenses were $1.1 million in 1997, 1996 and 1995.
Sales and Distribution
The Company believes that its TWINLAB products have a presence in over 90%
of the health food stores in the United States, but that only approximately 12%
of such stores carry a comprehensive line of the Company's products. 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 79.3% of the Company's net sales in 1997. The Company's
distributor customers include GNC, Tree of Life, United Natural Foods, Inc.
("United Naturals"), Nature's Best, Inc. and other distributors that supply
retailers of vitamins, herbs 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 such distributors. The
Company is also currently expanding distribution into domestic military
exchanges.
Several of the Company's distributors, such as GNC, Tree of Life and
United Naturals, 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 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 19% and 23%,
respectively, of the Company's net sales in 1997. No other single customer
accounted for more than 10% of the Company's net sales in 1997. The largest
retail organization which sells the Company's products is GNC, with
approximately 3,400 stores.
The Company believes that substantial long-term growth opportunities exist
within the mass market distribution channel. The Company's major customers among
mass market retailers include Wal-Mart, Albertson's, Inc., American Stores,
Inc., Duane Reade Inc., Rite Aid Corporation and Safeway, Inc. Management is
continuing its efforts to expand its presence in mass market retail outlets and
recently hired a President of Mass Market Sales to oversee the Company's efforts
in this distribution channel.
Changes International currently markets and distributes 10 products
through a network of over 60,000 independent distributors in the United States
and Canada. The distributor network markets Changes International's products
directly to consumers.
Approximately 5.1%, or $10.9 million, of the Company's net sales in 1997
were derived from international sales originating from overseas distributor
organizations. The Company presently has distribution agreements covering
fourteen western European countries, including Great Britain, France, Belgium,
the Netherlands and the Scandinavian countries; six eastern European countries,
including Russia; nine Latin American countries, including Mexico, Brazil and
Argentina; eight Middle Eastern countries, including Israel and Saudi Arabia;
and several other countries in the Far East and the Caribbean. The Company has
also initiated new programs to qualify distributors in Italy and China.
Marketing
The Company's marketing strategy, which centers around an extensive
advertising and promotion program, has been a critical component of the
Company's growth, strong brand name recognition and leading position within the
nutritional supplement industry.
The Company's marketing and advertising expenditures were approximately
$15.9 million in 1997, $12.7 million in 1996 and $11.1 million in 1995. The
Company has budgeted $20.5 million for marketing and advertising expenditures in
fiscal 1998, a 29.2% increase over fiscal 1997. Approximately 45.5% of the
Company's 1998 advertising budget is slated for network and cable television
programming. Of the Company's $13.0 million in 1997 advertising expenditures,
approximately $4.8 million, or 37.3%, was spent on print advertising,
approximately $5.1 million, or 38.8%, was spent on television and radio
advertising and approximately $3.1 million, or 23.9%, was spent on production of
advertising materials. As the Company's customers align themselves with fewer
vendors of brand name
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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 categories in order to generate purchases by customers and also
communicates the points-of-difference between the Company's products and those
of its competitors.
Print advertisements continue to be an integral part of the Company's
advertising efforts. The Company regularly advertises in consumer magazines such
as Better Nutrition, Delicious, Vegetarian Times, Let's Live, Natural Health,
Nutrition Science Journal, New Age Journal, Muscle & Fitness and Flex. The
Company also plans to expand its print advertising into more widely circulated
publications such as GQ, Men's Health & Fitness and Reader's Digest.
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
shows, including Team Universe, Fitness America and Natural Eastern Classic, and
sponsorship of health-oriented television and radio programs. In addition, the
Company promotes its products at major industry trade shows and through in-store
point of sale materials. The Company also engages athletic personalities as well
as scientists to communicate on the Company's behalf with the trade and the
public and to promote the Company's products.
The Company extended its marketing efforts in 1997 to include a new site
on the World Wide Web at http://www.twinlab.com, which provides an overview of
the Company in addition to a product catalog. The site also provides a list of
retailers carrying the Company's products and is linked to other sites,
including those of the Company's Nature's Herbs division
(http://www.herbalvillage.com) and the publishing division
(http://www.musculardevelopment.com). Changes International's web site can be
reached at http://www.changesinternational.com. Information contained in any of
the Company's Web sites shall not be deemed to be a part of or incorporated by
reference into this Annual Report on Form 10-K.
Customer Sales Support
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 32 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 Company's products and to maximize exposure for TWINLAB, Nature's Herbs and
Alvita products. An additional sales and marketing staff supports Nature's Herbs
products and the servicing of customer needs. The Company is presently expanding
its administrative and sales infrastructure to service its increased sales in
the mass market channel. The Company also designs and supplies a broad range of
marketing literature, including brochures, pamphlets and in-store display
materials 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.
Changes International provides its independent distributors with a broad
range of informational materials, including product brochures, sales tools,
business and information forms, audio materials and initial distributor startup
kits. Changes International maintains a 24-hour toll-free phone line for
receiving distributors' orders and a separate customer service line to answer
product questions.
Manufacturing and Product Quality
Virtually all of the Company's TWINLAB products are manufactured at the
Company's 72,000 square foot manufacturing facility located in Ronkonkoma, New
York (the "New York Facility"). Herbal supplements and phytonutrients are
manufactured at the Company's 57,000 square foot FDA registered Utah Facility
and at the New York Facility. Herb teas are currently packaged by an independent
contractor and are warehoused at the Utah Facility. Changes International's
product line is currently manufactured and packaged by an independent contractor
pursuant to the Company's specifications and warehoused in Destin, Florida. The
Company's two modern manufacturing facilities provide the Company with the
capability to promptly meet customers' sales demands 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 1996, the Company completed an addition of approximately 8,500 square feet to
the Utah Facility to provide additional plant capacity for the operations of the
Nature's Herbs and Alvita divisions of the Company. In
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March 1998, the Company commenced construction of an 85,000 square foot addition
to its Utah Facility which will provide additional capacity for the production,
warehouse and distribution operations, as well as additional office space for
the Nature's Herbs and Alvita divisions. The cost of the project, including
land, construction and equipment, will total approximately $13.0 million. It
will be financed through a nine-month construction loan that will be converted
to a fifteen year mortgage. Management believes that the Company's New York and
Utah Facilities will be sufficient to enable the Company to meet sales demand
for the foreseeable future. If additional space is required, management believes
that it will have the option to lease or purchase additional space or to
construct an additional facility. See "Properties."
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 dosage forms. The Company
operates flexible manufacturing lines which enable it to efficiently and
effectively shift output among various products as dictated by customer demand.
The Company is capable of producing over 40 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 ten high-speed capsule and tablet packaging lines, two
high-speed liquid filling lines and two powder filling lines, which are capable
of operating simultaneously, at its New York and Utah Facilities. The Company
manufactures the powders used in its Ultra Fuel, Hydra Fuel and Nitro Fuel
single-serving sports drink products and 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 primarily for
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 1997.
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 capsule and tablet products
manufactured by the Company are visually inspected before being packaged.
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 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 63 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 five years.
The Company has a strong commitment to maintaining the quality of the
environment. All of the Company's plastic and corrugated cardboard 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
Vitamins and nutritional supplements are sold primarily through several
channels of distribution: health food stores, mass market retailers (drug store
chains, supermarkets and other mass merchandisers), and direct sales channels
(including network marketing and catalog distribution).
The Company's principal competitors in the health food store market
include Nutraceutical International Corporation, Weider Nutrition International,
Inc., Nature's Way Products, Inc., Solgar Vitamin and Herb Company, Inc. and
Nature's Plus Inc. 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.
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
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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.
In the mass market retail channel of distribution, the Company competes
with major private label and broadline brand manufacturers, including Leiner
Health Products Inc., Pharmavite Corp., Rexall Sundown, Inc. and NBTY, Inc.,
certain of which are larger and have access to greater resources than the
Company. The Company competes on the basis of customer service, product quality,
pricing and marketing support. The Company believes that it competes favorably
with other companies because of its (i) sales and marketing strategies, (ii)
customer service (including speed of delivery) and (iii) reputation as being a
supplier of quality products.
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.
Although Changes International competes with other health and nutritional
food companies, the Company believes Changes International's primary competition
stems from other network marketing companies. Changes International competes in
the recruitment of independent distributors with other network marketing
organizations whose product lines may or may not compete with its products.
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 United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency. These activities are
also regulated by various agencies of the states, localities and foreign
countries to which the Company's products are distributed and in which the
Company's products are sold. The FDA, in particular, regulates the formulation,
manufacture and labeling of vitamin and other nutritional supplements.
On October 25, 1994, the President signed into law the Dietary Supplement
Health and Education Act of 1994 ("DSHEA"). This new law revises the provisions
of the Federal Food, Drug, and Cosmetic Act (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. The substantial majority of the products marketed by the Company are
classified as dietary supplements under the FFDC Act.
Both foods and dietary supplements are subject to the Nutrition Labeling
and Education Act of 1990 (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 either pre-approved by the
FDA or the subject of substantial government scientific publications and a
notification to the FDA. To date, the FDA has approved the use of only limited
health claims for dietary supplements. 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
preapproval 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").
The FDA issued final dietary supplement labeling regulations in 1997 that
require the Company to revise most of its product labels by 1999. The
regulations also currently require the Company to submit notification to the FDA
of all "statements of nutritional support," a process that the Company has not
fully completed.
Advertising and label claims for dietary supplements and conventional
foods 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 regulations or FTC decisions will not
restrict the permissible scope of such claims.
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
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such foreign governmental regulations is generally the responsibility of the
Company's distributors for those countries. These distributors are independent
contractors over whom the Company has limited control.
As a result of the Company's efforts to comply with applicable statutes
and regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
The Company's 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. See "Legal Proceedings."
Ma Huang
Approximately 15 of the Company's products include an herb known as "Ma
Huang," which contains naturally-occurring ephedrine. Certain of such products
also contain caffeine or other central nervous system stimulants. Such products
accounted for approximately 13.0% of the Company's net sales in 1997. The
Company's products which contain Ma Huang are generally marketed for
bodybuilding, weight loss, sports nutrition and other purposes, including
increased endurance and energy, generally in conjunction with diet or exercise,
and as natural alternatives to over-the-counter medications.
Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects. The
FDA has proposed regulations relating to the sale of dietary supplements
containing Ma Huang which, if promulgated in final form, would require the
Company to substantially reformulate and relabel almost all of its Ma Huang
products and would limit potency, require warnings, prohibit certain combination
products and would preclude the Company from making bodybuilding and weight loss
claims for such products. Comments from industry participants and inquiries from
Committees of the United States Congress have been filed with the FDA
challenging the scientific and legal basis for the proposed regulations. The
Company is not able to predict whether the FDA's proposed regulations will
become final. There can be no assurance as to the effect that any resulting
reformulation, relabeling or change in the marketing of the Company's products
would have on the sales of such products. In 1996, the Company introduced a line
of Ma Huang-free products as alternatives to certain of its bodybuilding and
sports nutrition products which currently contain Ma Huang. The Company's net
sales of Ma Huang-free products were $1.9 million for fiscal 1997. There can be
no assurance that sales of such alternative products would offset any decrease
in sales attributable to any reformulation or relabeling of the Company's Ma
Huang products.
A number of state and local governments have proposed or passed
legislation prohibiting or regulating the sale of Ma Huang products. The
Company's products containing Ma Huang may become subject to further federal,
state, local or foreign laws or regulations, which could also require the
Company to reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or relabel its products with different warnings or
revised directions for use. There can be no assurance that the loss of sales of
the Company's Ma Huang products would not have a material adverse effect on the
Company. See "Legal Proceedings."
Employees
At December 31, 1997, the Company employed 634 persons, of which 134 were
involved in executive, sales and administrative activities. The balance of the
Company's employees were engaged in production, packaging and shipping
activities. Changes International also subcontracts an additional 67 persons
from an independent personnel agency. None of the Company's employees are
covered by a collective bargaining agreement, and management considers relations
with its employees to be good.
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, Changes and Fuel family of trademarks,
and has rights to
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use other names material to its business. In addition, the Company has obtained
trademarks for various of its products and has approximately 289 trademark
registrations with the United States Patent and Trademark Office for TWINLAB,
Nature's Herbs, Alvita and Changes 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.
Item 2. PROPERTIES
The Company owns a modern vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. The 72,000 square foot New York
Facility also houses the Company's executive offices. The Company recently
signed a lease for approximately 21,000 square feet of space in a modern office
building in Hauppauge, New York and expects to move all of its corporate and
most of its administrative offices to this location in the second quarter of
fiscal 1998. The Company leases 26,300 square feet of warehouse space in
Ronkonkoma, 60,000 square feet of warehousing space in Hauppauge, and 5,000
square feet of office space in Ronkonkoma. In addition, the Company owns the
modern FDA-registered 57,000 square foot Utah Facility. The Utah Facility, which
was initially constructed in 1993, houses office, manufacturing and warehousing
facilities for the operations of the Nature's Herbs division and office and
warehousing facilities for the operations of the Alvita division. The Company
also leases 21,500 square feet of warehouse and office space in Destin, Florida
for Changes International.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. In 1996, the Company completed an
addition of approximately 8,500 square feet to the Utah Facility at a cost of
approximately $700,000 to provide additional plant capacity for the operations
of the Nature's Herbs and Alvita divisions of the Company. In March 1998, the
Company commenced construction of an 85,000 square foot addition to its Utah
Facility which will provide additional capacity for production, warehouse and
distribution operations, as well as additional office space for the Nature's
Herbs and Alvita divisions. The cost of the project, including land,
construction and equipment, will total approximately $13.0 million,
approximately $8.0 million of which will be financed through a nine-month
construction loan that will be converted to a fifteen year mortgage. Management
believes that the Company's New York and Utah Facilities will be sufficient to
enable the Company to meet sales demand for the foreseeable future. If
additional space is required, management believes that it will have the option
to lease or purchase additional space or to construct an additional facility.
Item 3. LEGAL PROCEEDINGS
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. The Company may be subjected to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. While such claims to date have
not been material to the Company and the Company maintains product liability
insurance, there can be no assurance that product liability claims and the
resulting adverse publicity will not have a material adverse effect on the
Company. The Company carries insurance in the types and amounts that management
considers reasonably adequate to cover the risks associated with its business.
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.
The Company has been a defendant in court actions seeking damages for
alleged personal injuries resulting from products containing allegedly
contaminated added manufactured L-Tryptophan. To date, 132 of the 133
L-Tryptophan actions brought against the Company (the "L-Tryptophan Actions")
have been dismissed or settled at no cost to the Company pursuant to an
indemnification agreement (the "Indemnification Agreement") between the Company
and a U.S. subsidiary of the Japanese manufacturer of the allegedly contaminated
ingredient. The Company believes that few new lawsuits are likely to be brought
in view of applicable statutes of limitation and, in light of the
Indemnification Agreement and the resolution of virtually all of the
L-Tryptophan Actions at no cost to the Company, that the prospect of the
remaining L-Tryptophan Actions and any possible future actions having a material
adverse effect on the Company's results of operations or financial condition is
remote. The Company ceased marketing products containing added manufactured
L-Tryptophan in 1990.
The Company has been named as a defendant in three currently pending
lawsuits alleging that its Ma Huang containing products caused injuries and/or
damages, including a proceeding seeking class action certification. The Company
intends to vigorously defend these lawsuits. The Company believes that such
claims, if successful, would not have a material adverse effect on the financial
condition or
13
<PAGE> 18
results of operations of the Company. There can be no assurance that the Company
will not be subject to further private civil actions with respect to its Ma
Huang products.
The State of California and the NRDC filed lawsuits against the Company
and a large number of manufacturers of dietary supplements containing calcium,
claiming that naturally-occurring lead levels in these supplements exceed
acceptable levels under California law ("Proposition 65"). The NRDC settled its
suit with the manufacturers, including the Company. The State of California
settled the first of two phases of its lawsuit with the Company and the other
manufacturers and is engaged in settlement discussions with respect to the
remainder of the case. The Company also received notice of a possible State of
California legal claim relating to alleged toxic impurities in fish oil
products. No action has been filed. There can be no assurance that the Company
will not be the subject of future Proposition 65 claims asserted by the State of
California or private parties.
The Company is presently engaged in various other legal actions which
arise in the ordinary course of business. Although ultimate liability cannot be
determined at the present time, the Company believes that the amount of any such
liability, if any, 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 or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1997, no matters were submitted
to a vote of security holders of the Company.
14
<PAGE> 19
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq National Market
since the Company's initial public offering (the "IPO") of its common stock, par
value $1.00 per share (the "Common Stock"), in November 1996, in which 8,500,000
shares of Common Stock were issued by the Company. Prior to the IPO, there was
no public market for the Common Stock. On March 19, 1998, the last reported
sales price of the Company's Common Stock as reported on the Nasdaq National
Market was $38.875. As of March 19, 1998, there were 119 holders of record of
the Company's Common Stock. The high and low sale prices for the Common Stock as
reported by the Nasdaq National Market for the periods since the Company's
initial public offering in November 1996 are summarized below.
<TABLE>
<CAPTION>
High Low
---- ---
1996
<S> <C> <C>
Fourth Quarter (from November 14, 1996) $12.375 $11.375
1997
First Quarter............. $15.250 $12.000
Second Quarter............ 24.000 12.125
Third Quarter............. 24.750 19.000
Fourth Quarter............ 25.375 17.750
</TABLE>
From 1993 until May 7, 1996, 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 on May 7, 1996.
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. Twinlab conducts its business through
its direct and indirect subsidiaries and has no operations of its own. The
principal assets of Twinlab are the capital stock of its direct and indirect
subsidiaries, Twin, ARP and Changes International. Accordingly, Twinlab has no
independent means of generating revenues. As a holding company, Twinlab'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 is the borrower restrict
the payment of dividends and the making of loans, advances or other
distributions to Twinlab, except in certain limited circumstances. 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.
On May 7, 1996, Twin 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 and Chase Securities Inc.
(collectively, the "Initial Notes Purchasers") for $100,000,000 in cash (less
the Initial Notes Purchasers' discount of $3,000,000) (the "Note Offering").
Such securities were sold in a transaction that was exempt from registration
under Section 4(2) of the Securities Act. Subsequently, pursuant to a
Registration Statement on Form S-4, on October 28, 1996, the Company consummated
a fully-subscribed registered exchange offer under the Securities Act for the
Old Notes and issued in exchange therefor $100,000,000 aggregate principal
amount of its registered 10 1/4% Senior Subordinated Notes due 2006
(collectively with the Old Notes, the "Notes").
On May 7, 1996, Twinlab sold (i) an aggregate of 30,000 shares of its 14%
Non-Voting Senior Cumulative Preferred Stock (the "Senior Preferred Stock") to
five investors (the "Senior Preferred Stock Purchasers") for $30,000,000 in
cash, (ii) 37,000 shares of its 11 1/4% Non-Voting Junior Cumulative Preferred
Stock (the "Junior Preferred Stock") to Green Equity Investors II, L.P. ("GEI")
for $37,000,000 in cash, (iii) 1,295,000 shares of Common Stock to the Senior
Preferred Stock Purchasers for an aggregate of $700,000 in cash, (iv) 8,880,000
shares of Common Stock to GEI for an aggregate of $4,800,000 in cash, and (v) an
aggregate of 8,325,000 shares of 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. In
connection with the consummation of the IPO, in November 1996, the Company
redeemed all of the outstanding shares of Senior Preferred Stock and Junior
Preferred Stock, which together had an aggregate liquidation preference of $67.0
million, plus accrued and unpaid dividends thereon.
15
<PAGE> 20
On November 12, 1997, Twinlab issued an aggregate of 312,500 shares of
Common Stock to the shareholders of Changes International as the stock portion
of the purchase price for all of the outstanding common stock of Changes
International; the cash portion of such purchase price was $7.9 million,
including acquisition costs. Such Common Stock was sold in a transaction that
was exempt from registration under Section 4(2) of the Securities Act.
Item 6. SELECTED FINANCIAL DATA
The selected historical financial data as of December 31, 1997, 1996,
1995, 1994 and 1993 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, 1997 and 1996, and for each of the three years in
the period ended December 31, 1997 is included elsewhere herein. The selected
financial data below also presents pro forma financial data relating to (i) the
Company's conversion of tax status from an "S" corporation to a "C" corporation
as a result of the Transactions (as hereinafter defined) and (ii) the
Transactions and the IPO. The selected historical 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 in Item 14 to this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996(a) 1995 1994 1993
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.......................................... $213,229 $170,075 $148,735 $117,342 $99,897
Gross profit....................................... 92,282 70,248 58,803 47,095 37,766
Operating expenses................................. 43,433 30,784 27,191 23,022 21,125
Income from operations............................. 48,849 39,464 31,612 24,073 16,641
Interest expense................................... 12,315 10,005 866 761 487
Nonrecurring and transaction expenses.............. -- 15,700(b) 656 -- --
Net income......................................... $ 22,671 $ 11,796(b) $ 30,224 $ 21,693 $16,676
======== ======== ======== ======== =======
Basic and diluted net income per share(c).......... $ 0.84 $ 0.26(b) $ 1.12 $ 0.80 $ 0.62
======== ======== ======== ======== =======
Diluted weighted average shares outstanding(d)..... 27,078 27,000 27,000 27,000 27,000
PRO FORMA RELATING TO CHANGE IN TAX STATUS:(e)
Historical income before provision for income taxes
and extraordinary item.......................... $ 14,384 $ 30,464 $ 21,938 $16,906
Pro forma provision for income taxes............... 5,466 12,060 9,087 6,644
-------- -------- -------- -------
Pro forma income before extraordinary item......... 8,918 18,404 12,851 10,262
Extraordinary item................................. (1,792)(f) -- -- --
-------- -------- -------- -------
Pro forma net income............................... $ 7,126 $ 18,404 $ 12,851 $10,262
======== ======== ======== =======
Basic and diluted income before extraordinary item
per share(c).................................... -- $ 0.15 $ 0.68 -- --
======== ========
Basic and diluted net income per share(c).......... $ 0.08 $ 0.68
======== ========
PRO FORMA FOR THE TRANSACTIONS AND THE IPO:(g)
Net income......................................... -- $ 16,729 $ 11,429 -- --
======== ========
Basic and diluted net income per share............. -- 0.62 0.42 -- --
======== ========
OTHER DATA:
Income from operations margin(h)................... 22.9% 23.2% 21.3% 20.5% 16.7 %
Capital expenditures............................... $ 3,842 $ 2,252 $ 2,641 $1,786 $ 4,904
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1997 1996(a) 1995 1994 1993
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital (excluding cash and cash
equivalents, marketable securities and current
debt)........................................... $ 57,474 $ 43,569 $ 39,405 $ 35,056 $25,437
Property, plant and equipment, net................. 13,958 14,157 13,036 12,071 10,732
Total assets....................................... 171,324 141,537 75,309 64,706 55,587
Total debt (including current debt)................ 114,238 120,654 8,792 9,288 8,039
Shareholders' equity............................... 30,344 1,688 55,405 48,671 40,543
</TABLE>
(footnotes on following page)
(a) The Blechman Brothers, their parents, David and Jean Blechman, Stephen L.
Welling, the President of the Nature's Herbs division of the Company
(collectively, the "Stockholders"), GEI and certain other parties 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 Twinlab
for aggregate consideration of $4.8 million and shares of Junior Preferred
Stock for aggregate consideration of $37.0 million, (ii) certain other
investors acquired 7% of the Common Stock of Twinlab for aggregate
consideration of $0.7 million and shares of Senior Preferred Stock
(together with the Junior Preferred Stock, the "Preferred Stock") for
aggregate consideration of $30.0 million, (iii) the Senior Executive
Officers exchanged certain of their shares of common stock of Twin
(formerly known as Natur-Pharma Inc.) for 45% of the outstanding shares of
Common Stock of Twinlab valued at $4.5 million, (iv) Twinlab purchased all
of the remaining shares of common stock of Twin from the Stockholders for
cash, resulting in Twin becoming a wholly owned subsidiary of Twinlab. The
total cash consideration that the Stockholders received was approximately
$212.5 million, the majority of which was paid to David and Jean Blechman.
The transactions described above are hereinafter referred to as the
"Acquisition." Concurrently with the consummation of the Acquisition, the
Company entered into a credit facility (the "Original Credit Facility")
(which provided for a term loan facility in the amount of $53.0 million
and a revolving credit facility in the amount of $15.0 million) and issued
$100.0 million principal amount of its Old Notes in the Note Offering
(collectively with the Acquisition and the Original Credit Facility, the
"Transactions"). The net cash proceeds of the Note Offering were used,
together with borrowings under the Original Credit Facility, the proceeds
from the issuance of the Common Stock and Preferred Stock of Twinlab 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. The net proceeds of the IPO
of approximately $93.7 million, together with available cash resources of
the Company and approximately $20.0 million of borrowings under the
Amended and Restated Credit and Guarantee Agreement, dated November 15,
1996 (the "Revolving Credit Facility"), were used to repay all of the
Company's outstanding indebtedness under the Original Credit Facility and
to redeem all of the outstanding shares of Preferred Stock. See Note 1 to
the Consolidated Financial Statements of the Company included under Item
14 of this Annual Report.
(b) Reflects $15.3 million of nonrecurring non-competition agreement expense
and $0.4 million of Transaction expenses.
(c) Basic and diluted income per share has been computed by dividing net
income (and pro forma income before extraordinary item and pro forma net
income for 1995 and 1996), after reduction for Preferred Stock dividends,
by the applicable weighted average shares outstanding.
16
<PAGE> 21
(d) Diluted weighted average shares outstanding for 1993 through 1996
represents the number of equivalent shares outstanding after giving
retroactive effect to Twinlab's 18.5 for 1 stock split (effected in the
form of a stock dividend) and assumes that the 10,175,000 shares of Common
Stock issued in connection with the Acquisition and the 8,500,000 shares
of Common Stock issued in connection with the Company's IPO were
outstanding. See Notes to the Consolidated Financial Statements of the
Company included under Item 14 of this Annual Report.
(e) Prior to May 1996, 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.
(f) Represents the write-off of previously deferred finance costs incurred in
connection with the Original Credit Facility (the "Extraordinary Item").
(g) The unaudited pro forma results of operations assume the Transactions and
the subsequent IPO occurred on January 1, 1995, and exclude the effect of
(i) the nonrecurring non-competition agreement expense, (ii) the
Transaction expenses, (iii) the Extraordinary Item and (iv) the dividends
paid on the Preferred Stock which was redeemed with a portion of the net
proceeds of the IPO, and reflects the additional interest expense relating
to the financing of the Acquisition and the change in tax status described
in Note (e) above. This 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 and the subsequent IPO
in fact occurred on January 1, 1995.
(h) Income from operations margin equals income from operations as a
percentage of net sales.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial Data" and the audited Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Annual Report.
Results of Operations
The Company operates in one business segment, the manufacture and
marketing of brand name nutritional supplements. Within this segment, the
Company operates in three primary business areas: the TWINLAB division, the
herbal products division, and the network marketing division. Products sold by
the TWINLAB division include vitamins, minerals, amino acids, fish and marine
oils, sports nutrition products and special formulas primarily under the TWINLAB
brand name. The herbal products division includes a full line of herbal
supplements and phytonutrients marketed by the Nature's Herbs division and a
full line of herb teas marketed by the Alvita division. The Company's network
marketing activities are conducted through Changes International, which was
acquired by the Company in November 1997. The Company's publishing activities
are conducted through ARP.
The following table sets forth, for the periods indicated, certain
historical income statement and other data for the Company andalso sets forth
certain of such data as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
TWINLAB Division..................... $174.9 82.0% $150.4 88.4% $132.2 88.8%
Herbal Supplements &
Phytonutrients..................... 41.1 19.3 23.1 13.6 19.8 13.3
Herb Teas............................ 8.4 3.9 8.1 4.8 5.8 3.9
Network Marketing.................... 7.0 3.3 NA NA NA NA
Publishing........................... 5.2 2.4 5.4 3.1 4.8 3.3
------ ------ ------ ------ ------ ------
Gross Sales.......................... 236.6 110.9 187.0 109.9 162.6 109.3
Discounts & Allowances............... (23.4) (10.9) (16.9) (9.9) (13.9) (9.3)
------ ------ ------ ------ ------ ------
Net Sales............................ 213.2 100.0 170.1 100.0 148.7 100.0
Gross Profit......................... 92.3 43.3 70.2 41.3 58.8 39.5
Operating Expenses................... 43.4 20.4 30.8 18.1 27.2 18.3
Income From Operations............... 48.8 22.9 39.5 23.2 31.6 21.3
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales for fiscal 1997 were $213.2 million, an increase of
$43.1 million, or 25.4%, as compared to net sales of $170.1 million for fiscal
1996. The 25.4% increase was attributable to increased sales in each of the
Company's product categories other than publishing, partially offset by an
increase in sales discounts and allowances which was primarily due to the
Company's increased sales volume. Changes International contributed gross sales
of $7.0 million after its acquisition in November 1997. Gross sales of TWINLAB
products contributed $174.9 million, an increase of $24.5 million or 16.3% as
compared to $150.4 million for fiscal 1996. This increase was primarily due to
the expansion of established accounts, increased sales of existing products, new
product introductions and product specific advertising. Herbal supplements and
phytonutrients contributed $41.1 million, an increase of $18.0 million, or
78.2%, as compared to $23.1 million for fiscal 1996 and herb teas contributed
$8.4 million as compared to $8.1 million for fiscal 1996. The gross sales
increase in herbal supplements and phytonutrients was primarily due
to the expansion of established
17
<PAGE> 22
accounts in domestic health food stores, improved business development in the
mass market channel of distribution, increased sales of existing products and
new product introductions.
Gross Profit. Gross profit for fiscal 1997 was $92.3 million, which
represented an increase of $22.1 million or 31.4%, as compared to $70.2 million
for fiscal 1996. Gross profit margin was 43.3% for 1997, as compared to 41.3%
for fiscal 1996. The overall increase in gross profit was primarily attributable
to the Company's higher sales volume for fiscal 1997 as compared to fiscal 1996.
The increase in gross profit margin for fiscal 1997 as compared to fiscal 1996
was due primarily to a more favorable product mix to higher margin sports
nutrition and special formula products, to higher gross profit margins on
recently introduced new product formulations and product line extensions, to
lower unit manufacturing overhead as a result of overhead costs increasing at a
rate lower than sales and to higher gross margins on sales through the network
marketing business, partially offset by an increase in sales discounts and
allowances.
Operating Expenses. Operating expenses were $43.4 million for fiscal 1997,
representing an increase of $12.6 million, or 41.1%, as compared to $30.8
million for fiscal 1996. As a percent of net sales, operating expenses increased
from 18.1% for fiscal 1996 to 20.4% for fiscal 1997. The increase in operating
expenses and operating expenses as a percent of net sales was primarily
attributable to increased selling and marketing expenses and higher general and
administrative expenses due to increased levels of promotional and sales
activities, including commission expense relating to Changes International, and
the hiring of additional administrative staff.
Income from Operations. Income from operations was $48.8 million for
fiscal 1997, representing an increase of $9.3 million or 23.8% as compared to
$39.5 million for fiscal 1996. Income from operations margin decreased to 22.9%
of net sales for fiscal 1997, as compared to 23.2% of net sales for fiscal 1996.
The increase in income from operations for 1997 was primarily due to the
Company's higher sales volume together with higher gross margins, offset in part
by higher operating expenses. The decrease in operating margin as a percent of
net sales in 1997 was due to higher operating expenses as a percent of net
sales, partially offset by increased sales volumes together with higher gross
margins.
Other Expense. Other expense was $12.1 million for fiscal 1997, as
compared to $25.1 million for fiscal 1996. The net decrease of $13.0 million is
primarily attributable to $15.7 million of nonrecurring non-competition
agreement expense and transaction expenses which were incurred in 1996 in
connection with the Transactions offset by an increase in net interest expense
of $2.7 million resulting from increased borrowings during 1997.
Fiscal 1996 Compared to Fiscal 1995
Net Sales. Net sales for fiscal 1996 were $170.1 million, an increase of
$21.4 million, or 14.3%, as compared to net sales of $148.7 million for fiscal
1995. The 14.3% increase was attributable to increased sales in each of the
Company's product categories, partially offset by an increase in sales discounts
and allowances which was primarily due to the Company's increased sales volume.
Gross sales of TWINLAB products contributed $150.4 million, an increase of $18.2
million, or 13.7%, as compared to $132.2 million for fiscal 1995. This increase
was primarily due to increased demand for products sold under the TWINLAB brand
name, which increase was due in substantial part to the successful introduction
of a number of new special formula and sports nutrition products. Herbal
supplements and phytonutrients contributed $23.1 million, an increase of $3.3
million, or 16.4%, as compared to $19.8 million for fiscal 1995 and herb teas
contributed $8.1 million, an increase of $2.3 million, or 41.5%, as compared to
$5.8 million for fiscal 1995. The gross sales increase in both herbal
supplements and phytonutrients and herb teas was primarily due to increased
demand for both Nature's Herbs and Alvita products, which increase was due in
part to the successful introduction of new products, continued strong consumer
interest in existing products and increased penetration of both Nature's Herbs
and Alvita products into domestic health food stores. Publishing contributed
gross sales of $5.4 million for fiscal 1996, as compared to $4.8 million for
fiscal 1995.
Gross Profit. Gross profit for fiscal 1996 was $70.2 million, which
represented an increase of $11.4 million, or 19.5%, as compared to $58.8 million
for fiscal 1995. Gross profit margin was 41.3% for fiscal 1996 as compared to
39.5% for fiscal 1995. The overall increase in gross profit was primarily
attributable to the Company's higher sales volume for fiscal 1996 as compared to
fiscal 1995. The increase in gross profit margin for fiscal 1996 as compared to
fiscal 1995 was due primarily to higher gross profit margins on recently
introduced new product formulations and lower unit manufacturing overhead as a
result of overhead costs increasing at a rate lower than sales due to
manufacturing efficiencies, partially offset by an increase in sales discounts
and allowances.
Operating Expenses. Operating expenses were $30.8 million for fiscal 1996,
representing an increase of $3.6 million, or 13.2%, as compared to $27.2 million
for fiscal 1995. As a percent of net sales, operating expenses declined from
18.3% for fiscal 1995 to 18.1% for fiscal 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
sales for fiscal 1996. The decline in operating expenses as a percent of net
sales was due to the Company's ability to maintain its research and development
expenditures and a substantial portion of its
18
<PAGE> 23
general and administrative costs at approximately the same level as in fiscal
1995, while substantially increasing the Company's sales volume.
Income from Operations. Income from operations was $39.5 million for
fiscal 1996, representing an increase of $7.9 million, or 24.8%, as compared to
$31.6 million for fiscal 1995. Income from operations margin increased to 23.2%
of net sales for fiscal 1996, as compared to 21.3% of net sales for fiscal 1995.
The increase in income from operations and income from operations margin was
primarily due to the Company's higher sales volume, higher gross margins and
lower operating expenses as a percent of net sales for fiscal 1996.
Other Income (Expense). Other expense was $25.1 million for fiscal 1996,
as compared to $1.1 million for fiscal 1995. The net increase is primarily
attributable to a nonrecurring $15.3 million charge relating to the write-off of
certain non-competition agreements and a $9.1 million increase in interest
expense which resulted from increased borrowings.
Income taxes. The Company consisted of "S" corporations for the year ended
December 31, 1995, 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 year ended December 31, 1995, 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, became subject to federal and state income taxes.
Liquidity and Capital Resources
For fiscal 1997, cash provided by operating activities was $11.4 million,
as compared to $25.5 million for fiscal 1996 and $26.8 million for fiscal 1995.
The decrease in fiscal 1997 compared to fiscal 1996 was primarily due to higher
accounts receivable and inventory balances due to higher levels of sales volume
as well as the timing of payments of accrued expenses and other current
liabilities. The decrease in fiscal 1996 compared to fiscal 1995 was primarily
due to higher interest expense, substantially offset by higher income from
operations. Cash used in financing activities was $6.3 million for fiscal 1997,
and represented repayment of certain outstanding indebtedness. Cash used in
financing activities for fiscal 1996 was $28.0 million, reflecting the net cash
effect of the Transactions (including the payments to the Stockholders made
pursuant to the Acquisition) and the IPO, and the application of the proceeds
therefrom, the repayment of $6.0 million of outstanding indebtedness and
distributions of $8.9 million to the Stockholders prior to the consummation of
the Acquisition. Cash used in financing activities for fiscal 1995 was $24.0
million and primarily consisted of distributions to the Stockholders of $23.5
million.
Capital expenditures in 1997 were $3.8 million ($3.1 million of which was
for equipment that was subsequently sold and leased back) and $2.3 million and
$2.6 million for fiscal 1996 and 1995, respectively. Historical capital
expenditures were primarily used to purchase production equipment, expand
capacity and improve manufacturing efficiency. Capital expenditures are expected
to be approximately $17.0 million during fiscal 1998, of which approximately
$13.0 million will be used to expand the Company's Utah Facility (approximately
$8.0 million of which will be financed by a nine-month construction loan that
will be converted to a fifteen-year mortgage) and the remainder of which will be
used primarily to purchase manufacturing equipment and computer hardware and
software. The Company estimates that its historical level of maintenance capital
expenditures has been approximately $0.5 million per fiscal year.
On November 12, 1997, the Company acquired Changes International for a
purchase price (including fees and expenses) of approximately $13.7 million,
consisting of $7.9 million in cash and 312,500 shares of Twinlab Common Stock.
The cash portion of the purchase price was financed through borrowings under the
Company's Revolving Credit Facility. Changes International operates as a network
marketer of nutritional supplements through independent distributors located
primarily throughout the United States and Canada. The acquisition was recorded
using the purchase method of accounting.
Twinlab has no operations of its own and accordingly has no independent
means of generating revenue. As a holding company, Twinlab'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. The
Indenture relating to the Notes and the Revolving Credit Facility impose upon
the Company certain financial and operating covenants, including, among others,
requirements that the Company maintain certain financial ratios and satisfy
certain financial tests, limitations on capital expenditures and restrictions on
the ability of the Company to incur debt, pay dividends or take certain other
corporate actions. The Company was in compliance with all such covenants as of
December 31, 1997.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for at least the next 18 to 24
months. The Company's capital resources
19
<PAGE> 24
and liquidity are expected to be provided by the Company's cash flow from
operations, borrowings under the Revolving Credit Facility and the proceeds from
the Offering. As of December 31, 1997, approximately $36.3 million of
borrowings were available under the Revolving Credit Facility for working
capital requirements and general corporate purposes.
One of the Company's business strategies is to actively pursue acquisition
opportunities that complement or extend its existing products, expand its
distribution channels 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. Up to $35.0 million of borrowings
under the Revolving Credit Facility is available to fund acquisitions subject to
certain conditions and reductions (approximately $21.3 million of which was
available as of December 31, 1997). 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.
On March 17, 1998, the Company filed a registration statement with the
Securities and Exchange Commission to sell up to 8 million shares of Common
Stock. Of the Common Stock to be sold in the Offering, 4 million shares will be
sold by the Company and 4 million shares will be sold by certain stockholders of
the Company. There can be no assurance that the Offering will be consummated.
On March 17, 1998, the Company entered into a definitive agreement to
acquire substantially all of the assets and assume certain liabilities of
Bronson. The Company expects that the closing of the Bronson Acquisition will
occur during the second quarter of fiscal 1998. Bronson's net sales and
operating income for the fiscal year ended December 31, 1997, were approximately
$32.1 million, and $9.5 million, respectively. The purchase price is $55.0
million in cash, subject to certain adjustments, which the Company intends to
finance with a portion of the net proceeds of the Offering.
In addition, the Company intends to use approximately $40.1 million of the
net proceeds from the Offering to redeem $35.0 million in outstanding principal
amount of Notes at a redemption price equal to 109-1/2% of the principal amount
thereof plus accrued and unpaid interest thereon to the date of redemption (the
"Redemption") and approximately $5.6 million to reduce outstanding borrowings
under the Company's Revolving Credit Facility (including accrued and unpaid
interest thereon). In connection with the Redemption, the Company will record an
extraordinary charge of approximately $2.9 million (net of tax benefit of
approximately $1.8 million) relating to the payment of premiums on the Notes and
the write-off of a pro rata portion of deferred finance costs.
The Company is currently considering the possibility of making an offer
(the "Offer") to purchase for cash all Notes not otherwise purchased in the
Redemption. The Company would finance any such Offer with borrowings under a new
bank credit facility, any remaining excess proceeds of the Offering, available
cash, or any combination of the foregoing. There can be no assurance that the
Company will be in a position to enter into a new bank credit facility for the
purposes of making an Offer or that other financing will be available. Moreover,
the Company's determination to make an Offer would be subject to financial,
market and other conditions and there can be no assurance that the Company will
make an Offer.
Recent Trends
In the first quarter of 1998, the Company received a substantial increase
in orders for its herbal supplement products, including a significant increase
in orders from Wal-Mart for herbal products which are being sold under
Wal-Mart's proprietary Spring Valley brand name. This increase is due to
increased demand at the retail level and to the fact that the number of SKU's
sold under this brand name at Wal-Mart more than doubled during the first
quarter of 1998. The Company has made several adjustments to its operations to
accommodate this increased demand for its herbal products, including the use of
production capacity at the New York Facility to produce herbal supplement
products and the installation of additional manufacturing equipment at both the
New York and Utah Facilities. As a result of these operational adjustments and
the Company's decision to reduce promotions offered to distributors during the
first quarter of 1998, the Company's mix of product sales during the first
quarter of 1998 will differ substantially from the product mix in the comparable
period in 1997. For the first quarter of 1998, herbal supplements will represent
a substantially greater portion of the Company's total net sales, and sales of
vitamins, minerals and nutritional supplements products will represent a smaller
percentage of total net sales and decline significantly from the comparable
period in 1997. Nevertheless, the Company anticipates that its overall growth
rate in net sales in the first quarter of 1998 will be comparable to that
achieved in the first quarter of 1997, as the increased sales of herbal products
will more than offset the decreased sales of vitamins, minerals and nutritional
supplements (all of the foregoing first quarter comparisons exclude the impact
of Changes International). The Company believes that there has been no material
decline in retail sales of its vitamin, mineral and nutritional supplement
products during the first quarter of 1998, as there has been adequate inventory
of its products in the distribution channel. The Company plans to adjust its
production mix during the second quarter of 1998 to increase the production of
vitamins, minerals and nutritional supplements compared to the first quarter of
1998, as
20
<PAGE> 25
additional capacity comes on line and production schedules are adjusted, and
expects to realize increased sales of these products during the second quarter
of 1998 as compared to the first quarter of 1998.
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. 130, "Reporting Comprehensive Income", SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
and SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." These pronouncements are not expected to have material
impact on the Company's financial statements.
Year 2000
The Company recognizes the importance of ensuring that neither its
customers nor its business operations are disrupted as a result of Year 2000
software failures. The Company is communicating with customers, suppliers,
financial institutions and other vendors with which it does business to
coordinate Year 2000 conversion efforts. At the present time, the Company
believes that its systems are substantially Year 2000 compliant and does not
expect Year 2000 issues to materially affect its products, services, competitive
position or financial performance. However, there can be no assurance that this
will be the case. The ability of third parties with whom the Company transacts
business to adequately address their Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of such third parties to
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto are presented
under Item 14 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE
Not applicable.
PART III
Information required under PART III (Items 10, 11, 12, and 13) is
incorporated herein by reference to the Company's definitive proxy statement to
be filed with the Securities and Exchange Commission within 120 days after the
year covered by this Form 10-K with respect to its Annual Meeting of
Stockholders to be held on June 17, 1998.
21
<PAGE> 26
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2). Financial Statements and Financial Statement Schedule:
Page
TWINLAB CORPORATION AND SUBSIDIARIES
Independent Auditors' Report.......................................F-1
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1996...F-2
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1996 and 1995...............................F-3
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995...................F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1997, 1996 and 1995........................ F-5
Notes to Consolidated Financial Statements.....................F-6
(2) Financial Statement Schedule
For the Three Years Ended December 31, 1997
Schedule II - Valuation and Qualifying Accounts....................S-1
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this Report.
(c) Exhibits:
Exhibit
Number Description of Exhibit
2.1 -- 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 GEI (the "Stock Purchase and Sale
Agreement") (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, dated June 4, 1996, as amended,
filed by the Registrant, Registration No. 333-05191; "Twinlab S-1").
2.1.1 -- Amendment to the Stock Purchase and Sale Agreement, dated May 6,
1996 (incorporated by reference to Exhibit 2.1.1 to Twinlab S-1).
3.1 -- Second Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.4 to the
Registration Statement on Form S-4, dated June 25, 1996, as amended,
filed by Twin, Registration No. 333-06781; "Twin S-4").
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.5 to Twin S-4).
4.1 -- Indenture, dated May 7, 1996, among Twin, and ARP and the Registrant
(together, 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 and the 10 1/4% Senior
Subordinated Notes due 2006 issued in exchange therefor
(incorporated by reference to Exhibit 4.2 to Twin S-1).
4.2 -- First Supplemental Indenture, dated as of December 1, 1997, to the
Indenture dated as of May 7, 1996, among Twin and ARP, Changes
International and the
22
<PAGE> 27
Registrant, as Guarantors and State Street Bank and Trust Company
(as successor to Fleet National Bank), as Trustee regarding Twin's
10 1/4% Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-3,
dated March 17, 1998, Registration No. 333-48091).
10.1 -- 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 (incorporated by reference to Exhibit 4.3 to Twinlab S-1).
10.2 -- Amended and Restated Credit and Guarantee Agreement, dated November
15, 1996, among Twin, the Registrant, the financial institutions
named therein, The Chase Manhattan Bank as Administrative Agent and
The Bank of New York as Documentation Agent (incorporated by
reference to Exhibit 10.2 to the Registrant's 1996 Annual Report on
Form 10-K; the "1996 Annual Report").
10.3 -- Guarantee and Collateral Agreement, dated May 7, 1996, among the
Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.1 to
Twinlab S-1).
10.4 -- Form of Revolving Credit Note (incorporated by reference to Exhibit
10.4 to the 1996 Annual Report).
10.5 -- Form of Swing Line Note (incorporated by reference to Exhibit 10.5
to the 1996 Annual Report).
10.6 -- Deed of Trust, dated May 7, 1996 (the "Deed of Trust"), from Twin to
First American Title Company of Utah, Trustee for the use and
benefit of Chemical Bank, as Administrative Agent, Beneficiary
(incorporated by reference to Exhibit 10.6 to Twinlab S-1).
10.7 -- Amendment to Deed of Trust, dated November 20, 1996, among Twin and
The Chase Manhattan Bank (incorporated by reference to Exhibit 10.7
to the 1996 Annual Report).
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 (incorporated by reference
to Exhibit 10.8 to Twinlab S-1).
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
(incorporated by reference to Exhibit 10.9 to Twinlab S-1).
10.10 -- Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.10 to Twinlab
S-1).
10.11 -- Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.11 to Twinlab
S-1).
10.12 -- Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.12 to Twinlab
S-1).
10.13 -- Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.13 to Twinlab
S-1).
10.14 -- Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.14 to Twinlab
S-1).
10.15 -- Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling (incorporated by reference to Exhibit 10.15 to Twinlab S-1).
10.16 -- Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.16 to Twinlab
S-1).
23
<PAGE> 28
10.17 -- Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.17 to Twinlab
S-1).
10.18 -- Noncompetition Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.18 to Twinlab
S-1).
10.19 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.19 to Twinlab
S-1).
10.20 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.20 to Twinlab
S-1).
10.21 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.21 to Twinlab
S-1).
10.22 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.22 to Twinlab
S-1).
10.23 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.23 to Twinlab
S-1).
10.24 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.24 to Twinlab
S-1).
10.25 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Stephen Welling (incorporated by reference to Exhibit 10.25 to
Twinlab S-1).
10.26 -- Management Services Agreement, dated May 7, 1996, between Twin and
Leonard Green & Partners, L.P. (incorporated by reference to Exhibit
10.26 to Twinlab S-1).
10.27 -- Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin and Showa Denko America, Inc. (incorporated by
reference to Exhibit 10.28 to Twinlab S-1).
10.28 -- Form of SDR Guaranty Agreement, dated August 1992, between Twin and
Showa Denko K.K. (incorporated by reference to Exhibit 10.29 to
Twinlab S-1).
10.29 -- Twinlab Corporation 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.30 to Twinlab S-1).
10.30 -- Stock Option Agreement, dated November 5, 1997, between the
Registrant and John McCusker.**
10.31 -- Letter, dated October 7, 1997, between the Registrant and John
McCusker.**
10.32 -- Construction Contract, dated February 27, 1998, between Twin and
Interwest Construction Company, Inc.**
10.33 -- Lease, dated January 16, 1998, between Twin and Reckson Operating
Partnership, L.P.*
10.34 -- Asset Purchase Agreement, dated as of March 17, 1998, among Jones
Medical Industries, Inc., JMI-Phoenix Laboratories, Inc., Twin and
Bronson Laboratories, Inc.**
21.1 -- List of Registrant's Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP.*
27 -- Financial Data Schedule.*
- - ------------
* Filed herewith.
** Paper copy filed; EDGAR copy to be filed by amendment.
24
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
TWINLAB CORPORATION
By: /s/ Ross Blechman
-----------------------
Ross Blechman
Chairman of the Board, Chief
Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Ross Blechman Chairman of the Board, Chief March 20, 1998
- - -------------------------- Executive Officer, President
Ross Blechman and Director (Principal
Executive Officer)
/s/ Neil Blechman Executive Vice President, Secretary March 20, 1998
- - -------------------------- and Director
Neil Blechman
/s/ Brian Blechman Executive Vice President, Treasurer March 20, 1998
- - -------------------------- and Director
Brian Blechman
/s/ Steve Blechman Executive Vice President and March 20, 1998
- - -------------------------- Director
Steve Blechman
/s/ Dean Blechman Executive Vice President and March 20, 1998
- - -------------------------- Director
Dean Blechman
/s/ John McCusker Chief Financial Officer (Principal March 20, 1998
- - -------------------------- Financial and Accounting Officer)
John McCusker
/s/ Stephen L. Welling Director March 20, 1998
- - --------------------------
Stephen L. Welling
/s/ Jonathan D. Sokoloff Director March 20, 1998
- - --------------------------
Jonathan D. Sokoloff
/s/ Jennifer Holden Dunbar Director March 20, 1998
- - --------------------------
Jennifer Holden Dunbar
/s/ John G. Danhakl Director March 20, 1998
- - --------------------------
John G. Danhakl
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Twinlab Corporation and subsidiaries
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheets of Twinlab
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule 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 financial position of Twinlab Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Jericho, New York
February 4, 1998
F-1
<PAGE> 31
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
(In thousands of dollars except share and per share amounts)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
ASSETS (Note 8)
CURRENT ASSETS:
Cash and cash equivalents $ 4,029 $ 3,794
Accounts receivable, net of allowance for bad debts of
$406 and $208, respectively (Note 13) 44,059 31,027
Inventories (Note 4) 37,254 29,443
Deferred tax assets (Note 10) 1,615 1,218
Prepaid expenses and other current assets 1,288 1,076
--------- ---------
Total current assets 88,245 66,558
PROPERTY, PLANT AND EQUIPMENT, Net (Note 5) 13,958 14,157
DEFERRED TAX ASSETS (Note 10) 48,777 52,858
OTHER ASSETS (Note 6) 20,344 7,964
--------- ---------
TOTAL $ 171,324 $ 141,537
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8) $ 13,993 $ 20,231
Accounts payable 16,534 10,313
Accrued expenses and other current liabilities (Note 7) 10,208 8,882
--------- ---------
Total current liabilities 40,735 39,426
LONG-TERM DEBT, less current portion (Note 8) 100,245 100,423
--------- ---------
Total liabilities 140,980 139,849
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
SHAREHOLDERS' EQUITY (Notes 1 and 9):
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued -- --
Common stock, $1.00 par value; 75,000,000 shares authorized;
27,320,100 shares outstanding as of December 31, 1997
and 27,000,000 as of December 31, 1996 27,320 27,000
Additional paid-in capital 147,003 141,338
Accumulated deficit (143,979) (166,650)
--------- ---------
Total shareholders' equity 30,344 1,688
--------- ---------
TOTAL $ 171,324 $ 141,537
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 32
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(In thousands of dollars except per share amounts)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES (Note 13) $ 213,229 $ 170,075 $ 148,735
COST OF SALES 120,947 99,827 89,932
--------- --------- ---------
GROSS PROFIT 92,282 70,248 58,803
OPERATING EXPENSES 43,433 30,784 27,191
--------- --------- ---------
INCOME FROM OPERATIONS 48,849 39,464 31,612
--------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income 204 593 313
Interest expense (12,315) (10,005) (866)
Transaction expenses (Note 1) -- (400) (656)
Nonrecurring non-competition agreement expense (Note 1) -- (15,300) --
Other 27 32 61
--------- --------- ---------
(12,084) (25,080) (1,148)
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 36,765 14,384 30,464
PROVISION FOR INCOME TAXES (Note 10) 14,094 796 240
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 22,671 13,588 30,224
EXTRAORDINARY ITEM, net of income tax benefit of
$1,134 (Note 1) -- (1,792) --
--------- --------- ---------
NET INCOME 22,671 11,796 30,224
PREFERRED STOCK DIVIDENDS -- 4,862 --
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK $ 22,671 $ 6,934 $ 30,224
========= ========= =========
BASIC AND DILUTED INCOME PER SHARE (Note 9):
Income before extraordinary item $ 0.84 $ 0.33 $ 1.12
Extraordinary item -- (0.07) --
--------- --------- ---------
Net income $ 0.84 $ 0.26 $ 1.12
========= ========= =========
Basic weighted average shares outstanding 27,042 27,000 27,000
========= ========= =========
Diluted weighted average shares outstanding 27,078 27,000 27,000
========= ========= =========
PRO FORMA RELATING TO CHANGE IN TAX STATUS
(Note 1):
Historical income before provision for income taxes and
extraordinary item $ 14,384 $ 30,464
Pro forma provision for income taxes 5,466 12,060
--------- ---------
Pro forma income relating to change in tax status before
extraordinary item 8,918 18,404
Extraordinary item (1,792) --
--------- ---------
Pro forma net income relating to change in tax status 7,126 18,404
Preferred Stock dividends 4,862 --
--------- ---------
Pro forma net income relating to change in tax status
applicable to common stock $ 2,264 $ 18,404
========= =========
PRO FORMA BASIC AND DILUTED INCOME PER SHARE
(Note 9):
Income before extraordinary item $ 0.15 $ 0.68
Extraordinary item (0.07) --
--------- ---------
Net income $ 0.08 $ 0.68
========= =========
Basic and diluted weighted average shares outstanding 27,000 27,000
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 33
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(In thousands except share data)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Additional Retained
----------------------- Paid-In Earnings
Shares Amount Capital (Deficit) Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 450,000 $ 450 $ 68 $ 48,153 $ 48,671
Net income -- -- -- 30,224 30,224
Distributions to shareholders -- -- -- (23,490) (23,490)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 450,000 450 68 54,887 55,405
Net income -- -- -- 11,796 11,796
Distributions to shareholders -- -- -- (8,929) (8,929)
Issuance of common stock (Note 1) 550,000 550 4,950 -- 5,500
Repurchase of shareholders' common
stock and recapitalization including
income tax effects (Note 1) -- -- 68,654 (219,542) (150,888)
Additional shares issued in 18.5 for 1
stock split effected in the form of
a stock dividend (Note 9) 17,500,000 17,500 (17,500) -- --
Dividends on Preferred Stock -- -- -- (4,862) (4,862)
Initial public offering of common stock 8,500,000 8,500 85,166 -- 93,666
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 27,000,000 27,000 141,338 (166,650) 1,688
Net income -- -- -- 22,671 22,671
Shares issued in connection with the acquisition
of Changes International (Note 3) 312,500 312 5,547 -- 5,859
Shares issues in connection with the
exercise of stock options and related
tax benefit 7,600 8 118 -- 126
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 27,320,100 $ 27,320 $ 147,003 $ (143,979) $ 30,344
========== ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 34
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(In thousands of dollars)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,671 $ 11,796 $ 30,224
Adjustment to reconcile net income to net cash provided
by operating activities:
Extraordinary item -- 1,792 --
Depreciation and amortization 1,949 1,880 1,011
Gain on sale of equipment (3) -- (58)
Bad debt expense 200 125 169
Deferred income taxes 3,684 (3,484) --
Nonrecurring non-competition agreement expense -- 15,300 --
Changes in operating assets and liabilities (net of effect
of business acquired):
Accounts receivable (13,232) (6,780) (6,649)
Inventories (7,093) (4,170) (2,541)
Prepaid expenses and other current assets (212) (204) 307
Accounts payable 5,494 3,459 3,242
Accrued expenses and other current liabilities (2,047) 5,758 1,123
--------- --------- ---------
Net cash provided by operating activities 11,411 25,472 26,828
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (3,726) -- --
Maturities of marketable securities -- 201 1,178
Proceeds from sales of property, plant and equipment 3,099 10 825
Acquisition of property, plant and equipment (3,842) (2,252) (2,641)
(Increase) decrease in other assets (417) 411 6
--------- --------- ---------
Net cash used in investing activities (4,886) (1,630) (632)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt -- 173,000 4,685
Proceeds from issuance of Preferred Stock -- 67,000 --
Dividends on Preferred Stock -- (4,862) --
Distributions to shareholders -- (8,929) (23,490)
Payments of debt (6,270) (61,002) (5,056)
Redemption of Preferred Stock -- (67,000) --
Issuance of common stock 126 5,500 --
Repurchase of shareholders' common stock and recapitalization -- (216,780) --
Net proceeds from initial public offering of common stock -- 93,666 --
Payment of financing costs -- (8,450) --
Principal payments of capital lease obligations (146) (136) (125)
--------- --------- ---------
Net cash used in financing activities (6,290) (27,993) (23,986)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 235 (4,151) 2,210
Cash and cash equivalents at beginning of year 3,794 7,945 5,735
--------- --------- ---------
Cash and cash equivalents at end of year $ 4,029 $ 3,794 $ 7,945
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest $ 12,251 $ 8,020 $ 853
========= ========= =========
Income taxes $ 9,726 $ 3,063 $ 216
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 35
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
(Dollar amounts are in thousands of dollars)
- - --------------------------------------------------------------------------------
1. DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND INITIAL PUBLIC OFFERING
Prior to May 7, 1996, Twin Laboratories Inc. ("Old 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
97 percent owned by such individuals.
On February 27, 1996, Twinlab Corporation (formerly TLG Laboratories
Holding Corp.) ("Twinlab") was incorporated in contemplation of the
Acquisition (as hereinafter defined). The accompanying consolidated
financial statements include the accounts of Twinlab 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.
The shareholders of the Companies entered into a stock purchase and sale
agreement dated as of March 5, 1996 and which was consummated on May 7,
1996 pursuant to which (i) Green Equity Investors II, L.P. ("GEI")
acquired 8,880,000 shares (adjusted for the 18.5 for 1 stock split - see
Note 9a) (48 percent) of the common stock of Twinlab for aggregate
consideration of $4,800 and shares of 11.25 percent non-voting junior
redeemable preferred stock of Twinlab (the "Junior Preferred Stock") for
aggregate consideration of $37,000, (ii) certain other investors acquired
1,295,000 shares (adjusted for the 18.5 for 1 stock split - see Note 9a)
(7 percent) of the common stock of Twinlab (each of these other investors
owns less than 5 percent of the common stock of Twinlab) for aggregate
consideration of $700 and shares of 14 percent non-voting senior
redeemable preferred stock of Twinlab for aggregate consideration of
$30,000 (the "Senior Preferred Stock", and together with the Junior
Preferred Stock, the "Preferred Stock"), (iii) certain of the shareholders
of the Companies (the "Continuing Shareholders") exchanged certain of
their shares of common stock of Natur-Pharma for 8,325,000 shares
(adjusted for the 18.5 for 1 stock split - see Note 9a) (45 percent) of
the outstanding shares of common stock of Twinlab, valued at $4,500, (iv)
Twinlab purchased all of the remaining shares of common stock of
Natur-Pharma from the existing shareholders for cash, resulting in
Natur-Pharma becoming a wholly-owned subsidiary of Twinlab, (v) Old Twin,
Alvita, Export, Specialty, and B. Bros. merged into Natur-Pharma and ARP
merged with Natur-Pharma II, Inc., a wholly-owned subsidiary of
Natur-Pharma (the surviving entity in such merger is referred to herein as
"ARP"), and (vi) in connection with such mergers, the existing
shareholders received cash in consideration for all their shares of
capital stock of Old Twin, Alvita, Export, Specialty, B. Bros., and ARP.
The total cash consideration that the existing shareholders received was
approximately $212,500, approximately $15,300 of which represented
consideration for non-competition agreements with each of the existing
shareholders, which was recognized as a nonrecurring expense upon the
consummation of the Acquisition. The
F-6
<PAGE> 36
transactions described above are hereinafter referred to as the
"Acquisition." Concurrently with the consummation of the Acquisition, the
Company entered into a credit facility (which provided for a term loan
facility in the amount of $53,000 and a revolving credit facility in the
amount of $15,000) (the "Original Credit Facility") and issued $100,000
aggregate principal amount of senior subordinated notes in a private
placement (the "Note Offering", and, collectively with the Acquisition and
the Original Credit Facility, the "Transactions"), which notes were
subsequently exchanged in October 1996 for publicly registered notes. The
net cash proceeds of the Note Offering were used, together with borrowings
under the Original Credit Facility, the proceeds from the issuance of the
common stock and Preferred Stock of Twinlab and available cash of the
Company, to finance the Acquisition, to refinance approximately $7,000
aggregate principal amount of debt of the Company and to pay related fees
and expenses. In connection with the Acquisition, Natur-Pharma's name was
changed to Twin Laboratories Inc. ("Twin"). In connection with the
Transactions, the Company has expensed $400 and $656 of professional fees
for the year ended December 31, 1996 and 1995, respectively (the
"Transaction Expenses").
Because the Acquisition did 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 Twinlab.
The Company manufactures and markets high quality nutritional products,
including a complete line of vitamins, minerals, and nutraceuticals,
antioxidants, fish and marine oils and sports nutrition supplements
through its Twinlab Division; a full line of herbs and phytonutrients
through its Nature's Herbs Division; herbal teas through its Alvita
Division; and a line of nutritional supplements through its network
marketing subsidiary, Changes International of Fort Walton Beach, Inc.
("Changes International"). Twinlab Corporation also publishes "All Natural
Muscular Development", a sports and fitness magazine, and health and
fitness related books, audios, and newsletters through its publishing
subsidiary, ARP.
The following unaudited pro forma results of operations assume the
Transactions occurred on January 1, 1995 and excludes the effect of (i)
the nonrecurring non-competition agreement expense, and (ii) the
Transaction Expenses, and reflects the additional interest expense
relating to the financing of the Acquisition and the change in tax status.
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 in fact occurred on
January 1, 1995. 1996 1995
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales $170,075 $148,735
Interest expense 15,395 15,684
Income before extraordinary item 14,942 9,418
Basic and diluted income before extraordinary
item per share 0.55 0.35
Weighted average shares outstanding
(in thousands) 27,000 27,000
</TABLE>
F-7
<PAGE> 37
On November 15, 1996, the Company consummated an initial public offering
of common stock (the "IPO"), with the sale to the public of 8,500,000
shares of common stock at $12.00 per share. In connection with the
consummation of the IPO, the Company entered into an amended credit
agreement which provides for a revolving credit facility of $50,000 (the
"Revolving Credit Facility") (see Note 8). The net proceeds to the Company
of the IPO of approximately $93,666 (after underwriters' discounts of
$6,630 and offering expenses of $1,704), together with available cash
resources of the Company and approximately $20,000 of borrowings under the
Revolving Credit Facility, were used to repay all of the Company's
outstanding indebtedness under the term loan contained in the Original
Credit Facility, plus accrued and unpaid interest thereon of approximately
$233, and to redeem all of the outstanding shares of Preferred Stock
having an aggregate liquidation preference of $67,000, plus accrued and
unpaid dividends thereon of approximately $4,862 (the "Repayments"). In
connection with the prepayment of outstanding indebtedness under the term
loan facility and the establishment of the Revolving Credit Facility, the
Company recorded an extraordinary charge representing the write-off of
previously deferred finance costs incurred in connection with the Original
Credit Facility of approximately $1,792 (net of tax benefit of $1,134).
The following unaudited pro forma results of operations assume the
Transactions and the subsequent IPO occurred on January 1, 1995 and
excludes the effect of (i) the nonrecurring non-competition agreement
expense, (ii) the Transaction Expenses, (iii) the extraordinary item, and
(iv) the dividends paid on the Preferred Stock which was redeemed in
connection with the IPO, and reflects the additional interest expense
relating to the financing of the Acquisition and the change in tax status.
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 and the subsequent IPO
in fact occurred on January 1, 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Net sales $170,075 $148,735
Interest expense 12,372 12,355
Net income 16,729 11,429
Basic and diluted net income per share 0.62 0.42
Weighted average shares outstanding
(in thousands) 27,000 27,000
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of consolidation - 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. Inventories - Inventories are stated at the lower of cost (first-in,
first-out method) or market value.
d. 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-8
f
<PAGE> 38
e. 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 periods ranging from twenty to forty
years. Other intangible assets acquired in connection with Changes
International are being amortized on the straight-line method over
five years.
f. Income taxes - The Company accounts for income taxes under the
provisions of Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting For Income Taxes", which requires recognition
of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the Company's
financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences
between the financial accounting and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
the differences are expected to reverse.
g. 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.
h. Research and development expenses - The Company charges research and
development expenses to operations as incurred. Research and
development expenses were $1,095, $1,119 and $1,140 for the years
ended December 31, 1997, 1996 and 1995, respectively.
i. Earnings per share - The Company retroactively adopted SFAS No. 128,
"Earnings Per Share" during 1997. SFAS No. 128 changed the
computation, presentation and disclosure requirements for earnings
per share. SFAS No. 128 requires presentation of "basic" and
"diluted" earnings per share. The adoption of SFAS No. 128 did not
have a material impact on the Company's income per share.
j. Impairment of long-lived assets - In accordance with SFAS No. 121,
"Accounting For the Impairment of Long-Lived Assets and For
Long-Lived Assets To Be Disposed Of", the Company reviews its
long-lived assets, including property and equipment, goodwill and
intangible assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine recoverability of its
long-lived assets, the Company evaluates the probability that future
undiscounted net cash flows will be less than the carrying amount of
the assets. Impairment costs, if any, are measured by comparing the
carrying amount of the related assets to their fair value.
k. Use of estimates in the preparation of financial statements - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-9
<PAGE> 39
l. Reclassifications - Certain prior year balances have been
reclassified to conform with current year classifications.
3. ACQUISITION
In November 1997, the Company acquired all of the outstanding shares of
Changes International. Changes International is a network marketer of
nutritional supplements. The Company paid $7,888 in cash, including
acquisition costs, and issued 312,500 shares of its common stock (which
had a market value of approximately $5,859 on the date of the
acquisition).
This acquisition has been accounted for as a purchase and, accordingly,
the results of Changes International are included in the consolidated
statements of income of the Company since the date of acquisition and the
purchase price (including acquisition costs) has been allocated on a
preliminary basis to net assets acquired based upon their fair values.
Goodwill relating to the acquisition of $10,768 is being amortized over 20
years. The following unaudited pro forma information assumes that the
acquisition of Changes International had occurred as of January 1, 1996,
including the impact of the amortization expense associated with
intangible assets acquired, increased interest expense on acquisition debt
and related income tax effects. 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
acquisition, in fact, occurred on January 1, 1996.
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales $247,636 $189,879
Net income 23,628 11,154
Basic and diluted net income per share 0.87 0.23
Diluted weighted average shares outstanding
(in thousands) 27,391 27,313
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials $16,340 $10,802
Work in process 7,393 8,712
Finished goods 13,521 9,929
------- -------
Total $37,254 $29,443
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Land, building and leasehold improvements $12,322 $12,197
Plant equipment 7,461 7,006
Office equipment 2,606 2,292
Automobiles 33 12
------- -------
22,422 21,507
Less: accumulated depreciation and amortization 8,464 7,350
------- -------
Property, plant and equipment - net $13,958 $14,157
======= =======
Depreciation and amortization expense $ 1,120 $ 1,121
======= =======
</TABLE>
F-10
<PAGE> 40
Included in plant equipment at December 31, 1997 and 1996 are assets held
under capital leases with net carrying values totaling $206 and $343,
respectively. Accumulated amortization on these assets at December 31,
1997 and 1996 was $480 and $343, respectively.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Goodwill and related intangible assets, net of accumulated
amortization of $274 and $131, respectively $13,197 $ 573
Deferred finance costs, net of accumulated amortization
of $872 and $321, respectively 4,337 4,915
Trademarks, net of accumulated amortization of $324
and $213, respectively 1,391 1,400
Other 1,419 1,076
------- -------
Total $20,344 $ 7,964
======= =======
</TABLE>
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued salaries, employee benefits and
payroll taxes $ 2,477 $ 1,957
Other 7,731 6,925
------- -------
Total $10,208 $ 8,882
======= =======
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Revolving Credit Facility (a) $ 13,750 $ 20,000
Senior subordinated notes (b) 100,000 100,000
Note payable to a power authority, payable
in monthly installments of $2, including
interest at 6.38 percent, maturing February 2011 266 277
Obligations under capital lease 158 304
Other 64 73
-------- --------
114,238 120,654
Less: current portion 13,993 20,231
-------- --------
Total $100,245 $100,423
======== ========
</TABLE>
(a) The Revolving Credit Facility expires on May 7, 2002 and provides
for borrowings up to $50,000. Borrowings under the Revolving Credit
Facility bear interest, at the Company's discretion, at either the
Alternative Base Rate, as defined, or at the Eurodollar Rate
(maximum six-month term), plus a margin of 1.25 percent, as defined.
The effective interest rate on borrowings under the Revolving Credit
Facility ranged from 6.75 to 8.5 percent as of December 31, 1997.
Interest rates are subject to increases or reduction based upon
Twin's meeting certain financial tests. The proceeds of the
Revolving Credit Facility are available for working capital
requirements and for general
F-11
<PAGE> 41
corporate purposes, including up to $35,000 of which is available to
fund permitted acquisitions, as defined, subject to certain
conditions and reductions. (At December 31, 1997, approximately
$21,250 of this portion of the Revolving Credit Facility was
available to fund permitted acquisitions). A portion of the
Revolving Credit Facility not to exceed $15,000 is available for the
issuance of letters of credit which generally have an initial term
of one year or less. The Revolving Credit Facility is secured by
first priority security interests in all of the tangible and
intangible assets of Twin and its direct subsidiaries and is
guaranteed by Twinlab, ARP, and Changes International. In addition,
the Revolving Credit Facility contains certain restrictive covenants
including, among other things, the maintenance of certain debt
coverage ratios, as well as restrictions on additional indebtedness,
dividends and certain other significant transactions. The Company
was in compliance with all such covenants as of December 31, 1997.
(b) The senior subordinated notes mature on May 15, 2006 and bear
interest at a rate of 10-1/4 percent per annum. The senior
subordinated notes are jointly and severally guaranteed by Twinlab,
ARP, and Changes International on a full and unconditional unsecured
senior subordinated basis. The senior subordinated notes are
callable after five years at a premium to par which declines to par
after eight years. Until May 15, 1999, Twin has the option to redeem
up to 35 percent of the subordinated notes with the proceeds of a
public offering at a redemption price of 109-1/2 percent. Upon a
change of control, as defined, Twin is required to offer to redeem
the subordinated notes at 101 percent of the principal amount plus
accrued and unpaid interest. Restrictive covenants contained in the
indenture governing the subordinated notes (the "Note Indenture")
include, among other things, limitations on additional indebtedness,
investments, dividends and certain other significant transactions.
The Company was in compliance with all such covenants as of December
31, 1997.
The Revolving Credit Facility and the Note Indenture restrict the
payment of dividends and the making of loans, advances or other
distributions of assets to Twinlab, except in certain limited
circumstances.
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1998 $ 13,993
1999 14
2000 15
2001 16
2002 17
Thereafter 100,183
--------
Total $114,238
========
</TABLE>
The carrying amount of the Company's debt approximates fair value
based on borrowing rates currently available to the Company for
loans with similar terms.
9. SHAREHOLDERS' EQUITY
(a) Changes in authorized capital and stock split - In July 1996, the
Board of Directors (the "Board") and the stockholders authorized an
increase in the number of common
F-12
<PAGE> 42
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. Prior to the IPO, on November 15, 1996,
the Board authorized 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 increased 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 have been retroactively reflected for
purposes of calculating income per share for all periods presented
herein.
(b) Stock incentive plan - In November 1996, the Board and stockholders
of the Company approved and adopted the Twinlab Corporation 1996
Stock Incentive Plan (the "1996 Plan"). The 1996 Plan provides for
the issuance of a total of up to 400,000 authorized and unissued
shares of common stock, treasury shares and/or shares acquired by
the Company for purposes of the 1996 Plan. Awards under the 1996
Plan may be made in the form of (i) incentive stock options; (ii)
nonqualified stock options; (iii) stock appreciation rights; (iv)
restricted stock; and (v) performance shares. Options become
exercisable over five years from the date of grant at the rate of 20
percent of the grant each year and expire up to ten years after the
date of grant. On November 14, 1996, the Board granted 120,000
nonqualified stock options under the 1996 Plan to certain key
persons at an exercise price equal to the initial public offering
price of $12.00 per share.
The following table sets forth summarized information concerning the
Company's stock options:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Exercise
of Shares Price Range Price
--------- ----------- -----
<S> <C> <C> <C>
Balance, January 1, 1996 -- $ -- $ --
Granted 120,000 $12.00 $12.00
-------- --------------- ------
Balance, December 31, 1996 120,000 $12.00 $12.00
Granted 56,000 $18.13 - $19.38 $19.24
Canceled or expired (6,000) $12.00 $12.00
Exercised (7,600) $12.00 $12.00
-------- --------------- ------
Balance, December 31, 1997 162,400 $12.00 - $19.38 $14.50
======== =============== ======
Shares exercisable at December 31, 1997 10,400 $12.00
======== ======
Shares reserved for issuance at December 31, 1997 392,400
========
</TABLE>
Significant option groups outstanding at December 31, 1997 and
related weighted average price and life information were as follows:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- - -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$12.00 106,400 8.9 $12.00 10,400 $12.00
$18.13 - $19.38 56,000 9.8 $19.24 -- N/A
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued To Employees", and selected
interpretations in accounting for the 1996
F-13
<PAGE> 43
Plan. Accordingly, as all options have been granted at exercise
prices equal to fair market value on the date of grant, no
compensation expense has been recognized by the Company in
connection with its stock-based compensation plan. Had compensation
cost for the Company's 1996 Plan been determined based upon the fair
value at the grant date for awards under the 1996 Plan consistent
with the methodology prescribed under Statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based
Compensation", the Company's net income would have been reduced by
approximately $188 and $14 in 1997 and 1996, respectively. The
weighted average fair value of the options granted during 1997 and
1996 is estimated at $10.89 and $6.81 on the date of grant (using
Black-Scholes option pricing model) with the following weighted
average assumptions for 1997 and 1996, respectively: volatility of
46 percent and 45 percent, risk-free interest rate of 5.75 percent
and 6.09 percent, and an expected life of seven years.
c. Net income per share - In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Basic income per share is determined by using
the weighted average number of shares of common stock outstanding
during each period. Diluted income per share further assumes the
issuance of common shares for all dilutive outstanding common stock
options. The calculation for income before extraordinary item per
share for each of the three years ended December 31, 1997 was as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------------------------------------------
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------------------------------------------------------------------------------------------------------------
In thousands, except per share data)
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income before
extraordinary item $ 22,671 $ 13,588 $ 30,224
Less: Preferred
dividends -- (4,862) --
-------- -------- --------
Basic income per
share
Income before
extraordinary item 22,671 27,042 $ 0.84 8,726 27,000(a) $ 0.33 30,224 27,000(a) $ 1.12
========== ========== ==========
Effect of Dilutive
Securities:
Options -- 36 -- -- -- --
-------- -------- -------- -------- -------- --------
Diluted income per
share
Income before
extraordinary item $ 22,671 27,078 $ 0.84 $ 8,726 27,000 $ 0.33 $ 30,224 27,000 $ 1,12
======== ======== ========== ======== ======== ========== ======== ======== ==========
</TABLE>
(a) Amount assumes, as outstanding for the entire year, the 10,175,000
shares (adjusted for the 18.5 for one stock split - see Note 9a)
issued in connection with the Acquisition and the 8,500,000 shares
issued in connection with the IPO (see Note 1).
10. INCOME TAXES
Prior to the consummation of the Acquisition, all of the Companies were
"S" corporations and as such Federal and state taxes were generally paid
at the shareholder level only. The provision for income taxes for the year
ended December 31, 1995 and through the consummation of the Acquisition on
May 7, 1996 represents state taxes for those states that impose a tax on
"S" corporations.
F-14
<PAGE> 44
Upon consummation of the Acquisition, the Companies terminated their S
Corporation status. The mergers of Old Twin, Alvita, Export, Specialty and
B. Bros. into Natur-Pharma were treated as taxable asset purchases for
Federal and state income tax purposes and 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. This resulted in different book and tax
asset bases for the assets of these companies, which resulted in deferred
tax assets of approximately $55,571.
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 8,916 $ 3,662 $ --
-------- -------- --------
State and local 1,494 618 240
-------- -------- --------
10,410 4,280 --
-------- -------- --------
Deferred:
Federal 3,515 (3,108) --
State and local 169 (376) --
-------- -------- --------
3,684 (3,484) --
-------- -------- --------
$ 14,094 $ 796 $ 240
======== ======== ========
</TABLE>
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pre-tax income):
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 34.0% 34.0%
State and local income taxes (net of
Federal tax benefit) 2.9 1.1 0.8
Exempt income due to "S" Corporation
status -- (26.8) (34.0)
Other 0.4 (2.8) --
---- ---- ----
Effective tax rate 38.3% 5.5% 0.8%
==== ==== ====
</TABLE>
At December 31, 1997 and 1996, the deferred tax assets, which required no
valuation allowance, consisted of:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accounts receivable $ 1,099 $ 856
Inventories 380 238
Property, plant and equipment 34 464
Intangible and other assets 48,743 52,394
Other 136 124
------- -------
$50,392 $54,076
======= =======
</TABLE>
11. EMPLOYEE BENEFIT PLANS
Old Twin provided a profit sharing plan, and Natur-Pharma provided an
Employee Savings and Investment Plan to all eligible employees, as
defined, through July 1, 1996. Effective July 1, 1996, the Company adopted
the Twin Laboratories Inc. 401(k) Plan (the "401(k) Plan") which is an
amendment and restatement of the Old Twin profit sharing plan and merged
the Natur-Pharma Employee Savings and Investment Plan into the 401(k)
Plan.
F-15
<PAGE> 45
Eligible employees may contribute up to 15 percent of their annual
compensation, subject to certain limitations, and the Company will match
50 percent of an employee's contribution. Total provisions with respect to
these plans approximated $375, $164 and $287 for the years ended December
31, 1997, 1996 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, 1997, 1996 and 1995 was approximately
$1,874, $1,579, 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>
1998 $ 3,089
1999 2,408
2000 2,300
2001 1,813
2002 1,697
Thereafter 1,828
-------
Total $13,135
=======
</TABLE>
During 1997, the Company entered into several agreements for the
sale and leaseback of certain production equipment. The Company
received $3,099 which approximated the net book value of the assets
sold. These leases have been classified as operating leases.
b. Legal matters - The Company, like various other participants in the
nutritional supplement industry, has been a defendant in court
actions seeking damages for alleged personal injuries resulting from
products containing allegedly contaminated added manufactured
L-Tryptophan. To date, 132 of the 133 suits in which the Company was
a named defendant (the "L-Tryptophan Actions") have been dismissed
or settled at no cost to the Company pursuant to an indemnification
agreement (the "Indemnification Agreement") between the Company and
a U.S. subsidiary of the Japanese manufacturer of the allegedly
contaminated ingredient. The Company believes, after consultation
with outside counsel, that few new lawsuits are likely to be brought
in view of applicable statutes of limitation. Based upon
consultation with outside counsel, the Company also believes that ,
in light of the Indemnification Agreement and the resolution of
virtually all of the L-Tryptophan Actions at no cost to the Company,
the prospect of the remaining L-Tryptophan Actions and any possible
future actions having a material adverse effect on the Company's
consolidated financial statements is remote. The Company no longer
markets any products containing added manufactured L-Tryptophan.
F-16
<PAGE> 46
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, if any, in connection with
these matters will not have a material adverse effect on the
consolidated financial statements.
13. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company has two significant customers which accounted for
approximately 19 and 23 percent, respectively, of net sales for 1997; 25
and 20 percent, respectively, of net sales for 1996; and 27 and 21
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, 1997.
The Company's customers are primarily large independent distributors of
health food products. At December 31, 1997 and 1996, approximately 58 and
64 percent, respectively, of accounts receivable related to two customers.
14. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
As noted in Note 8b, the Revolving Credit Facility and the Note Indenture
restrict the payment of dividends and the making of loans, advances, or
other distributions to Twinlab, except in certain limited circumstances.
After giving retroactive effect, in a manner similar to a pooling of
interests, to the merger of the Companies pursuant to the Acquisition, the
condensed financial information of Twinlab, on a stand-alone basis, is as
follows (because Twinlab had no cash prior to the consummation of the
Acquisition, no condensed statement of cash flows is presented for the
year ended December 31, 1995):
<TABLE>
<CAPTION>
Condensed Balance Sheets
1997 1996
--------- ---------
<S> <C> <C>
Assets
Cash $ 169 $ 162
Investment in subsidiaries 30,175 1,526
--------- ---------
$ 30,344 $ 1,688
========= =========
Shareholders' Equity
Preferred stock, $.01 par value; 2,000,000
shares authorized; none issued $ -- $ --
Common stock ($1.00 par value; 75,000,000
shares authorized; 27,320,100 and 27,000,000
shares outstanding, respectively) 27,320 27,000
Additional paid-in capital 147,003 141,338
Accumulated deficit (143,979) (166,650)
--------- ---------
$ 30,344 $ 1,688
========= =========
Condensed Statements of Income
1997 1996 1995
--------- --------- ---------
Equity interest in net income of subsidiaries $ 22,856 $ 11,742 $ 30,224
Interest income 7 54 --
--------- --------- ---------
Income before provision for income taxes 22,863 11,796 30,224
Provision for income taxes 192 -- --
--------- --------- ---------
Net income $ 22,671 $ 11,796 $ 30,224
========= ========= =========
</TABLE>
F-17
<PAGE> 47
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows
1997 1996
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,671 $ 11,796
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity investment in subsidiaries (19,064) 119,771
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of business, net of cash acquired (3,726) --
Proceeds from issuance of Preferred Stock -- 67,000
Dividends on Preferred Stock -- (4,862)
Distributions to shareholders -- (8,929)
Redemption of Preferred Stock -- (67,000)
Issuance of common stock 126 5,500
Repurchase of shareholders' common stock and recapitalization -- (216,780)
Proceeds from initial public offering of common stock -- 93,666
--------- ---------
Net cash used in financing activities (3,600) (131,405)
--------- ---------
Net increase in cash 7 162
Cash at beginning of year 162 --
--------- ---------
Cash at end of year $ 169 $ 162
========= =========
</TABLE>
Twin is a direct wholly-owned subsidiary of Twinlab. ARP and Changes
International are indirect wholly-owned subsidiaries of Twinlab. Twinlab,
ARP and Changes International have provided joint and several full and
unconditional senior subordinated guarantees of the senior subordinated
notes of Twin (see Note 8b).
The assets, results of operations and shareholders' equity of Twin
comprise substantially all of the assets, results of operations and
shareholders' equity of Twinlab on a consolidated basis. Twinlab has no
separate operations and has no significant assets other than Twinlab's
investment in Twin and, through Twin, in ARP and Changes International.
Twin has no direct or indirect subsidiaries other than ARP and Changes
International; Twin has no other stockholder than Twinlab. Accordingly,
the Company has determined that separate financial statements of Twin, ARP
and Changes International would not be material to investors and,
therefore, are not included herein.
Summarized financial information of Twin is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current assets $ 88,077 $ 68,100 $ 58,663
Noncurrent assets 83,079 74,979 16,646
Current liabilities 44,825 39,426 14,233
Noncurrent liabilities 100,245 100,423 5,671
Shareholder's equity 26,086 3,230 55,405
Net sales 213,229 170,075 148,735
Gross profit 92,282 70,248 58,803
Net income 22,856 11,742 30,224
</TABLE>
F-18
<PAGE> 48
Summarized financial information of ARP is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current assets $ 1,399 $ 1,577 $ 1,266
Noncurrent assets 193 182 168
Current liabilities 568 1,200 1,211
Noncurrent liabilities -- -- --
Shareholder's equity 1,024 559 223
Net sales 5,661 5,862 5,200
Gross profit 1,329 886 259
Net income (loss) 465 392 (128)
</TABLE>
Summarized financial information of Changes International is as
follows:
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Current assets $ 4,005
Noncurrent assets 13,026
Current liabilities 3,010
Noncurrent liabilities --
Shareholder's equity 14,021
Net sales 7,037
Gross profit 5,854
Net income 273
</TABLE>
15. SUBSEQUENT EVENTS (UNAUDITED)
a. Proposed Public Offering - In February 1998, the Company determined
to work towards a proposed public offering of the Company's common
stock (the "Offering") on a firm commitment basis. The proposed
Offering contemplates that a total of 8,000,000 shares of common
stock will be offered to the public, of which 4,000,000 will be sold
by certain of the Company's stockholders. The net proceeds to the
Company from the Offering are estimated to be approximately
$127,900. Of the net proceeds to the Company, approximately $56,500
will be used to pay the purchase price for the Bronson Acquisition
(as defined in Note 15.b.), including related fees and expenses;
approximately $40,100 will be used to exercise the Company's option
to redeem $35,000 of the senior subordinated notes at a redemption
price of 109-1/2 percent, plus accrued and unpaid interest; and
approximately $5,600 will be used to reduce outstanding borrowings
under the Revolving Credit Facility, including accrued and unpaid
interest. The remaining net proceeds to the Company will be used for
working capital and other general corporate purposes.
b. Potential Acquisition - On March 17, 1998, the Company entered into
a definitive agreement to acquire substantially all of the assets
and assume certain liabilities of the Bronson division ("Bronson")
of Jones Medical Industries, Inc. (the "Bronson Acquisition"). The
Company expects that the closing of the Bronson Acquisition will
occur during the second quarter of fiscal 1998. Bronson's net sales
and operating income for the fiscal year ended December 31, 1997
were approximately $32,105 and $9,505, respectively. The purchase
price is $55,000 in cash (excluding related fees and expenses),
subject to certain adjustments, which the Company intends to finance
with a
F-19
<PAGE> 49
portion of the net proceeds of the Offering. In the event the
Offering is not consummated, the Company would seek to amend its
Revolving Credit Facility to increase the permitted borrowings and
to finance the Bronson Acquisition with borrowings thereunder.
F-20
<PAGE> 50
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, 1997:
Allowance for bad debts $ 208 $ 200 $ -- $ 2(1) $ 406
===== ===== ==== ====== ======
Reserve for excess and
slow moving inventory $ 625 $ 375 $ -- $ -- $1,000
===== ===== ==== ====== ======
Year ended December 31, 1996:
Allowance for bad debts $ 177 $ 125 $ -- $ 94(1) $ 208
===== ===== ==== ====== ======
Reserve for excess and
slow moving inventory $ 515 $ 625 $ -- $ 515(1) $ 625
===== ===== ==== ====== ======
Year ended December 31, 1995:
Allowance for bad debts $ 63 $ 169 $ -- $ 55(1) $ 177
===== ===== ==== ====== ======
Reserve for excess and
slow moving inventory $ 100 $ 415 $ -- $ -- $ 515
===== ===== ==== ====== ======
</TABLE>
(1) Amounts written off.
<PAGE> 51
Exhibit Index
-------------
Number Description of Exhibit
2.1 -- 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 GEI (the "Stock Purchase and Sale
Agreement") (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, dated June 4, 1996, as amended,
filed by the Registrant, Registration No. 333-05191; "Twinlab S-1").
2.1.1 -- Amendment to the Stock Purchase and Sale Agreement, dated May 6,
1996 (incorporated by reference to Exhibit 2.1.1 to Twinlab S-1).
3.1 -- Second Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.4 to the
Registration Statement on Form S-4, dated June 25, 1996, as amended,
filed by Twin, Registration No. 333-06781; "Twin S-4").
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.5 to Twin S-4).
4.1 -- Indenture, dated May 7, 1996, among Twin, and ARP and the Registrant
(together, 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 and the 10 1/4% Senior
Subordinated Notes due 2006 issued in exchange therefor
(incorporated by reference to Exhibit 4.2 to Twin S-1).
4.2 -- First Supplemental Indenture, dated as of December 1, 1997, to the
Indenture dated as of May 7, 1996, among Twin and ARP, Changes
International and the
<PAGE> 52
Exhibit Index (Con't)
---------------------
Registrant, as Guarantors and State Street Bank and Trust Company
(as successor to Fleet National Bank), as Trustee regarding Twin's
10 1/4% Senior Subordinated Notes due 2006 (incorporated by
reference to Exhibit 4.2 to the Registration Statement on Form S-3,
dated March 17, 1998, Registration No. 333-48091).
10.1 -- 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 (incorporated by reference to Exhibit 4.3 to Twinlab S-1).
10.2 -- Amended and Restated Credit and Guarantee Agreement, dated November
15, 1996, among Twin, the Registrant, the financial institutions
named therein, The Chase Manhattan Bank as Administrative Agent and
The Bank of New York as Documentation Agent (incorporated by
reference to Exhibit 10.2 to the Registrant's 1996 Annual Report on
Form 10-K; the "1996 Annual Report").
10.3 -- Guarantee and Collateral Agreement, dated May 7, 1996, among the
Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.1 to
Twinlab S-1).
10.4 -- Form of Revolving Credit Note (incorporated by reference to Exhibit
10.4 to the 1996 Annual Report).
10.5 -- Form of Swing Line Note (incorporated by reference to Exhibit 10.5
to the 1996 Annual Report).
10.6 -- Deed of Trust, dated May 7, 1996 (the "Deed of Trust"), from Twin to
First American Title Company of Utah, Trustee for the use and
benefit of Chemical Bank, as Administrative Agent, Beneficiary
(incorporated by reference to Exhibit 10.6 to Twinlab S-1).
10.7 -- Amendment to Deed of Trust, dated November 20, 1996, among Twin and
The Chase Manhattan Bank (incorporated by reference to Exhibit 10.7
to the 1996 Annual Report).
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 (incorporated by reference
to Exhibit 10.8 to Twinlab S-1).
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
(incorporated by reference to Exhibit 10.9 to Twinlab S-1).
10.10 -- Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.10 to Twinlab
S-1).
10.11 -- Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.11 to Twinlab
S-1).
10.12 -- Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.12 to Twinlab
S-1).
10.13 -- Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.13 to Twinlab
S-1).
10.14 -- Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.14 to Twinlab
S-1).
10.15 -- Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling (incorporated by reference to Exhibit 10.15 to Twinlab S-1).
10.16 -- Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.16 to Twinlab
S-1).
<PAGE> 53
Exhibit Index (Con't)
---------------------
10.17 -- Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.17 to Twinlab
S-1).
10.18 -- Noncompetition Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.18 to Twinlab
S-1).
10.19 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.19 to Twinlab
S-1).
10.20 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.20 to Twinlab
S-1).
10.21 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.21 to Twinlab
S-1).
10.22 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.22 to Twinlab
S-1).
10.23 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.23 to Twinlab
S-1).
10.24 -- Noncompetition Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.24 to Twinlab
S-1).
10.25 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Stephen Welling (incorporated by reference to Exhibit 10.25 to
Twinlab S-1).
10.26 -- Management Services Agreement, dated May 7, 1996, between Twin and
Leonard Green & Partners, L.P. (incorporated by reference to Exhibit
10.26 to Twinlab S-1).
10.27 -- Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin and Showa Denko America, Inc. (incorporated by
reference to Exhibit 10.28 to Twinlab S-1).
10.28 -- Form of SDR Guaranty Agreement, dated August 1992, between Twin and
Showa Denko K.K. (incorporated by reference to Exhibit 10.29 to
Twinlab S-1).
10.29 -- Twinlab Corporation 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.30 to Twinlab S-1).
10.30 -- Stock Option Agreement, dated November 5, 1997, between the
Registrant and John McCusker.**
10.31 -- Letter, dated October 7, 1997, between the Registrant and John
McCusker.**
10.32 -- Construction Contract, dated February 27, 1998, between Twin and
Interwest Construction Company, Inc.**
10.33 -- Lease, dated January 16, 1998, between Twin and Reckson Operating
Partnership, L.P.*
10.34 -- Asset Purchase Agreement, dated as of March 17, 1998, among Jones
Medical Industries, Inc., JMI-Phoenix Laboratories, Inc., Twin and
Bronson Laboratories, Inc.**
21.1 -- List of Registrant's Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP.*
27 -- Financial Data Schedule.*
- - ------------
* Filed herewith.
** Paper copy filed; EDGAR copy to be filed by amendment.
<PAGE> 1
Exhibit 10.33
AGREEMENT OF LEASE
BETWEEN
RECKSON OPERATING PARTNERSHIP, L.P.
AND
TWIN LABORATORIES INC.
<PAGE> 2
TABLE OF CONTENTS
PAGE
SPACE .....................................................................1
TERM .....................................................................1
RENT .....................................................................3
USE .....................................................................4
LANDLORD ALTERATION...........................................................5
SERVICES .....................................................................5
LANDLORD'S REPAIRS............................................................5
WATER SUPPLY..................................................................7
PARKING FIELD.................................................................7
DIRECTORY.....................................................................7
TAXES AND OTHER CHARGES.......................................................7
TENANT'S REPAIRS..............................................................9
FIXTURES & INSTALLATIONS.....................................................10
ALTERATIONS..................................................................10
REQUIREMENTS OF LAW..........................................................14
END OF TERM..................................................................17
QUIET ENJOYMENT..............................................................18
SIGNS ....................................................................18
RULES AND REGULATIONS........................................................19
RIGHT TO SUBLET OR ASSIGN....................................................19
LANDLORD'S ACCESS TO PREMISES................................................24
SUBORDINATION................................................................25
PROPERTY LOSS, DAMAGE REIMBURSEMENT..........................................27
<PAGE> 3
TENANT'S INDEMNITY...........................................................27
DESTRUCTION - FIRE OR OTHER CASUALTY.........................................28
INSURANCE....................................................................30
EMINENT DOMAIN...............................................................33
NONLIABILITY OF LANDLORD.....................................................34
DEFAULT ....................................................................35
TERMINATION ON DEFAULT.......................................................37
DAMAGES ....................................................................38
SUMS DUE LANDLORD............................................................40
NO WAIVER....................................................................41
WAIVER OF TRIAL BY JURY......................................................41
NOTICES ....................................................................42
INABILITY TO PERFORM.........................................................42
INTERRUPTION OF SERVICE......................................................43
CONDITIONS OF LANDLORD'S LIABILITY...........................................43
TENANT'S TAKING POSSESSION...................................................44
ENTIRE AGREEMENT.............................................................44
DEFINITIONS..................................................................45
PARTNERSHIP TENANT...........................................................45
SUCCESSORS, ASSIGNS, ETC.....................................................46
BROKER ....................................................................46
CAPTIONS ....................................................................47
NOTICE OF ACCIDENTS..........................................................47
TENANT'S AUTHORITY TO ENTER LEASE............................................47
RENEWAL OPTION...............................................................47
ARBITRATION..................................................................49
ii
<PAGE> 4
RIGHT OF FIRST OFFER.........................................................50
SCHEDULE "A".................................................................54
SCHEDULE "B".................................................................57
SCHEDULE "C".................................................................59
SCHEDULE "D".................................................................63
EXHIBIT 1....................................................................66
EXHIBIT 2....................................................................67
EXHIBIT 3....................................................................68
iii
<PAGE> 5
AGREEMENT OF LEASE, made as of this 16th day of January, 1998, between
RECKSON OPERATING PARTNERSHIP, L.P., a Limited Partnership, having its principal
office at 225 Broadhollow Road, Suite 212 W, Melville, New York 11747-0983
(hereinafter referred to as "Landlord"), and Twin Laboratories Inc. a Utah
corporation, having its principal place of business at 2120 Smithtown Avenue,
Ronkonkama, New York (hereinafter referred to as "Tenant").
WITNESSETH: Landlord and Tenant hereby covenant and agree as
follows:
SPACE
1. Landlord hereby leases to Tenant and Tenant hereby hires from
Landlord the space substantially as shown on the Rental Plan initialed by the
parties and made part hereof as Exhibit "1" ("Demised Premises" or "Premises")
located at 150 Vanderbilt Motor Parkway, Hauppauge, New York (hereinafter
referred to as the "Building") which the parties agree contains 21,636 square
feet in a Building containing 195,905 square feet which constitutes 11.04
percent of the area of the Building ("Tenant's Proportionate Share").
TERM
2. The term ("Term", "term" or "Demised Term") of this lease shall
commence upon the execution of this lease. Subject to the provisions of this
Article 2, Tenant's obligation to pay Rent (as defined in Article 3 hereof) and
all items of additional rent shall commence on April 16, 1998 (the "Rent
Commencement Date"),so long as this lease is executed on or before January 16,
1998. If this lease is not executed on or before January 16, 1998, the Rent
Commencement Date shall be postponed one day for each day after such date, until
the lease is executed. The Term of this lease shall expire on the day preceding
the day which is five (5) years and one (1) month after (a) the Rent
Commencement Date, if such date is the first day of the first full calendar
month or (b) the first day of the first full calendar month following the Rent
Commencement Date, if such date is not the first day of a calendar month (the
"Expiration Date").
If on the foregoing date specified for the Rent Commencement
Date the Demised Premises shall not be "substantially completed" in accordance
with Schedule A annexed hereto, then the Rent Commencement Date shall be
postponed until the date on which the Demised Premises shall be "substantially
completed" and the Term of this lease shall be extended so that the Expiration
Date
1
<PAGE> 6
shall be five (5) years and one (1) month after the last day of the month in
which the Rent Commencement Date occurs. In the event that the Rent Commencement
Date is postponed hereunder Landlord shall provide Tenant with seven (7) days
prior notice of substantial completion of the Demised Premises. "Substantially
completed" as used herein is defined to mean when the only items to be completed
are those which do not interfere with the Tenant's occupancy and substantially
full enjoyment of the Demised Premises; but if Landlord shall be delayed in such
"substantial completion" as a result of (i) Tenant's failure to furnish plans
and specifications; (ii) Tenant's request for materials, finishes or
installations other than Landlord's standard or those specified in Schedule "A";
(iii) Tenant's changes in said plans; (iv) the performance or completion of any
work, labor or services by a party employed by Tenant; or (v) Tenant's failure
to approve final plans, working drawings or reflective ceiling plans; then the
commencement of the Term of this lease and the payment of rent hereunder shall
be accelerated by the number of days of such delay. If Tenant makes a request
for additional materials, finishes or installations as per (ii) above, Landlord
shall use reasonable efforts to inform Tenant if same will cause delay hereunder
within a reasonable amount of time after Tenant's request. Tenant waives any
right to rescind this lease under Section 223-a of the New York Real Property
Law or any successor statute of similar import then in force and further waives
the right to recover any damages which may result from Landlord's failure to
deliver possession of the Premises on the Rent Commencement Date.
Notwithstanding anything to the contrary herein, if the Demised Premises is not
substantially completed at the expiration of seven (7) months from the Rent
Commencement Date specified in the first paragraph of this Article, either party
hereto shall have the right to terminate this lease by giving written notice
thereof to the other party and thereupon the parties shall have no further
obligation or liability to each other hereunder except that Landlord shall
promptly refund to Tenant all amounts paid to Landlord for Rent and additional
rent under the Lease. This obligation shall survive the expiration of the Lease.
Landlord shall obtain a certificate of occupancy for the Landlord's Initial
Construction and deliver a copy to Tenant. If Landlord does not obtain such
certificate of occupancy within one hundred and eighty (180) days from the date
the Premises are substantially completed, and Tenant is required to vacate the
Premises by the governmental authority having jurisdiction over the Premises due
to the lack of such certificate of occupancy, Tenant shall have the right to
terminate this Lease by giving written notice thereof to the Landlord and
thereupon the parties shall have no further obligation or liability to each
other hereunder except that Landlord shall promptly refund to Tenant, the sum of
$85,642.50 and all additional rent paid by Tenant for any period beyond the date
the lease is terminated in accordance with Tenant's notice. This obligation
shall survive the expiration of the Lease.
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A "Lease Year" shall be comprised of a period of twelve (12)
consecutive months. The first Lease Year shall commence on the Rent Commencement
Date but, notwithstanding the first sentence of this paragraph, if the Rent
Commencement Date is not the first day of a month, then the first Lease Year
shall include the additional period from the Rent Commencement Date to the end
of the then current month. Each succeeding Lease Year shall end on the
anniversary date of the last day of the preceding Lease Year. For example, if
the Rent Commencement date is January 1, 1997, the first Lease Year would begin
on January 1, 1997, and end on December 31, 1997, and each succeeding Lease Year
would end on December 31st. If, however, the Rent Commencement Date is January
2, 1997, the first Lease Year would end on January 31, 1998, the second Lease
Year would commence on February 1, 1998, and each succeeding Lease Year would
end on January 31st.
Within five (5) business days after Landlord's delivery to Tenant of
Landlord's standard Rent Commencement Date Certificate annexed hereto as Exhibit
3, Tenant will sign and return said Certificate to Landlord.
RENT
3. The annual minimum rental ("Rent" or "rent") is as
follows:
During the first Lease Year, the Rent shall be $599,497.50, payable $128,463.75
for the first month and $42,821.25 for each of the second through twelfth
months.
During the second Lease Year, the Rent shall be $530,325.36, payable in monthly
installments of $44,193.78.
During the third Lease Year, the Rent shall be $547,372.32, payable in monthly
installments of $45,614.36.
During the fourth Lease Year, the Rent shall be $565,015.80, payable in monthly
installments of $47,084.65.
During the fifth Lease Year, the Rent shall be $583,276.80, payable $48,606.40.
for each of the first through eleventh months and $5,785.15 for the twelfth
month.
For the last month of the term, the rent shall be $7,360.17.
Tenant agrees to pay the Rent to Landlord, without notice or demand, in lawful
money of the United States which shall be legal tender in payment of the debts
and dues, public and private, at the time of payment in advance on the first day
of each calendar month during the Demised Term at the office of the Landlord set
forth on
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page 1 of this lease, or at such other place as Landlord shall designate, except
that Tenant shall pay the first monthly installment on the execution hereof.
Tenant shall pay the Rent as above and as hereinafter provided, without any set
off or deduction whatsoever. Should the Rent Commencement Date be a date other
than the first day of a calendar month, the Tenant shall pay a pro rata portion
of the Rent on a per diem basis, based upon the fourth full calendar month of
the first Lease Year, from such date to and including the last day of that
current calendar month, and the first Lease Year shall include said partial
month. The Rent payable for such partial month shall be in addition to the Rent
payable pursuant to the Rent schedule set forth above.
Notwithstanding the foregoing, provided Tenant is not then in default under any
provision of this lease, Tenant shall be relieved of its obligations to pay Rent
for the third full calendar month of the first Lease Year of the Term of this
lease.
USE
4. (A) Tenant shall use and occupy the Demised Premises
only for general, executive and administrative offices and for no
other purpose.
(B) Tenant shall not use or occupy, suffer or permit the
Premises, or any part thereof, to be used in any manner which would in any way,
in the reasonable judgment of Landlord, (i) violate any laws or regulations of
public authorities; (ii) make void or voidable any insurance policy then in
force with respect to the Building; (iii) impair the appearance, character or
reputation of the Building; (iv) discharge objectionable fumes, vapors or odors
into the Building, air-conditioning systems or Building flues or vents in such a
manner as to offend other occupants. The provisions of this Section shall not be
deemed to be limited in any way to or by the provisions of any other Section or
any Rule or Regulation.
(C) The emplacement of any equipment which will impose an
evenly distributed floor load in excess of 100 pounds per square foot shall be
done only after written permission is received from the Landlord. Such
permission will be granted only after adequate proof is furnished by a
professional engineer that such floor loading will not endanger the structure.
Business machines and mechanical equipment in the Premises shall be placed and
maintained by Tenant, at Tenant's expense, in such manner as shall be sufficient
in Landlord's reasonable judgment to absorb vibration and noise and prevent
annoyance or inconvenience to Landlord or any other tenants or occupants of the
Building.
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(D) Tenant will not at any time use or occupy the Demised
Premises in violation of the existing certificate of occupancy (temporary or
permanent) issued for the Building or portion thereof of which the Demised
Premises form a part.
LANDLORD ALTERATION
5. Landlord, at its expense, will perform the work and make the
installations, as set forth in Schedule A annexed hereto and the Rental Plan
annexed hereto as Exhibit 1, which work is sometimes hereinafter referred to as
the "Landlord's Initial Construction".
SERVICES
6. Landlord, during the hours of 8:00 A.M. to 7:00 P.M. Monday through
Friday ("Working Hours"), excluding legal holidays which include New Year's Day,
Washington's Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day, shall furnish the Demised Premises with heat and
air-conditioning in the respective seasons, and provide the Demised Premises
with electricity for lighting and Tenant's usual office equipment as set forth
in Schedule "C". Landlord may alter or amend the list of holidays provided
herein so long as Landlord provides Tenant with prior written notice of same.
Tenant, shall have the right to designate other hours, so long as the total
hours per week do not exceed fifty-five (55). At any hours other than the
aforementioned, such services will be provided at Tenant's expense in accordance
with Schedule "C".
LANDLORD'S REPAIRS
7. Landlord, at its expense, will make all the repairs to and provide
the maintenance for the Demised Premises including the roof and structural
components of the Building (excluding painting and decorating, except to the
extent painting and decorating is part of the Landlord's Initial Construction)
and for all public areas and facilities as set forth in Schedule B, except such
repairs and maintenance as may be necessitated by the negligence, improper care
or use of the Premises by Tenant, its agents, employees, licensees or invitees,
which will be made by Landlord at Tenant's expense. All repairs shall be
performed in a good workmanlike manner and with materials at least equal in
quality to the materials that are repaired or replaced and Landlord shall
maintain the Building at a level commensurate with other similar Buildings in
the marketplace.
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WATER SUPPLY
8. Landlord, at its expense, shall furnish hot and cold or
tempered water for lavatory and kitchen purposes only.
PARKING FIELD
9. Tenant shall have the right to use one hundred eighteen(118) parking
spaces, ten (10) of which, located as depicted on Exhibit 2, shall be reserved
for Tenant's exclusive use, for the parking of automobiles of the Tenant, its
employees and invitees, in the parking area designated for tenants of the
building (hereinafter sometimes referred to as "Building Parking Area"), subject
to the reasonable Rules and Regulations now or hereafter adopted by Landlord.
Tenant shall not use nor permit any of its officers, agents or employees to use
any parking spaces in excess of Tenant's allotted number of spaces therein.
DIRECTORY
10. Landlord will furnish on the building directory listings in the
lobby requested by Tenant, not to exceed eight (8) listings. The initial
listings will be made at Landlord's expense and any subsequent changes by Tenant
shall be made at Tenant's expense. Landlord's acceptance of any name for listing
on the directory will not be deemed, nor will it substitute for, Landlord's
consent, as required by this lease, to any sublease, assignment or other
occupancy of the Premises.
TAXES AND OTHER CHARGES
11. (A) As used in and for the purposes of this Article 11,
the following definitions shall apply:
(i) "Taxes" shall be the real estate taxes, assessments,
special or otherwise, sewer rents, rates and charges, and any other governmental
charges, general, specific, ordinary or extraordinary, foreseen or unforeseen,
levied on a calendar year or fiscal year basis against the Real Property. If at
any time during the Term the method of taxation prevailing at the date hereof
shall be altered so that there shall be levied, assessed or imposed in lieu of,
or as in addition to, or as a substitute for, the whole or any part of the
taxes, levies, impositions or charges now levied, assessed or imposed on all or
any part of the Real Property (a) a tax, assessment, levy, imposition or charge
based upon the rents
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received by Landlord from the Real Property, whether or not wholly or partially
as a capital levy or otherwise, or (b) a tax, assessment, levy, imposition or
charge measured by or based in whole or in part upon all or any part of the Real
Property and imposed on Landlord, or (c) a license fee measured by the rent
payable by Tenant to Landlord, or (d) any other tax, levy, imposition, charge or
license fee however described or imposed, then all such taxes, levies,
impositions, charges or license fees or any part thereof, so measured or based,
shall be deemed to be Taxes. In the event the method of taxation shall be
altered as mentioned above, the taxes applicable to the Real Property shall be
determined as if the Real Property was the only asset of Landlord.
(ii) "Base Year Taxes" shall be the taxes actually due and
payable in the 1997/98 tax year.
(iii) "Escalation Year" shall mean each calendar year which
shall include any part of the Demised Term.
(iv) "Real Property" shall be the land upon which the Building
stands and any part or parts thereof utilized for parking, landscaped areas or
otherwise used in connection with the Building, and the Building and other
improvements appurtenant thereto.
(B) The Tenant shall pay the Landlord increases in Taxes levied against
the Real Property as follows: If the Taxes actually due and payable with respect
to the Real Property in any Escalation Year shall be increased above the Base
Year Taxes, then the Tenant shall pay to the Landlord, as additional rent for
such Escalation Year, a sum equal to Tenant's Proportionate Share of said
increase ("Tenant's Tax Payment" or "Tax Payment"). Tenant shall not be
responsible, however, for increases in taxes which are proven by Tenant to be
attributable to leasehold improvements made by or for other tenants in the
Building.
(C) Landlord shall render to Tenant a statement containing a
computation of Tenant's Tax Payment ("Landlord's Statement"). Within fifteen
(15) days after the rendition of the Landlord's Statement, Tenant shall pay to
Landlord the amount of Tenant's Tax Payment, however, Tenant shall not be
required to make payment of Tenant's first Tax Payment until the first
anniversary of the Rent Commencement Date. On the first day of each month
following the rendition of each Landlord's Statement, Tenant shall pay to
Landlord, on account of Tenant's next Tax Payment, a sum equal to one-twelfth
(1/12th) of Tenant's last Tax Payment due hereunder, which sum shall be subject
to adjustment for subsequent increases or decreases in Taxes. Any overpayment by
Tenant shall be refunded by Landlord upon request by Tenant. Upon written
request, Landlord shall provide Tenant with a copy of the real estate tax bill
evidencing the taxes due for the applicable Escalation Year.
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(D) Tenant shall not, without Landlord's prior written consent,
institute or maintain any action, proceeding or application in any court or body
or with any governmental authority for the purpose of changing the Taxes. If
Landlord shall receive a refund of Taxes for any Escalation Year, Landlord shall
pay to Tenant Tenant's share of the net refund (after deducting from such refund
the costs and expenses of obtaining the same, including, without limitation,
appraisal, accounting and legal fees, to the extent that such reasonable costs
and expenses were not included in the Taxes for such Escalation Year, and upon
written request, Landlord shall provide Tenant with an itemized list of all said
costs and expenses) to the extent such refund represents taxes actually paid by
Tenant; provided, that such payment to Tenant shall in no event exceed Tenant's
Tax Payment paid for such Escalation Year. This subparagraph shall survive the
expiration of this lease.
(E) Landlord's failure to render a Landlord's Statement with respect to
any Escalation Year shall not prejudice Landlord's right to render a Landlord's
Statement with respect to any Escalation Year. The obligation of Landlord and
Tenant under the provisions of this Article with respect to any additional rent
for any Escalation Year shall survive the expiration or any sooner termination
of the Demised Term.
TENANT'S REPAIRS
12. Tenant shall take good care of the Demised Premises, normal wear
and tear and natural deterioration excepted, and, subject to the provisions of
Article 7 hereof, Landlord at the reasonable expense of Tenant, shall make as
and when needed as a result of misuse or neglect by Tenant or Tenant's servants,
employees, agents or licensees, all repairs in and about the Demised Premises
necessary to preserve them in good order and condition. Except as provided in
Article 24 hereof, there shall be no allowance to Tenant for a diminution of
rental value and no liability on the part of Landlord by reason of
inconvenience, annoyance or injury to business arising from Landlord, Tenant or
others making any repairs, alterations, additions or improvements in or to any
portion of the Building or of the Demised Premises, or in or to the fixtures,
appurtenances or equipment thereof, and no liability upon Landlord for failure
of Landlord or others to make any repairs, alterations, additions or
improvements in or to any portion of the Building or of the Demised Premises, or
in or to the fixtures, appurtenances or equipment thereof. Landlord shall,
however, use reasonable efforts to minimize interference with Tenant's use of
the Demised Premises in making repairs hereunder. All repairs performed pursuant
to Article 12 hereof shall be performed in a good workmanlike manner and with
materials at least
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equal in quality to the materials that are repaired or replaced
hereunder.
FIXTURES & INSTALLATIONS
13. All appurtenances, fixtures, improvements, additions and other
property attached to or built into the Demised Premises, whether by Landlord or
Tenant or others, and whether at Landlord's expense, or Tenant's expense, or the
joint expense of Landlord and Tenant, shall be and remain the property of
Landlord (except for purposes of sales tax which, other than sales tax incurred
in connection with Landlord's Initial Construction, shall remain Tenant's
obligation). All trade fixtures, furniture, furnishings and other articles of
movable personal property owned by Tenant and located within the Premises
(collectively, "Tenant's Property") may be removed from the Premises by Tenant
at any time during the Term. Tenant, before so removing Tenant's Property, shall
establish to Landlord's reasonable satisfaction that no structural damage or
change will result from such removal and that Tenant can and promptly will
repair and restore any damage caused by such removal without cost or charge to
Landlord. Any such repair and removal shall itself be deemed an Alteration (as
defined in Article 14 below) within the purview of this lease (except for the
removal of ordinary office furnishings, desks, chairs and office tables, so long
as such removal will not result in any damage to the Demised Premises). Any
Tenant's Property for which Landlord shall have granted any allowance,
contribution or credit to Tenant, excluding the one month rent concession
referred to in Article 3 hereof, shall, at Landlord's option, not be so removed.
Landlord shall advise Tenant of its requirement to remove any such Tenant's
Property within ten (10) business days after its receipt of notice from Tenant
requesting same. All the outside walls of the Demised Premises including
corridor walls and the outside entrance doors to the Demised Premises, any
balconies, terraces or roofs adjacent to the Demised Premises, and any space in
the Demised Premises used for shafts, stacks, pipes, conduits, ducts or other
building facilities, and the use thereof, as well as access thereto in and
through the Demised Premises for the purpose of operation, maintenance,
decoration and repair, are expressly reserved to Landlord, and Landlord does not
convey any rights to Tenant therein. Notwithstanding the foregoing, Tenant shall
enjoy full right of access to the Demised Premises through the public entrances,
elevators, public corridors and public areas within the Building.
ALTERATIONS
14. (A) After completion of the Demised Premises as set
forth in Schedule A, Tenant shall make no alterations,
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installations, additions or improvements (hereinafter collectively referred to
as "Alterations") in or to the Demised Premises without Landlord's prior written
consent, and then only by contractors or mechanics approved by Landlord, which
approval shall not be unreasonably withheld or delayed with respect to such
contractors or mechanics, and at such times and in such manner as Landlord may
from time to time designate.
(B) All Alterations done by Tenant shall at all times comply
with (i) laws, rules, orders and regulations of governmental authorities having
jurisdiction thereof, and (ii) rules and regulations of the Landlord attached as
Schedule D.
(C) With respect to all Alterations, plans and specifications
prepared by and at the expense of Tenant shall be submitted to Landlord for its
prior written approval in accordance with the following requirements:
(i) With respect to any Alterations to be performed
by Tenant pursuant to this lease, Tenant shall, at its expense, furnish Landlord
with all drawings, plans, layouts and specifications for work to be performed by
Tenant, including, without limitation, architectural, plumbing, electrical,
mechanical and heating, ventilating and air conditioning plans (the "Tenant's
Plans"). All of the Tenant's Plans shall: (a) be compatible with the Landlord's
building plans, (b) comply with all applicable laws and the rules, regulations,
requirements and orders of any and all governmental agencies, departments or
bureaus having jurisdiction, and (c) be fully detailed, including locations and
complete dimensions;
(ii) Tenant's Plans shall be subject to approval by
Landlord;
(iii) Tenant shall, at Tenant's expense, (a) cause
Tenant's Plans to be filed with the governmental agencies having jurisdiction
thereover, (b) obtain when necessary all governmental permits, licenses and
authorizations required for the work to be done in connection therewith, and (c)
obtain all necessary certificates of occupancy, both temporary and permanent.
Tenant shall not be deemed to be in default of its obligations hereunder if as a
result of the existence of any open building permits or violations against the
Building Tenant cannot obtain the necessary certificates of occupancy. Landlord
shall execute such documents as may be reasonably required in connection with
the foregoing and Landlord shall otherwise cooperate with Tenant in connection
with obtaining the foregoing, but without any expense to Landlord except that
the execution of said documents shall not be deemed an expense of Landlord.
Tenant shall make no amendments or additions to Tenant's Plans without the prior
written consent of Landlord in each instance;
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(iv) No work shall commence in the Premises until
(a) Tenant has procured all necessary permits therefor and has delivered copies
of same to Landlord, (b) Tenant has procured a paid builder's risk insurance
policy naming Landlord as an additional insured and has delivered to Landlord a
certificate of insurance evidencing such policy, and (c) Tenant or its
contractor has procured a workmen's compensation insurance policy covering the
activities of all persons working at the Premises naming Landlord as an
additional insured and has delivered to Landlord a certificate of insurance
evidencing such policy;
(v) Tenant may use any licensed architect or
engineer to prepare its plans and to file for permits. However,
all such plans and permit applications shall be subject to review,
revision and approval by Landlord or its architect;
(vi) Tenant, at its expense, shall perform all
work, in accordance with Tenant's Plans and all Alterations, unless Landlord
performs same, shall be subject to Landlord's supervisory fee charge of 10% of
the cost thereof. This fee shall include the services described in subparagraph
(v) hereof. In receiving such fee, Landlord assumes no responsibility for the
quality or manner in which such work has been performed; and
(vii) Tenant agrees that it will not, either
directly or indirectly, use any contractors and/or labor and/or materials if the
use of such contractors and/or labor and/or materials would or will create any
difficulty with other contractors and/or labor engaged by Tenant or Landlord or
others in the construction, maintenance or operation of the Building or any part
thereof.
(D) Tenant's right to make Alterations shall be subject to the
following additional conditions: (i) the Alterations will not result in a
violation of, or require a change in, any certificate of occupancy applicable to
the Building; (ii) the outside appearance, character or use of the Building
shall not be affected; (iii) no part of the Building outside of the Premises
shall be physically affected; (iv) the proper functioning of any
air-conditioning, elevator, plumbing, electrical, sanitary, mechanical and other
service or utility system of the Building shall not be affected.
(E) Notwithstanding the foregoing, Landlord shall not
unreasonably withhold its consent to any Alteration requested by Tenant;
provided same is not a Material Alteration. The term "Material Alteration", as
used herein, means any Alteration which may, in the opinion of Landlord (i) be
structural in nature; (ii) affect the exterior or any structural portions or
components of the Building; (iii) be visible from outside of the Demised
Premises; (iv) affect the usage or proper functioning of any of the Building
systems (including, without limitation, the heating, ventilation,
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air conditioning, plumbing, electrical, sprinkler or security systems serving
the Building); (v) jeopardize health safety or life safety; (vi) require a
change to the certificate of occupancy for the Building; (vii) require the
issuance of a building permit or other authorization by any governmental or
quasi-governmental entity exercising jurisdiction over the Building; (viii)
require the consent of any mortgagee or ground lessor of the Building and/or the
Real Property; (ix) cause any previously non-mandatory legal requirement to
become a mandatory legal requirement with regard to the Building (including,
without limitation, any such legal requirement set forth in the Americans with
Disabilities Act); or (x) have a cost of completion in excess of Ten Thousand
Dollars ($10,000.00), excluding Landlord's supervisory fee set forth in
Paragraph (C) (vi) of this Article 14.
(F) Tenant shall defend, indemnify and save harmless Landlord
against any and all mechanics' and other liens filed in connection with Tenant's
Alterations, repairs or installations, including the liens of any conditional
sales of, or chattel mortgages made by Tenant upon, any materials, fixtures or
articles so installed in and constituting part of the Premises and against any
loss, cost, liability, claim, damage and expense, including reasonable counsel
fees, penalties and fines incurred in connection with any such lien, conditional
sale or chattel mortgage or any action or proceeding brought thereon. Tenant
agrees to obtain and deliver to Landlord, promptly upon completion of each
Alteration, written and unconditional waivers of mechanics' liens for all work,
labor and services performed and materials furnished, signed by all contractors,
subcontractors, materialmen and laborers involved in such work. Tenant shall not
be obligated to obtain said waivers for work, labor, services or materials
performed or furnished during the Term which total, in the aggregate, One
Thousand ($1,000) Dollars or less.
(G) Tenant, at its expense, shall procure the satisfaction or
discharge of all such liens within thirty (30) days of the filing of such lien
against the Premises or the Building. If Tenant shall fail to cause such lien to
be discharged within the aforesaid period, then, in addition to any other right
or remedy, Landlord may, but shall not be obligated to, discharge the same
either by paying the amount claimed to be due or by procuring the discharge of
such lien by deposit or by bonding proceedings, and in any such event Landlord
shall be entitled, if Landlord so elects, to compel the prosecution of an action
for the foreclosure of such lien by the lienor and to pay the amount of the
judgment in favor of the lienor with interest, costs and allowances. Any amount
so paid by Landlord, and all costs and expenses incurred by Landlord in
connection therewith, together with interest thereon at the maximum rate
permitted by law from the respective dates of Landlord's making of the payments
or incurring of the cost and expense, shall constitute additional rent and shall
be paid on demand.
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(H) Nothing in this lease contained shall be construed in any
way as constituting the consent or request of Landlord, expressed or implied, to
any contractor, subcontractor, laborer or materialman for the performance of any
labor or the furnishing of any material for any improvement, alteration or
repair of the Premises, nor as giving any right or authority to contract for the
rendering of any services or the furnishing of any materials that would give
rise to the filing of any mechanics' liens against the Premises.
(I) Prior to making any Alteration hereunder, Tenant shall
obtain and submit to Landlord a copy of a bona fide bid, from a reputable
contractor, which Tenant desires to accept for each Alteration to be performed
and permitted hereunder. Landlord shall have the right, at its option, to match
such bid within the Bid Period (hereinafter defined) and to perform the
Alteration upon terms and conditions substantially similar to those accompanying
such bid (including conditions with respect to time limits for completion of the
Alterations, and quality of materials to be used, in accordance with the bid
requirements). The Bid Period shall mean the same number of calendar days
allowed by Tenant to contractors for the submission to Tenant of a written bid
to perform the Alteration. The Bid Period shall commence on the date that Tenant
delivers to Landlord, at the address to which notices are sent to Landlord in
accordance with Article 34 of this lease, the same information and construction
plans provided by Tenant to contractors to facilitate the preparation of a bid
to perform the Alteration. If Landlord does not elect to match such bid, Tenant
shall have the right to use such contractor to perform the Alteration, in
accordance with the bona fide bid, provided such contractor shall be properly
licensed and insured and shall be reasonably satisfactory to Landlord. In the
event Landlord fails to give Tenant written notice by certified mail (return
receipt requested) or by overnight courier, of its election within the Bid
Period, it shall be deemed that Landlord has elected not to perform such work.
REQUIREMENTS OF LAW
15. (A) Tenant, as Tenant's sole cost and expense, shall comply with
all statutes, laws, ordinances, orders, regulations and notices of Federal,
State, County and Municipal authorities, and with all directions, pursuant to
law, of all public officers, which shall impose any duty upon Tenant with
respect to the Demised Premises or the use or occupation thereof, except that
Tenant shall not be required to make any structural alterations or capital
improvements to the Demised Premises or the Building in order so to comply
unless such alterations shall be necessitated or occasioned, in whole or in
part, by the acts, omissions, or negligence of Tenant or any person claiming
through or under Tenant or any of
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their servants, employees, contractors, agents, visitors or licensees, or by the
use or occupancy or manner of use or occupancy of the Demised Premises by
Tenant, or any such person.
(B) The parties acknowledge that there are certain Federal,
State and local laws, regulations and guidelines now in effect and that
additional laws, regulations and guidelines may hereafter be enacted, relating
to or affecting the Premises, the Building, and the land of which the Premises
and the Building may be a part, concerning the impact on the environment of
construction, land use, the maintenance and operation of structures and the
conduct of business. Tenant will not cause, or permit to be caused, any act or
practice, by negligence, omission, or otherwise, that would adversely affect the
environment or do anything or permit anything to be done that would violate any
of said laws, regulations, or guidelines. Any violation of this covenant shall
be an event of default under this lease.
(C) Tenant shall keep or cause the Premises to be kept free of
Hazardous Materials (hereinafter defined). Without limiting the foregoing,
Tenant shall not cause or permit the Premises to be used to generate,
manufacture, refine, transport, treat, store, handle, dispose, transfer, produce
or process Hazardous Materials, except in compliance with all applicable
Federal, State and Local laws or regulations, nor shall Tenant cause or permit,
as a result of any intentional or unintentional act or omission on the part of
Tenant or any person or entity claiming through or under Tenant or any of their
employees, contractors, agents, visitors or licensees (collectively, "Related
Parties"), a release of Hazardous Materials onto the Premises or onto any other
property. Tenant shall comply with and ensure compliance by all Related Parties
with all applicable Federal, State and Local laws, ordinances, rules and
regulations, whenever and by whomever triggered, and shall obtain and comply
with, and ensure that all Related Parties obtain and comply with, any and all
approvals, registrations or permits required thereunder. With respect to
Hazardous Materials for which Tenant is responsible hereunder, Tenant shall (i)
conduct and complete all investigations, studies, samplings, and testing, and
all remedial removal and other actions necessary to clean up and remove such
Hazardous Materials, on, from, or affecting the Premises (a) in accordance with
all applicable Federal, State and Local laws, ordinances, rules, regulations,
policies, orders and directives, and (b) to the reasonable satisfaction of
Landlord, and (ii) defend, indemnify, and hold harmless Landlord, its employees,
agents, officers, and directors, from and against any claims, demands,
penalties, fines, liabilities, settlements, damages, reasonable costs, and
expenses of whatever kind or nature, known or unknown, contingent or otherwise,
arising out of, or in any way related to, (a) the presence, disposal, release,
or threatened release by Tenant of such Hazardous Materials which are on, from,
or affecting the soil, water, vegetation, buildings, personal
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property, persons, animals, or otherwise at the Real Property; (b) any personal
injury (including wrongful death) or property damage (real or personal) arising
out of or related to such Hazardous Materials; (c) any lawsuit brought or
threatened, settlement reached, or government order relating to such Hazardous
Materials; and/or (d) any violation of laws, orders, regulations, requirements,
or demands of government authorities, including, without limitation, reasonable
attorney and consultant fees, investigation and laboratory fees, court costs,
and litigation expenses. In the event this lease is terminated, or Tenant is
dispossessed, Tenant shall deliver the Premises to Landlord free of any and all
Hazardous Materials other than Hazardous Materials existing at the Demised
Premises as of the Rent Commencement Date, or the date Tenant receives
possession of any additional space at the Building, as the case may be, so that
the conditions of the Premises shall conform with all applicable Federal, State
and Local laws, ordinances, rules or regulations affecting the Premises. For
purposes of this paragraph, "Hazardous Materials" includes, without limitation,
any flammable explosives, radioactive materials, hazardous materials, hazardous
wastes, hazardous or toxic substances, or related materials defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Sections 9601, et seq.), the Hazardous Materials
Transportation Act, as amended (49 U.S.C. Sections 1801 et seq.), the Resource
Conservation and Recovery Act, as amended (42 U.S.C. ]Sections 9601, et seq.),
and in the regulations adopted and publications promulgated pursuant thereto, or
any other Federal, State or Local environmental law, ordinance, rule, or
regulation.
(D) Landlord represents that general office use is a permitted
use under current zoning classifications and the certificate of occupancy
applicable to the Building. Landlord also represents that as of the date of this
Lease, the Building of which the Demised Premises forms a part is in compliance
with all mandatory requirements of the American with Disabilities Act ("ADA").
If any existing ADA requirements become mandatory as a result of Tenant's use of
the Demised Premises or any alteration made by or on behalf of Tenant except for
Landlord's Initial Construction and any other alteration or improvement
performed by Landlord, in accordance with the terms of this lease, to prepare
additional space in the Building for occupancy by Tenant, Tenant shall be
responsible for the entire cost of addressing such requirement(s) including the
work required to be performed to bring the Demised Premises into compliance with
such ADA requirements. If Tenant is not solely responsible for any additional
ADA requirement, then to the extent Tenant is responsible therefor, Tenant shall
pay for the costs of addressing such requirement on a proportional basis. To the
best of Landlord's knowledge there is no friable asbestos within the Building,
the Building is in compliance with all laws pertaining to Hazardous Materials,
and the Demised Premises do not contain any Hazardous Materials.
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END OF TERM
16. (A) Upon the expiration or other termination of the Term of this
lease, Tenant shall, at its own expense, quit and surrender to Landlord the
Demised Premises, broom clean, in good order and condition, ordinary wear, tear,
natural deterioration and damage by fire or other insured casualty excepted, and
Tenant shall remove all of its property and shall pay the cost to repair all
damage to the Demised Premises or the Building occasioned by such removal. Any
property not removed from the Premises shall be deemed abandoned by Tenant and
may be retained by Landlord, as its property, or disposed of in any manner
deemed appropriate by the Landlord. Any reasonable expense incurred by Landlord
in removing or disposing of such property shall be reimbursed to Landlord by
Tenant within twenty (20) days following Tenant's receipt of an itemized invoice
of such expenses from Landlord accompanied by invoices for all materials
supplied and labor performed by parties other than Landlord's affiliates and
employees. Tenant expressly waives, for itself and for any person claiming
through or under Tenant, any rights which Tenant or any such person may have
under the provisions of Section 2201 of the New York Civil Practice Law and
Rules and of any successor law of like import then in force, in connection with
any holdover or summary proceeding which Landlord may institute to enforce the
foregoing provisions of this Article. Tenant's obligation to observe or perform
this covenant shall survive the expiration or other termination of the Term of
this lease. If the last day of the Term of this lease or any renewal hereof
falls on Sunday or a legal holiday, this lease shall expire on the business day
immediately preceding. Tenant's obligations under this Article 16 shall survive
the Expiration Date or sooner termination of this lease.
(B) In the event of any holding over by Tenant after the expiration
or termination of this Lease without the written consent of Landlord, Tenant
shall:
(i) pay as holdover rental for each month of the
holdover tenancy an amount equal to the greater of (a) the fair market rental
value of the Premises for such month (as reasonably determined by Landlord) or
(b) one hundred fifty (150%) percent of the Rent payable by Tenant for the third
month prior to the Expiration Date of the term of this lease, and otherwise
observe, fulfill and perform all of its obligations under this lease, including
but not limited to, those pertaining to additional rent, in accordance with its
terms; and
(ii) In the event such holdover exceeds thirty (30)
days, in addition to the holdover rental set forth above, Tenant shall:
(a) be liable to Landlord for any payment or
rent concession which Landlord may be required to make to any
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tenant in order to induce such tenant not to terminate an executed lease
covering all or any portion of the Premises by reason of the holdover over by
Tenant; and
(b) be liable to Landlord for any damages
suffered by Landlord as the result of Tenant's failure to surrender
the Premises.
No holding over by Tenant after the Term shall operate to
extend the Term.
The holdover, with respect to all or any part of the Premises,
of a person deriving an interest in the Premises from or through Tenant,
including, but not limited to, an assignee or subtenant, shall be deemed a
holdover by Tenant.
Notwithstanding anything in this Article contained to the
contrary, the acceptance of any Rent paid by Tenant pursuant to this Paragraph
16(B), shall not preclude Landlord from commencing and prosecuting a holdover or
eviction action or proceeding or any action or proceeding in the nature thereof.
The preceding sentence shall be deemed to be an "agreement expressly providing
otherwise" within the meaning of Section 232-c of the Real Property Law of the
State of New York and any successor law of like import.
QUIET ENJOYMENT
17. Landlord covenants and agrees with Tenant that upon Tenant paying
the Rent and additional rent and observing and performing all the terms,
covenants and conditions on Tenant's part to be observed and performed, Tenant
may peaceably and quietly enjoy the Demised Premises during the Term of this
lease without hindrance or molestation by either Landlord or anyone claiming by
or through Landlord, subject, nevertheless, to the terms, covenants and
conditions of this lease including, but not limited to, Article 22.
SIGNS
18. No signs or lettering of any nature may be put on or in any window
or on the exterior of the Building or elsewhere within the Demised Premises such
as will be visible from the street. No sign or lettering in the public corridors
or on the doors is permitted except Landlord's standard name plaque.
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RULES AND REGULATIONS
19. Tenant and Tenant's agents, employees, visitors, and licensees
shall faithfully observe and comply with, and shall not permit violation of, the
Rules and Regulations set forth on Schedule D annexed hereto and made part
hereof, and with such further reasonable Rules and Regulations as Landlord at
any time may make and communicate in writing, sent in accordance with Article 34
hereof, to Tenant which, in Landlord's judgment, shall be necessary for the
reputation, safety, care and appearance of the Building and the land allocated
to it or the preservation of good order therein, or the operation or maintenance
of the Building, and such land, its equipment, or the more useful occupancy or
the comfort of the tenants or others in the Building. Such rules shall be deemed
effective upon five (5) days written notice to Tenant. Landlord shall not be
liable to Tenant for the violation of any of said Rules and Regulations, or the
breach of any covenant or condition, in any lease by any other tenant in the
Building. Notwithstanding anything to the contrary contained herein, or in any
Rules and Regulations of Landlord now or hereafter in effect, Tenant shall not
be obligated to use or patronize any vendor, supplier or cafeteria operator
Landlord may designate from time to time.
RIGHT TO SUBLET OR ASSIGN
20. (A) Tenant shall not assign this lease nor sublet the Demised
Premises or any part thereof, by operation of law or otherwise, including,
without limitation, an assignment or subletting as defined in (D) below, without
the prior written consent of Landlord in each instance, which consent shall not
be unreasonably withheld. Tenant may assign this lease or sublet all or a
portion of the Demised Premises with Landlord's prior written consent, provided:
(i) That such assignment or sublease is for a use which is in
compliance with this lease and the then existing zoning regulations and the
certificate of occupancy;
(ii) That, at the time of such assignment or subletting, there
is no monetary or material non-monetary default beyond expiration of any notice
and/or grace periods provided herein for the cure thereof, under the terms of
this lease on the Tenant's part;
(iii) That, in the event of an assignment, the assignee shall
assume in writing the performance of all of the terms and obligations of the
within lease;
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(iv) That a duplicate original of said assignment or sublease shall
be delivered by certified mail to the Landlord at the address herein set forth
within ten (10) days from the said assignment or sublease and within one hundred
twenty (120) days of the date that Tenant first advises Landlord of the name and
address of the proposed subtenant or assignee, as required pursuant to
subparagraph (B) hereof;
(v) Such assignment or subletting shall not, however, release the
within Tenant or any successor tenant or any guarantor from their primary
liability for the full and faithful performance of all of the terms and
conditions of this lease;
(vi) If this lease be assigned, or if the Demised Premises or any
part thereof be underlet or occupied by anybody other than Tenant, Landlord may
after default by Tenant, beyond expiration of any notice and/or grace periods
provided herein for the cure thereof, collect rent from the assignee,
undertenant or occupant, and apply the net amount collected to the rent herein
reserved; and
(vii) That, in the event Tenant shall request Landlord's consent to
a proposed assignment of this lease or proposed sublease of all or a portion of
the Demised Premises, Tenant shall pay or reimburse to Landlord the reasonable
attorney fees incurred by Landlord in processing such request.
(B) Notwithstanding anything contained in this Article 20 to
the contrary, no assignment or underletting shall be made by Tenant in any event
until Tenant has offered to terminate this lease as of the last day of any
calendar month during the Term hereof and to vacate and surrender the Demised
Premises to Landlord on the date fixed in the notice served by Tenant upon
Landlord (which date shall be prior to the date of such proposed assignment or
the commencement date of such proposed sublease)and Landlord has rejected such
offer. Simultaneously with said offer to terminate this lease, Tenant shall
advise the Landlord, in writing, of the name and address of the proposed
assignee or subtenant, a reasonably detailed statement of the proposed
subtenant/assignee's business, reasonable financial references, and all the
terms, covenants, and conditions of the proposed sublease or assignment.
Landlord shall accept or reject Tenant's offer within ten (10) days after
receiving all of the information from Tenant required pursuant to this
Paragraph. If Landlord does not respond within the aforementioned time period,
Landlord shall be deemed to have rejected Tenant's offer. If Landlord accepts
Tenant's offer hereunder at any time during the Term prior to the twelfth month
of the fifth Lease Year, Landlord shall promptly pay to Tenant the sum of
$85,642.50, and all additional rent paid by Tenant for any period beyond the
date the lease is terminated, provided Tenant is not then in default under any
provision of this lease. The obligation to pay said $85,642.50 shall not be
applicable during
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any renewal period. Landlord's obligation to pay said amounts to Tenant shall
survive the expiration of this lease.
(C) Notwithstanding anything to the contrary contained herein
Tenant may, without the consent of Landlord, assign this lease to an affiliated,
parent or subsidiary corporation, partnership or other entity of Tenant or to a
corporation, partnership or other entity to which it sells or assigns all or
substantially all of its assets, interest or shares of stock or with which it
may be consolidated or merged, or which is acquired in whole or in part by
Tenant, or which is controlled directly or indirectly by Tenant (control shall
mean the ownership of fifty (50%) percent or more of the capital stock,
partnership interest or ownership interest, whichever is applicable), provided
such purchasing, consolidated, merged, affiliated or subsidiary corporation,
partnership or other entity shall, in writing, assume and agree to perform all
of the obligations of Tenant under this lease and it shall deliver such
assumption with a copy of such assignment to Landlord within ten (10) days
thereafter, and provided further than Tenant shall not be released or discharged
from any liability under this lease by reason of such assignment.
(D) For purposes of this Article 20, (i) the transfer of a
majority of the issued and outstanding capital stock of any corporate tenant
other than Twin Laboratories Inc. or an assignee who acquired an interest in
this lease in accordance with an assignment effected pursuant to subparagraph C
of this Article, or of a corporate subtenant, or the transfer of a majority of
the total interest in any partnership tenant or subtenant, however accomplished,
whether in a single transaction or in a series of related or unrelated
transactions, shall be deemed an assignment of this lease, or of such sublease,
as the case may be; (ii) any person or legal representative of Tenant, to whom
Tenant's interest under this lease passes by operation of law or otherwise,
shall be bound by the provisions of this Article 20; and (iii) a modification or
amendment of a sublease shall be deemed a sublease.
(E) Whenever Tenant shall claim under this Article or any
other part of this lease that Landlord has unreasonably withheld or delayed its
consent to some request of Tenant, Tenant shall have no claim for damages by
reason of such alleged withholding or delay, and Tenant's sole remedy thereof
shall be a right to obtain specific performance or injunction but in no event
with recovery of damages.
(F) Tenant shall not mortgage, pledge, hypothecate or
otherwise encumber its interest under this lease without Landlord's prior
written consent.
(G) Without affecting any of its other obligations under this
lease, except with respect to any permitted assignment or subletting under
Article 20(C) hereof, Tenant will pay Landlord as
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additional rent any sums or other economic consideration, which (i) are
collected by Tenant as a result of any permitted assignment or subletting to a
then existing tenant in any building then owned by Landlord, whether or not
referred to as rentals under the assignment or sublease (after deducting
therefrom the reasonable costs and expenses incurred by Tenant in connection
with the assignment or subletting in question, including but not limited to,
attorney's fees and disbursements, reasonable broker's commissions, Tenant's
advertising costs and any allowance or economic concessions paid by Tenant to an
assignee or subtenant, provided such costs were approved by Landlord when it
approved the assignment or sublease. Tenant must seek such approval for costs
including Attorney's Fees, Tenant improvement costs, allowances, negotiated
monetary credits, reasonable broker's commissions and advertising costs, but
reasonable costs which Tenant could not ascertain prior to Landlord's approval
shall also be deducted so long as Tenant notifies Landlord promptly of such
costs when they arise); and (ii) exceed in total the sums which Tenant is
obligated to pay Landlord under this lease (prorated to reflect obligations
allocable to that portion of the Demised Premises subject to such assignment or
sublease), it being the express intention of the parties that Tenant shall not
in any manner whatsoever be entitled to any profit by reason of such sublease or
assignment.
In the event such permitted assignment or subletting is to
a person or entity which is not a then existing tenant in any building then
owned by Landlord, Tenant shall pay Landlord as additional rent fifty (50%)
percent of the above referenced sums collected by Tenant. Nothing contained
herein shall relieve Tenant from its primary obligations hereunder including,
without limitation, the obligation to pay Rent and additional rent hereunder.
Tenant will not amend the assignment or sublease in such a way as to reduce or
delay payment of amounts which are provided in the assignment or sublease
approved by Landlord.
(H) In determining reasonableness under this Article 20, there
shall be taken into account the character and reputation of the proposed
subtenant or assignee, the specific nature of the proposed subtenant's or
assignee's business and whether same is in keeping with other tenancies in the
building; the financial standing of the proposed subtenant or assignee; and the
impact of all of the foregoing upon the Building and the other tenants of
Landlord therein. Landlord shall not be deemed to have unreasonably withheld its
consent if it refuses to consent to a subletting or assignment to a proposed
subtenant or assignee with whom Landlord is negotiating a lease or if at the
time of Tenant's request, Tenant is in default, beyond applicable grace and
notice periods provided herein for the cure thereof, of any of the terms,
covenants and conditions of this lease to be performed by Tenant. At least
thirty (30) days prior to any proposed subletting or assignment, Tenant shall
submit to Landlord a written notice of the
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proposed subletting or assignment, which notice shall contain or be accompanied
by the following information:
(i) the name and address of the proposed subtenant or
assignee;
(ii) the nature and character of the business of the
proposed subtenant or assignee and its proposed use of the premises to be
demised;
(iii) the most recent three (3) years of balance sheets
and profit and loss statements of the proposed subtenant or assignee or other
financial information reasonably satisfactory to Landlord; and
(iv) such shall be accompanied by a copy of the proposed
sublease or assignment of lease.
(I) Notwithstanding the foregoing, Tenant agrees that it and
anyone holding through Tenant shall not sublet or assign all or any portion of
the Demised Premises to any subtenant or assignee who will use the Demised
Premises or a portion thereof for any of the following designated uses nor for
any other use which is substantially similar to any one of the following
designated uses:
(i) federal, state or local governmental division,
department or agency which generates heavy public traffic, including, without
limitation, court, social security offices, labor department office, drug
enforcement agency, motor vehicle agency, postal service, military recruitment
office;
(ii) union or labor organization;
(iii) office for the practice of medicine, dentistry or
the rendering of other "retail" level health related services;
(iv) chemical or pharmaceutical company provided; however,
that the subletting or assignment to such a company which will use the premises
only for executive, general and sales offices and waive the right to conduct any
research and development shall not be prohibited;
(v) insurance claims office, including, but not limited
to, unemployment insurance or worker's compensation insurance; or
(vi) brokerage firm.
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LANDLORD'S ACCESS TO PREMISES
21. (A) Landlord or Landlord's agents shall have the right to enter
and/or pass through the Demised Premises at all reasonable times on reasonable
prior notice, except in an emergency, to examine the same, and to show them to
ground lessors, prospective purchasers or lessees or mortgagees of the Building,
and to make such repairs, improvements or additions as Landlord may deem
necessary or desirable, and Landlord shall be allowed to take all material into
and upon and/or through said Demised Premises that may be required therefor.
During the twelve (12) months prior to the expiration of the Term of this lease,
or any renewal term, Landlord may exhibit the Demised Premises to prospective
tenants or purchasers at all reasonable hours upon verbal notice given at least
one hour prior to entry and without unreasonably interfering with Tenant's
business. If Tenant shall not be personally present to open and permit an entry
into said premises at any time, when for any reason an entry therein shall be
reasonably necessary to meet Landlord's obligations under the lease, Landlord or
Landlord's agents may enter the same by a master key, or forcibly, upon
reasonable prior written notice to Tenant (except in cases of emergency) and
Tenant's failure to provide access in accordance with the notice, without
rendering Landlord or such agent liable therefor (if during such entry Landlord
or Landlord's agents shall accord reasonable care to Tenant's property).
Landlord shall use reasonable effort to minimize interference with Tenant's
business when exercising its rights under this paragraph.
(B) Landlord shall also have the right, at any time, to change
the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets, or other public parts of the
Building, provided, however, that Landlord shall make no change in the
arrangement and/or location of public entrances or passageways or other public
parts of the Building which will adversely affect in any material manner
Tenant's use and enjoyment of the Demised Premises. Landlord shall also have the
right, at any time, to name the Building, including, but not limited to, the use
of appropriate signs and/or lettering on any or all entrances to the Building,
and to change the name, number or designation by which the Building is commonly
known.
(C) Neither this lease nor any use by Tenant shall give Tenant
any right or easement to the use of any door or passage or concourse connecting
with any other building or to any public conveniences, and the use of such doors
and passages and concourse and of such conveniences may be regulated and/or
discontinued at any time and from time to time by Landlord without notice to
Tenant.
(D) The exercise by Landlord or its agents of any right
reserved to Landlord in this Article shall not constitute an actual
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or constructive eviction, in whole or in part, or entitle Tenant to any
abatement or diminution of rent, or relieve Tenant from any of its obligations
under this lease, or impose any liability upon Landlord, or its agents, or upon
any lessor under any ground or underlying lease, by reason of inconvenience or
annoyance to Tenant, or injury to or interruption of Tenant's business, or
otherwise.
SUBORDINATION
22. (A) This lease and all rights of Tenant hereunder are, and
shall be, subject and subordinate in all respects to all ground leases and/or
underlying leases and to all first mortgages and building loan agreements which
may now or hereafter be placed on or affect such leases and/or the Real Property
of which the Demised Premises form a part, or any part or parts of such Real
Property, and/or Landlord's interest or estate therein, and to each advance made
and/or hereafter to be made under any such mortgages, and to all renewals,
modifications, consolidations, replacements and extensions thereof and all
substitutions therefor. This Section A shall be self-operative and no further
instrument of subordination shall be required. In confirmation of such
subordination, Tenant shall execute and deliver promptly any certificate that
Landlord and/or any mortgagee and/or the lessor under any ground or underlying
lease and/or their respective successors in interest may request.
Notwithstanding anything to the contrary contained in this Lease, Landlord
agrees to obtain, enter into and require the Holder and/or any current or future
mortgage lender(s) to enter into, and Tenant agrees to enter into, a
subordination, nondisturbance and attornment agreement with any current or
future mortgage lender(s) and/or the holder of all ground and/or underlying
leases, (collectively "Holder") on such lender's and/or Holders standard form.
Notwithstanding anything to the contrary contained in this lease, subordination
of this lease pursuant to this Article shall be conditioned upon Landlord's
compliance with this paragraph. Landlord represents that there is no current
Holder with respect to the subject Building.
(B) Without limitation of any of the provisions of this lease,
in the event that any mortgagee or its assigns shall succeed to the interest of
Landlord or of any successor-Landlord and/or shall have become lessee under a
new ground or underlying lease, then, at the option of such mortgagee, this
lease shall nevertheless continue in full force and effect and Tenant shall and
does hereby agree to attorn to such mortgagee or its assigns and to recognize
such mortgagee or its respective assigns as its Landlord, in accordance with the
aforesaid subordination, non-disturbance and attornment agreement.
(C) Tenant shall, at any time and from time to time (but no
more than four (4) times in any one lease year), upon not less
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than ten (10) business days prior notice by Landlord, execute, acknowledge and
deliver to Landlord a statement in writing certifying that this lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modification) and the dates to which the Rent, additional rent and other charges
have been paid in advance, if any, and stating whether or not to the best
knowledge of the signer of such certificate Landlord is in default in
performance of any covenant, agreement, term, provision or condition contained
in this lease, and if so, specifying each such default of which the signer may
have knowledge, it being intended that any such statement delivered pursuant
hereto may be relied upon by any prospective purchaser or lessee of said real
property or any interest or estate therein, any mortgagee or prospective
mortgagee thereof, or any prospective assignee of any mortgage thereof. If, in
connection with such financing, such institutional lender shall require
financial audited information on the Tenant, Tenant shall promptly provide its
most recent financial statements.
(D) Subject to and in accordance with the provisions of the
applicable Subordination, Nondisturbance and Attornment Agreement, the Tenant
covenants and agrees that if by reason of a default under any underlying lease
(including an underlying lease through which the Landlord derives its leasehold
estate in the premises), such underlying lease and the leasehold estate of the
Landlord in the premises demised hereby is terminated, providing notice has been
given to the Tenant and leasehold mortgagee, the Tenant will attorn to the then
holder of the reversionary interest in the premises demised by this lease or to
anyone who shall succeed to the interest of the Landlord or to the lessee of a
new underlying lease entered into pursuant to the provisions of such underlying
lease, and will recognize such holder and/or such lessee as the Tenant's
landlord of this lease. The Tenant agrees to execute and deliver, at any time
and from time to time, upon ten (10) business days prior written notice from
Landlord or of the lessor under any such underlying lease, any instrument which
may be necessary or appropriate to evidence such attornment. The Tenant further
waives the provision of any statute or rule of law now or hereafter in effect
which may give or purport to give the Tenant any right of election to terminate
this lease or to surrender possession of the premises in the event any
proceeding is brought by the lessor under any underlying lease to terminate the
same, and agrees that unless and until any such lessor, in connection with any
such proceeding, shall elect to terminate this lease and the rights of the
Tenant hereunder, this lease shall not be affected in any way whatsoever by any
such proceeding.
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PROPERTY LOSS, DAMAGE REIMBURSEMENT
23. (A) Except otherwise specifically provided in this Article.
Landlord or its agents shall not be liable for any damages to property of Tenant
or of others entrusted to employees of the Building, nor for the loss of or
damage to any property of Tenant by theft or otherwise. Landlord or its agents
shall not be liable for any injury or damage to persons or property resulting
from fire, explosion, falling plaster, steam, gas, electricity, electrical
disturbance, water, rain or snow or leaks from any part of the Building or from
the pipes, appliances or plumbing works or from the roof, street or subsurface
or from any other place or by dampness or by any other cause of whatsoever
nature, unless caused by or due to the negligence of Landlord, its agents,
servants or employees; nor shall Landlord or its agents be liable for any such
damage caused by other tenants or persons in the Building or caused by
operations in construction of any private, public or quasi-public work. If at
any time any windows of the Demised Premises are temporarily closed or darkened
incident to or for the purpose of repairs, replacements, maintenance and/or
cleaning in, on, to or about the Building or any part or parts thereof, Landlord
shall not be liable for any damage Tenant may sustain thereby and Tenant shall
not be entitled to any compensation therefor nor abatement of rent nor shall the
same release Tenant from its obligations hereunder nor constitute an eviction.
Landlord shall use reasonable efforts to minimizing the period during which any
windows are temporarily closed or darkened. Tenant shall reimburse and
compensate Landlord as additional rent for all expenditures (including, without
limitation, reasonable attorneys' fees) made by, or damages or fines sustained
or incurred by, Landlord due to non-performance or non-compliance with or breach
or failure to observe any term, covenant or condition of this lease upon
Tenant's part to be kept, observed, performed or complied with. Tenant shall
give immediate notice to Landlord in case of fire in the Demised Premises or in
the Building or of defects therein or in any fixtures or equipment.
TENANT'S INDEMNITY
(B) Tenant shall indemnify and save harmless Landlord against and
from any and all claims by or on behalf of any person or persons, firm or firms,
corporation or corporations arising from the conduct or management of or from
any work or other thing whatsoever done (other than by Landlord or its
contractors or the agents or employees of either) in and on the Demised Premises
during any other period of occupancy by Tenant including the Term of this lease
and during the period of time, if any, prior to the specified commencement date
that Tenant may have been given access to the Demised Premises for the purpose
of making installations,
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and will further indemnify and save harmless Landlord against and from any and
all claims arising from any condition of the Demised Premises or Tenant's
occupancy thereof due to or arising from any act or omissions or negligence of
Tenant or any of its agents, contractors, servants, employees, licensees or
invitees and against and from all costs, expenses, and liabilities incurred in
connection with any such claim or claims or action or proceeding brought
thereon; and in case any action or proceeding be brought against Landlord by
reason of any such claim, Tenant, upon written notice from Landlord, agrees that
Tenant, at Tenant's expense, will resist or defend such action or proceeding and
will employ counsel therefor reasonably satisfactory to Landlord. Landlord
agrees that counsel employed by Tenant's insurance carrier shall be deemed
satisfactory to Landlord.
DESTRUCTION - FIRE OR OTHER CASUALTY
24. (A) If the Premises or any part thereof shall be damaged by fire or
other casualty and Tenant gives prompt notice thereof to Landlord, Landlord
shall proceed with reasonable diligence to repair or cause to be repaired such
damage (including Landlord's Initial Construction). The Rent and Additional Rent
shall be abated to the extent that the Premises shall have been rendered
untenantable, such abatement to be from the date of such damage or destruction
to ten (10) days following the date that repairs have been Substantially
Completed (as defined in Article 2 hereof), in proportion which the area of the
part of the Premises so rendered untenantable bears to the total area of the
Premises.
(B) If the Premises shall be totally damaged or rendered wholly
untenantable (which shall include damage that prevents reasonable means of
ingress and egress to and from the Demised Premises) by fire or other casualty,
and Landlord has not terminated this lease pursuant to Subsection (C) and
Landlord has not completed the making of the required repairs and restored and
rebuilt the Premises and/or access thereto, in accordance with this lease,
within twelve (12) months from the date of such damage or destruction, and such
additional time after such date (but in no event to exceed three (3) months) as
shall equal the aggregate period Landlord may have been delayed in doing so by
unavoidable delays or adjustment of insurance, Tenant may serve notice on
Landlord of its intention to terminate this lease, and, if within thirty (30)
days thereafter Landlord shall not have Substantially Completed the making of
the required repairs and restored and rebuilt the Premises, in accordance with
this lease, this lease shall terminate on the expiration of such thirty (30) day
period as if such termination date were the Expiration Date, and the Rent and
additional rent shall be apportioned as of such date and any prepaid portion of
Rent and additional rent for any period after such date shall be promptly
refunded by Landlord to Tenant and this
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obligation shall survive the termination of this lease. The Demised Premises
shall be deemed to be totally damaged or rendered wholly untenantable if the
portion of the Demised Premises useable by Tenant is not functional without the
portion damaged or rendered wholly untenantable, and Tenant is no longer using
any part of the Demised Premises.
(C) If the Premises shall be totally damaged or rendered wholly
untenantable by fire or other casualty or if the Building shall be so damaged by
fire or other casualty that substantial alteration or reconstruction of the
Building shall, in Landlord's opinion, be required (whether or not the Premises
shall have been damaged by such fire or other casualty), then in any of such
events Landlord may, at its option, terminate this lease and the Term and estate
hereby granted, by giving Tenant thirty (30) days notice of such termination
within sixty (60) days after the date of such damage. In the event that such
notice of termination shall be given, this lease and the Term and estate hereby
granted, shall terminate as of the date provided in such notice of termination
(whether or not the Term shall have commenced) with the same effect as if that
were the Expiration Date, and the Rent and additional rent shall be apportioned
as of such date or sooner termination, and, provided that such date is prior to
the twelfth month of the fifth Lease Year, Landlord shall promptly pay to Tenant
the sum of $85,642.50, and all additional rent paid by Tenant for any period
beyond the date the lease is terminated, provided Tenant is not then in default
under any provision of this lease. The obligation to pay said $85,642.50 shall
not be applicable during any renewal period. This obligation shall survive the
expiration of this Lease.
(D) Landlord shall not be liable for any inconvenience or annoyance
to Tenant or injury to the business of Tenant resulting in any way from such
damage by fire or other casualty or the repair thereof. Landlord will not carry
insurance of any kind on Tenant's property, and Landlord shall not be obligated
to repair any damage thereto or replace the same, and this obligation shall
survive the expiration of this lease.
(E) This lease shall be considered an express agreement governing
any case of damage to or destruction of the Building or any part thereof by fire
or other casualty, and Section 227 of the Real Property Law of the State of New
York providing for such a contingency in the absence of such express agreement,
and any other law of like import now or hereafter enacted, shall have no
application in such case.
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INSURANCE
25. (A) Tenant shall not do anything, or suffer or permit anything to
be done, in or about the Premises which shall (i) invalidate or be in conflict
with the provisions of any fire or other insurance policies covering the
Building or any property located therein, or (ii) result in a refusal by fire
insurance companies of good standing to insure the Building or any such property
in amounts reasonably satisfactory to Landlord, or (iii) subject Landlord to any
liability or responsibility for injury to any person or property by reason of
any activity being conducted in the Premises or (iv) cause any increase in the
fire insurance rates applicable to the Building or equipment or other property
located therein at the beginning of the Term or at any time thereafter. Tenant,
at Tenant's expense, shall comply with all rules, orders, regulations or
requirements of the New York Board of Fire Underwriters and the New York Fire
Insurance Rating Organization or any similar body, except that Tenant shall not
be required to make any structural alterations or capital improvements to the
Building or the Demised Premises in connection therewith.
(B) If, by reason of any act or omission on the part of Tenant,
(other than the use of the Demised Premises as general, executive and
administrative offices only, in accordance with this lease), the rate of fire
insurance with extended coverage on the Building or equipment or other property
of Landlord or any other tenant or occupant of the Building shall be higher than
it otherwise would be, Tenant shall reimburse Landlord and all such other
tenants or occupants, upon fifteen (15) days notice from Landlord, accompanied
by evidence from the applicable insurance carrier as to amount of the increase,
for the part of the premiums for fire insurance and extended coverage paid by
Landlord and such other tenants or occupants because of such act or omission on
the part of Tenant. Upon written request, Landlord shall provide Tenant with a
description of the act or omission on the part of Tenant giving rise to said
increase.
(C) In the event that any dispute should arise between Landlord and
Tenant concerning insurance rates, a schedule or make up of insurance rates for
the Building or the Premises, as the case may be, issued by the New York Fire
Insurance Rating Organization or other similar recognized body making rates for
fire insurance and extended coverage for the Premises concerned, shall be
conclusive evidence of the facts therein stated and of the several items and
charges in the fire insurance rates with extended coverage then applicable to
such Premises.
(D) Tenant shall obtain and keep in full force and effect during
the Term, at its own cost and expense, (i) Public Liability Insurance, such
insurance to afford protection in an
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amount of not less than Three Million ($3,000,000) Dollars for injury or death
arising out of any one occurrence, and Five Hundred Thousand ($500,000) Dollars
for damage to property, protecting Landlord and Tenant as insureds against any
and all claims for personal injury, death or property damage and (ii) Fire and
Extended Coverage Insurance on Tenant's property, insuring against damage by
fire, and such other risks and hazards as are insurable under present and future
standard forms of fire and extended coverage insurance policies, to Tenant's
property for the full insurable value thereof, protecting Landlord and Tenant as
insureds.
(E) Said insurance is to be written in form and substance
reasonably satisfactory to Landlord by a good and solvent insurance company
admitted to do business in the State of New York, and rated by Best's Insurance
Reports or any successor publication of comparable standing as A-/VIII or better
or the then equivalent of such rating. Tenant shall procure, maintain and place
such insurance and pay all premiums and charges therefor and upon failure to do
so Landlord may, but shall not be obligated to, procure, maintain and place such
insurance or make such payments, and in such event the Tenant agrees to pay the
amount thereof, plus interest at the maximum rate permitted by law, to Landlord
payable within twenty (20) days of notice of same. Upon written request Landlord
will promptly provide Tenant with an invoice or other evidence as to the amount
of the insurance premium. Tenant shall cause to be included in all such
insurance policies a provision to the effect that the same will be
non-cancelable except upon twenty (20) days written notice to Landlord. On the
Rent Commencement Date appropriate certificates of insurance showing that the
policy is paid shall be deposited with Landlord. Any renewals, replacements or
endorsements thereto shall also be deposited with Landlord to the end that said
insurance shall be in full force and effect during the Term.
(F) Each party agrees to use its best efforts to include in each of
its insurance policies (insuring the Building and Landlord's property therein,
in the case of Landlord, and insuring Tenant's property, in the case of Tenant,
against loss, damage or destruction by fire or other casualty) a waiver of the
insurer's right of subrogation against the other party, or if such waiver should
be unobtainable or unenforceable (i) an express agreement that such policy shall
not be invalidated if the insured waives or has waived before the casualty, the
right of recovery against any party responsible for a casualty covered by the
policy, or (ii) any other form of permission for the release of the other party,
or (iii) the inclusion of the other party as an additional insured, but not a
party to whom any loss shall be payable. If such waiver, agreement or permission
shall not be, or shall cease to be, obtainable without additional charge or at
all, the insured party shall so notify the other party promptly after learning
thereof. In such case, if the other party shall agree in writing to pay the
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insurer's additional charge therefor, such waiver, agreement or permission shall
be included in the policy, or the other party shall be named as an additional
insured in the policy, but not a party to whom any loss shall be payable. Each
such policy which shall so name a party hereto as an additional insured shall
contain, if obtainable, agreements by the insurer that the policy will not be
cancelled without at least twenty (20) days prior notice to both insureds and
that the act or omission of one insured will not invalidate the policy as to the
other insured.
(G) As long as Landlord's fire insurance policies then in force
include the waiver of subrogation or agreement or permission to release
liability referred to in Subsection (F) or name the Tenant as an additional
insured, Landlord hereby waives (i) any obligation on the part of Tenant to make
repairs to the Premises necessitated or occasioned by fire or other casualty
that is an insured risk under such policies, and (ii) any right of recovery
against Tenant, any other permitted occupant of the Premises, and any of their
servants, employees, agents or contractors, for any loss occasioned by fire or
other casualty that is an insured risk under such policies. In the event that at
any time Landlord's fire insurance carriers shall not include such or similar
provisions in Landlord's fire insurance policies, the waivers set forth in the
foregoing sentence shall, upon notice given by Landlord to Tenant, be deemed of
no further force or effect, with respect to any insured risks under such policy
from and after the giving of such notice. During any period while the foregoing
waiver of right of recovery is in effect, Landlord shall look solely to the
proceeds of such policies to compensate Landlord for any loss occasioned by fire
or other casualty which is an insured risk under such policies.
(H) As long as Tenant's fire insurance policies then in force
include the waiver of subrogation or agreement or permission to release
liability referred to in Subsection (F), or name the Landlord as an additional
insured, Tenant hereby waives (and agrees to cause any other permitted occupants
of the Premises to execute and deliver to Landlord written instruments waiving)
any right of recovery against Landlord, any other tenants or occupants of the
Building, and any servants, employees, agents or contractors of Landlord or of
any such other tenants or occupants, for any loss occasioned by fire or other
casualty which is an insured risk under such policies. In the event that at any
time Tenant's fire insurance carriers shall not include such or similar
provisions in Tenant's fire insurance policies, the waiver set forth in the
foregoing sentence shall, upon notice given by Tenant to Landlord, be deemed of
no further force or effect with respect to any insured risks under such policy
from and after the giving of such notice. During any period while the foregoing
waiver of right of recovery is in effect, Tenant, or any other permitted
occupant of the Premises, as the case may be, shall look solely to the proceeds
of such policies to compensate Tenant or such other permitted occupant
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for any loss occasioned by fire or other casualty which is an insured risk under
such policies.
(I) Tenant shall have the right to insure and maintain insurance
under blanket insurance policies covering other premises used or operated by
Tenant so long as such blanket policies are aggregated so that at all times when
required by this lease there is adequate insurance attributable to the Demises
Premises or to this lease so as to comply with the insurance provisions set
forth in this lease.
EMINENT DOMAIN
26. (A) In the event that the whole of the Demised Premises, or all or
a portion of the parking lot (if alternative parking, providing Tenant with use
of the same number of parking spaces set forth in this lease, cannot be provided
within five hundred (500) feet of the Building), shall be lawfully condemned or
taken in any manner for any public or quasi-public use, this lease and the Term
and estate hereby granted shall forthwith cease and terminate as of the date of
vesting of title. In the event that only a part of the Demised Premises shall be
so condemned or taken, then effective as of the date of vesting of title, the
Rent and additional rent hereunder shall be abated in an amount thereof
apportioned according to the area of the Demised Premises so condemned or taken.
In the event that only a part of the Building (consisting of at least
twenty-five (25%) percent of the area of the Building set forth in Article 1
hereof), shall be so condemned or taken, then (i) Landlord (whether or not the
Demised Premises be affected) may, at its option, terminate this lease effective
as of the date of vesting of title and the Term and estate hereby granted as of
the date of such vesting of title by notifying Tenant in writing of such
termination within sixty (60) days following the date on which Landlord shall
have received notice of vesting of title, and (ii) if such condemnation or
taking shall be of a substantial part of the Demised Premises or a substantial
part of the means of access thereto (substantial part shall mean more than forty
(40%) percent, or if in the last year of the term, more than twenty-five (25%)
percent of the Demised Premises), Tenant shall have the right, by delivery of
notice in writing to Landlord within sixty (60) days following the date on which
Tenant shall have received notice of vesting of title, to terminate this lease
and the Term and estate hereby granted as of the date of vesting of title, or
(iii) if neither Landlord nor Tenant elects to terminate this lease, as
aforesaid, this lease shall be and remain unaffected by such condemnation or
taking, except that the Rent and additional rent shall be abated to the extent,
if any, hereinabove provided in this Article 26, and Tenant's proportionate
share shall be adjusted accordingly. In the event that only a part of the
Demised Premises shall be so condemned or taken and this lease and the Term
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and estate hereby granted are not terminated as hereinbefore provided, Landlord
will, at its expense, promptly restore the remaining portion of the Demised
Premises as nearly as practicable to the same condition as it was in prior to
such condemnation or taking. In the event that Tenant has paid Rent and/or
additional rent for any period covered by an abatement under this article,
Landlord shall promptly refund such amounts to Tenant.
(B) In the event of a termination in any of the cases hereinabove
provided, this lease and the Term and estate granted shall expire as of the date
of such termination with the same effect as if that were the date hereinbefore
set for the expiration of the Term of this lease, and the Rent and additional
rent hereunder shall be apportioned as of such date and, provided that such date
is prior to the twelfth month of the fifth Lease Year, Landlord shall promptly
pay to Tenant the sum of $85,642.50, and all additional rent paid by Tenant for
any period beyond the date the lease is terminated, provided Tenant is not then
in default under any provision of this lease. The obligation to pay said
$85,642.50 shall not be applicable during any renewal period. This obligation
shall survive the expiration of this lease.
(C) In the event of any condemnation or taking hereinabove
mentioned of all or part of the Building, Landlord shall be entitled to receive
the entire award in the condemnation proceeding, including any award made for
the value of the estate vested by this lease in Tenant, and Tenant hereby
expressly assigns to Landlord any and all right, title and interest of Tenant
now or hereafter arising in or to any such award or any part thereof, and Tenant
shall be entitled to receive no part of such award, except that the Tenant may
file a claim for any taking of nonmovable fixtures owned by Tenant and for
moving expenses incurred by Tenant. It is expressly understood and agreed that
the provisions of this Article 26 shall not be applicable to any condemnation or
taking for governmental occupancy for a limited period, not exceeding twelve
(12) months in the aggregate during the term hereof.
NONLIABILITY OF LANDLORD
27. (A) If Landlord or a successor in interest is an individual (which
term as used herein includes aggregates of individuals, such as joint ventures,
general or limited partnerships or associations), such individual shall be under
no personal liability with respect to any of the provisions of this lease, and
if such individual hereto is in breach or default with respect to its
obligations under this lease, Tenant shall look solely to the equity of such
individual in the land and Building of which the Demised Premises form a part
for the satisfaction of Tenant's remedies and in no event shall Tenant attempt
to secure
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any personal judgment against any such individual or any partner, employee or
agent of Landlord by reason of such default by Landlord.
(B) The word "Landlord" as used herein means only the owner of the
landlord's interest for the time being in the land and Building (or the owners
of a lease of the Building or of the land and Building) of which the Premises
form a part, and in the event of any sale of the Building and land of which the
Demised Premises form a part, Landlord shall be and hereby is entirely freed and
relieved of all covenants and obligations of Landlord hereunder other than
claims against Landlord which are brought within sixty (60) days of Landlord's
giving notice to Tenant that there will be a new landlord (notice may consist of
an estoppel certificate in connection with the sale of the Building provided
Tenant is notified that such estoppel certificate is being requested in
connection with a sale of the Building), and, it shall be deemed and construed
without further agreement between the parties or between the parties and the
purchaser of the Premises, that such purchaser has assumed and agreed to carry
out any and all covenants and obligations of Landlord hereunder.
DEFAULT
28. (A) Upon the occurrence, at any time prior to or during the Demised
Term, of any one or more of the following events (referred to as "Events of
Default"):
(i) If Tenant shall default in the payment when due of any
installment of Rent or in the payment when due of any additional rent, and such
default shall continue for a period of ten (10) days after written notice by
Landlord to Tenant of such default; or
(ii) If Tenant shall default in the observance or performance of
any term, covenant or condition of this lease on Tenant's part to be observed or
performed (other than the covenants for the payment of Rent and additional rent)
and Tenant shall fail to remedy such default within twenty (20) days after
written notice by Landlord to Tenant of such default, or if such default is of
such a nature that it cannot be completely remedied within said period of twenty
(20) days and Tenant shall not commence within said period of twenty (20) days,
or shall not thereafter diligently prosecute to completion, all reasonable steps
necessary to remedy such default; or
(iii) If Tenant shall file a voluntary petition in bankruptcy or
insolvency, or shall be adjudicated a bankrupt or become insolvent, or shall
file any petition or answer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief under the
present or any
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future federal bankruptcy code or any other present or future applicable
federal, state or other statute or law, or shall make an assignment for the
benefit of creditors or shall seek or consent to or acquiesce in the appointment
of any trustee, receiver or liquidator of Tenant or of all or any part of
Tenant's property; or
(iv) If, within one hundred twenty (120) days after the
commencement of any proceeding against Tenant, whether by the filing of a
petition or otherwise, seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under the present or
any future federal bankruptcy code or any other present or future applicable
federal, state or other statute or law, such proceedings shall not have been
dismissed, or if, within one hundred twenty (120) days after the appointment or
any trustee, receiver or liquidator of Tenant, or of all or any part of Tenant's
property, such appointment shall not have been vacated or otherwise discharged,
or if any execution or attachment shall be issued against Tenant or any of
Tenant's property pursuant to which the Demised Premises shall be taken or
occupied or attempted to be taken or occupied; or
(v) If Tenant shall materially default in the observance or
performance of any term, covenant or condition on Tenant's part to be observed
or performed under any other lease with Landlord of space in the Building and
such material default shall continue beyond any grace period set forth in such
other lease for the remedying of such default; or
(vi) If Tenant's interest in this lease shall devolve upon or pass
to any person, whether by operation of law or otherwise, except as expressly
permitted under Article 20;
then, upon the occurrence, at anytime prior to or during the
Demised Term, of any one or more of such Events of Default, Landlord, at any
time thereafter, at Landlord's option, may give to Tenant a ten (10) days'
notice of termination of this lease and, in the event such notice is given, this
lease and the Term shall come to an end and expire (whether or not said term
shall have commenced) upon the expiration of said ten (10)days with the same
effect as if the date of expiration of said ten (10) days were the Expiration
Date, but Tenant shall remain liable for damages as provided in Article 30.
(B) If, at any time (i) Tenant shall be comprised of two (2) or
more persons, or (ii) Tenant's obligations under this lease shall have been
guaranteed by any person other than Tenant, or (iii) Tenant's interest in this
lease shall have been assigned, the word "Tenant", as used in subsection (iii)
and (iv) of Section 28(A), shall be deemed to mean any one or more of the
persons primarily or secondarily liable for Tenant's obligations under this
lease. Any monies received by Landlord from or on behalf of Tenant during the
pendency of any proceeding of the types referred to in
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said subsections (iii) and (iv) shall be deemed paid as compensation for the use
and occupation of the Demised Premises and the acceptance of such compensation
by Landlord shall not be deemed an acceptance of Rent or a waiver on the part of
Landlord of any rights under Section 28(A).
TERMINATION ON DEFAULT
29. (A) If Tenant shall default in the payment when due of any
installment of rent or in the payment when due of any additional rent and such
default shall continue for a period of ten (10) days after written notice by
Landlord to Tenant of such default, or if this lease and the Demised Term shall
expire and come to an end as provided in Article 28:
(i) Landlord and its agents and servants may immediately, or at any
time after such default or after the date upon which this lease and the Demised
Term shall expire and come to an end, re-enter the Demised Premises or any part
thereof, without notice, either by summary proceedings or by any other
applicable action or proceeding, or by force or other means provided such force
or other means are lawful (without being liable to indictment, prosecution or
damages therefor), and may repossess the Demised Premises and dispossess Tenant
and any other persons from the Demised Premises and remove any and all of their
property and effects from the Demised Premises; and
(ii) Landlord, at Landlord's option, may relet the whole or any
part or parts of the Demised Premises from time to time, either in the name of
Landlord or otherwise, to such tenant or tenants, for such term or terms ending
before, on or after the Expiration Date, at such rental or rentals and upon such
other conditions, which may include concessions and free rent periods, as
Landlord, in its sole discretion, may determine. Landlord shall have no
obligation to relet the Demised Premises or any part thereof and shall in no
event be liable for refusal or failure to relet the Demised Premises or any part
thereof, or, in the event of any such reletting, for refusal or failure to
collect any rent due upon any such reletting, and no such refusal or failure
shall operate to relieve Tenant of any liability under this lease or otherwise
to affect any such liability; Landlord, at Landlord's option, may make such
repairs, replacements, alterations, additions, improvements, decorations and
other physical changes in and to the Demised Premises as Landlord, in its sole
discretion, considers advisable or necessary in connection with any such
reletting or proposed reletting, without relieving Tenant of any liability under
this lease or otherwise affecting any such liability.
(B) Tenant, on its own behalf and on behalf of all persons claiming
through or under Tenant, including all creditors,
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does hereby waive any and all rights which Tenant and all such persons might
otherwise have under any present or future law to redeem the Demised Premises,
or to re-enter or repossess the Demised Premises, or to restore the operation of
this lease, after (i) Tenant shall have been dispossessed by a judgment or by
warrant of any court or judge, or (ii) any re-entry by Landlord, or (iii) any
expiration or termination of this lease and the Demised Term, whether such
dispossess, re-entry, expiration or termination shall be by operation of law or
pursuant to the provisions of this lease. In the event of a breach or threatened
breach by Tenant or any persons claiming through or under Tenant, of any term,
covenant or condition of this lease on Tenant's part to be observed or
performed, Landlord shall have the right to enjoin such breach and the right to
invoke any other remedy allowed by law or in equity as if re-entry, summary
proceeding and other special remedies were not provided in this lease for such
breach. The rights to invoke the remedies hereinbefore set forth are cumulative
and shall not preclude Landlord from invoking any other remedy allowed at law or
in equity.
DAMAGES
30. (A) If this lease and the Demised Term shall expire and come to an
end as provided in Article 28 or by or under any summary proceeding or any other
action or proceeding, or if Landlord shall re-enter the Demised Premises as
provided in Article 29 or by or under any summary proceedings or any other
action or proceeding, then, in any of said events:
(i) Tenant shall pay to Landlord all Rent, additional rent and
other charges payable under this lease by Tenant to Landlord to the date upon
which this lease and the Demised Term shall have expired and come to an end or
to the date of re-entry upon the Demised Premises by Landlord, as the case may
be; and
(ii) Tenant shall also be liable for and shall pay to Landlord, as
damages, any deficiency (referred to as "Deficiency") between the Rent and
additional rent reserved in this lease for the period which otherwise would have
constituted the unexpired portion of the Demised Term and the net amount, if
any, of rents collected under any reletting effected pursuant to the provisions
of Section 29(A) for any part of such period (first deducting from the rents
collected under any such reletting all of Landlord's reasonable expenses in
connection with the termination of this lease or Landlord's re-entry upon the
Demised Premises and with such reletting including, but not limited to, all
repossession costs, brokerage commissions, reasonable legal expenses, attorneys'
fees, alteration costs and other expenses of preparing the Demised Premises for
such reletting). Any such Deficiency shall be paid in monthly installments by
Tenant on the days specified in this lease for payment of installments of Rent.
Landlord shall be entitled to
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recover from Tenant each monthly Deficiency as the same shall arise, and no suit
to collect the amount of the Deficiency for any month shall prejudice Landlord's
rights to collect the Deficiency for any subsequent month by a similar
proceeding; and
(iii) At any time after the Demised Term shall have expired and
come to an end or Landlord shall have re-entered upon the Demised Premises as a
result of Tenant's default hereunder, as the case may be, whether or not
Landlord shall have collected any monthly Deficiencies as aforesaid, Landlord
shall be entitled to recover from Tenant, and Tenant shall pay to Landlord, on
demand, as and for liquidated and agreed final damages, a sum equal to the
amount by which the Rent and additional rent reserved in this lease for the
period which otherwise would have constituted the unexpired portion of the
Demised Term exceeds the then fair and reasonable rental value of the Demised
Premises for the same period, both discounted to present worth at the rate of
six (6%) per cent per annum, less all amounts collected by Landlord on account
of any Deficiency. If, before presentation of proof of such liquidated damages
to any court, commission, or tribunal, the Demised Premises, or any part
thereof, shall have been relet by Landlord pursuant to a lease with a tenant
that is not; affiliated with, controlled by, or a subsidiary or parent company
of Landlord, where the intent of such lease is to enter into a transaction which
is not "arms length", for the period which otherwise would have constituted the
unexpired portion of the Demised Term, or any part thereof, the amount of Rent
reserved upon such reletting shall be deemed, prima facie, to be the fair and
reasonable rental value for the part or the whole of the Demised Premises so
relet during the term of the reletting.
(B) If the Demised Premises, or any part thereof, shall be relet
together with other space in the Building, the rents collected or reserved under
any such reletting and the expenses of any such reletting shall be equitably
apportioned for the purposes of this Article 30. Tenant shall in no event be
entitled to any rents collected or payable under any reletting, whether or not
such rents shall exceed the rent reserved in this lease. Solely for the purposes
of this Article, the term "Rent" as used in Section 30(A) shall mean the rent in
effect immediately prior to the date upon which this lease and the Demised Term
shall have expired and come to an end, or the date of re-entry upon the Demised
Premises by Landlord, as the case may be, plus any additional rent payable
pursuant to the provisions of Article 11 for the Escalation Year (as defined in
Article 11) immediately preceding such event. Nothing contained in Articles 28
and 29 of this lease shall be deemed to limit or preclude the recovery by
Landlord from Tenant of the maximum amount allowed to be obtained as damages by
any statute or rule of law, or of any sums or damages to which Landlord may be
entitled in addition to the damages set forth in Section 30(A).
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SUMS DUE LANDLORD
31. If Tenant shall default in the performance of any covenants on
Tenant's part to be performed under this lease, and such default shall continue
beyond applicable notice and grace periods provided in this lease, Landlord may
immediately, or at anytime thereafter, without notice, and without thereby
waiving such default, perform the same for the account of Tenant and at the
reasonable expense of Tenant. If Landlord at any time is compelled to pay or
elects to pay any reasonable sum of money, or do any act which will require the
payment of any reasonable sum of money by reason of the failure of Tenant to
comply with any provision hereof, or, if Landlord is compelled to or elects to
incur any reasonable expense, including reasonable attorneys' fees, instituting,
prosecuting and/or defending any action or proceeding instituted by reason of
any default of Tenant hereunder, the reasonable sum or sums so paid by Landlord,
with all interest, costs and damages, shall be deemed to be additional rent
hereunder and shall be due from Tenant to Landlord within ten (10) days of
notice thereof from Landlord to Tenant, given in accordance with Article 34 of
this lease. Upon written request, Landlord shall provide Tenant with an itemized
invoice of such amounts. Any sum of money (other than rent) accruing from Tenant
to Landlord pursuant to any provisions of this lease, including, but not limited
to, the provisions of Schedule C, whether prior to or after the Rent
Commencement Date, may, at Landlord's option, be deemed additional rent, and
Landlord shall have the same remedies for Tenant's failure to pay any item of
additional rent when due as for Tenant's failure to pay any installment of Rent
when due. Tenant's obligations under this Article shall survive the expiration
or sooner termination of the Demised Term. In any case in which the Rent or
additional rent is not paid within ten (10) days of the day when same is due,
Tenant shall pay a late charge equal to 8-1/2 cents for each dollar so due, and
in addition thereto, the sum of $100.00 for the purpose of defraying expenses
incident to the handling of such delinquent account. This late payment charge is
intended to compensate Landlord for its additional administrative costs
resulting from Tenant's failure to pay in a timely manner and has been agreed
upon by Landlord and Tenant as a reasonable estimate of the additional
administrative costs that will be incurred by Landlord as a result of Tenant's
failure as the actual cost in each instance is extremely difficult, if not
impossible, to determine. This late payment charge will constitute liquidated
damages and will be paid to Landlord together with such unpaid amounts. The
payment of this late payment charge will not constitute a waiver by Landlord of
any default by Tenant under this lease. This late payment charge shall not
apply, however, to the first late payment made by Tenant within any twelve (12)
month period.
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NO WAIVER
32. No act or thing done by Landlord or Landlord's agents during the
term hereby demised shall be deemed an acceptance of a surrender of said Demised
Premises, and no agreement to accept such surrender shall be valid unless in
writing signed by Landlord. No employee of Landlord or of Landlord's agents
shall have any power to accept the keys of the Demised Premises prior to the
termination of this lease. The delivery of keys to any employee of Landlord or
of Landlord's agents shall not operate as a termination of this lease or a
surrender of the Demised Premises. In the event Tenant shall at any time desire
to have Landlord underlet the Demised Premises for Tenant's account, Landlord or
Landlord's agents are authorized to receive said keys for such purposes without
releasing Tenant from any of the obligations under this lease, and Tenant hereby
relieves Landlord of any liability for loss of or damage to any of Tenant's
effects in connection with such underletting. The failure of Landlord to seek
redress for violation of, or to insist upon the strict performance of, any
covenants or conditions of this lease, or any of the Rules and Regulations
annexed hereto and made a part hereof or hereafter adopted by Landlord, shall
not prevent a subsequent act, which would have originally constituted a
violation, from having all the force and effect of an original violation. The
receipt by Landlord of rent with knowledge of the breach of any covenant of this
lease shall not be deemed a wavier of such breach. The failure of Landlord to
enforce any of the Rules and Regulations annexed hereto and made a part hereof,
or hereafter adopted, against Tenant and/or any other tenant in the Building
shall not be deemed a waiver of any such Rules and Regulations. No provision of
this lease shall be deemed to have been waived by Landlord, unless such waiver
be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of
a lesser amount then the monthly Rent herein stipulated shall be deemed to be
other than on account of the earliest stipulated Rent nor shall any endorsement
or statement on any check or any letter accompanying any check or payment of
Rent be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlord's right to recover the balance of such
Rent or pursue any other remedy in this lease provided.
WAIVER OF TRIAL BY JURY
33. To the extent such waiver is permitted by law, Landlord and Tenant
hereby waive trial by jury in any action, proceeding or counterclaim brought by
Landlord or Tenant against the other on any matter whatsoever arising out of or
in any way connected with this lease, the relationship of landlord and tenant,
the use or occupancy of the Demised Premises by Tenant or any person claiming
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through or under Tenant, any claim of injury or damage, and any emergency or
other statutory remedy. The provisions of the foregoing sentence shall survive
the expiration or any sooner termination of the Demised Term. If Landlord
commences any summary proceeding for nonpayment, Tenant agrees not to interpose
any counterclaim of whatever nature or description in any such proceeding or to
consolidate such proceeding with any other proceeding.
Tenant hereby expressly waives any and all rights of redemption
granted by or under any present or future laws in the event of Tenant being
evicted or dispossessed for any cause, or in the event of Landlord's obtaining
possession of the Demised Premises, by reason of the violation by Tenant of any
of the covenants and conditions of this lease or otherwise.
NOTICES
34. Except as otherwise expressly provided in this lease, any bills,
statements, notices, demands, requests or other communications including,
without limitation, default notices and notices pursuant to Articles 2, 19, 25,
28, 46, and 47 of this lease (other than bills, statements or notices given in
the regular course of business) given or required to be given under this lease
shall be effective only if rendered or given in writing, sent by overnight
courier, registered or certified mail (return receipt requested), or hand
delivery, addressed (A) to Tenant, to the attention of Brian Blechman (i) at
Tenant's address set forth in this lease if mailed prior to Tenant's taking
possession of the Demised Premises, or (ii) at the Building if mailed subsequent
to Tenant's taking possession of the Demised Premises, or (iii) at any place
where Tenant or any agent or employee of Tenant may be found if mailed
subsequent to Tenant's vacating, deserting, abandoning or surrendering the
Demised Premises, or (B) to Landlord at Landlord's address set forth in this
lease, or (C) addressed to such other address as either Landlord or Tenant may
designate as its new address for such purpose by notice given to the other in
accordance with the provisions of this Article. Any such bills, statements,
notices, demands, requests or other communications shall be deemed to have been
rendered or given two (2) business days from the date it shall have been mailed
or, with respect to overnight courier or hand delivery, upon delivery or when
delivery is refused, as provided in this Article.
INABILITY TO PERFORM
35. (A) If, by reason of strikes or other labor disputes, fire or other
casualty (or reasonable delays in adjustment of
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insurance), accidents, orders or regulations of any Federal, State, County or
Municipal authority, or any other cause beyond Landlord's reasonable control,
whether or not such other cause shall be similar in nature to those hereinbefore
enumerated, Landlord is unable to furnish or is delayed in furnishing any
utility or service required to be furnished by Landlord under the provisions of
this lease or any collateral instrument or is unable to perform or make or is
delayed in performing or making any installations, decorations, repairs,
alterations, additions or improvements, whether or not required to be performed
or made under this lease, or under any collateral instrument, or is unable to
fulfill or is delayed in fulfilling any of Landlord's other obligations under
this lease, or any collateral instrument, no such inability or delay shall
constitute an actual or constructive eviction (the foregoing shall not be deemed
a waiver of either actual or constructive eviction), in whole or in part, or
entitle Tenant to any abatement or diminution of rent, or relieve Tenant from
any of its obligations under this lease except for Tenant's right to terminate
this lease as specifically provided in Article 2 and Article 24, or impose any
liability upon Landlord or its agents, by reason of inconvenience or annoyance
to Tenant, or injury to or interruption of Tenant's business, or otherwise.
INTERRUPTION OF SERVICE
(B) Landlord reserves the right to stop the services of the air
conditioning, elevator, escalator, plumbing, electrical or other mechanical
systems or facilities in the Building when necessary by reason of accident or
emergency, or for repairs, alterations or replacements, which, in the judgment
of Landlord are necessary, until such repairs, alterations or replacements shall
have been completed. The exercise of such rights by Landlord in a commercially
reasonable manner shall not constitute an actual or constructive eviction, in
whole or in part, or entitle Tenant to any abatement or diminution of rent, or
relieve Tenant from any of its obligations under this lease, or impose any
liability upon Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business or otherwise, however,
Landlord shall use reasonable efforts to minimize interruption of service.
CONDITIONS OF LANDLORD'S LIABILITY
(C) (i) In addition to the requirements for constructive eviction
imposed by law, Tenant shall not be entitled to claim a constructive eviction
from the Demised Premises unless Tenant shall have first notified Landlord of
the condition or conditions giving rise thereto, and if the complaints be
justified,
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unless Landlord shall have failed to remedy such conditions within a reasonable
time after receipt of such notice.
(ii) If Landlord shall be unable to give possession of the
Demised Premises on any date specified for the commencement of the term by
reason of the fact that the Premises have not been sufficiently completed to
make the Premises ready for occupancy, or for any other reason, Landlord shall
not be subject to any liability for the failure to give possession on said date,
other than Tenant's right to terminate this lease as specifically provided in
Article 2 hereof, nor shall such failure in any way affect the validity of this
lease or the obligations of Tenant hereunder,.
TENANT'S TAKING POSSESSION
(D) (i) Tenant, by entering into occupancy of the Premises, shall
be conclusively deemed to have agreed that Landlord, up to the time of such
occupancy has performed all of its obligations hereunder and that the Premises
were in satisfactory condition as of the date of such occupancy except for
incomplete portions of Landlord's Initial Construction, unless within ten (10)
days after such date Tenant shall have given written notice to Landlord
specifying the respects in which the same were not in such condition.
(ii) If Tenant shall use or occupy all or any part of the
Demised Premises for the conduct of business prior to the Rent Commencement
Date, such use or occupancy shall be deemed to be under all of the terms,
covenants and conditions of this lease, including the covenant to pay rent for
the period from the commencement of said use or occupancy to the Rent
Commencement Date.
36. INTENTIONALLY OMITTED
ENTIRE AGREEMENT
37. This lease (including the Schedules and Exhibits annexed hereto)
contains the entire agreement between the parties and all prior negotiations and
agreements are merged herein. Tenant hereby acknowledges that neither Landlord
nor Landlord's agent or representative has made any representations or
statements, or promises, upon which Tenant has relied, regarding any matter or
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thing relating to the Building, the land allocated to it (including the parking
area) or the Demised Premises, or any other matter whatsoever, except as is
expressly set forth in this lease, including, but without limiting the
generality of the foregoing, any statement, representation or promise as to the
fitness of the Demised Premises for any particular use, the services to be
rendered to the Demised Premises, or the prospective amount of any item of
additional rent. No oral or written statement, representation or promise
whatsoever with respect to the foregoing or any other matter made by Landlord,
its agents or any broker, whether contained in an affidavit, information
circular, or otherwise, shall be binding upon the Landlord unless expressly set
forth in this lease. No rights, easements or licenses are or shall be acquired
by Tenant by implication or otherwise unless expressly set forth in this lease.
This lease may not be changed, modified or discharged, in whole or in part,
orally, and no executory agreement shall be effective to change, modify or
discharge, in whole or in part, this lease or any obligations under this lease,
unless such agreement is set forth in a written instrument executed by the party
against whom enforcement of the change, modification or discharge is sought. All
references in this lease to the consent or approval of Landlord shall be deemed
to mean the written consent of Landlord, or the written approval of Landlord, as
the case may be, and no consent or approval of Landlord shall be effective for
any purpose unless such consent or approval is set forth in a written instrument
executed by Landlord.
DEFINITIONS
38. The words "re-enter", "re-entry", and "re-entered" as used in this
lease are not restricted to their technical legal meanings. The term "business
days" as used in this lease shall exclude Saturdays (except for any
modifications of specific hours for services pursuant to Article 6) Sundays and
all days observed by the State or Federal Government as legal holidays. The
terms "person" and "persons" as used in this lease shall be deemed to include
natural persons, firms, corporations, partnerships, associations and any other
private or public entities, whether any of the foregoing are acting on their
behalf or in a representative capacity. The various terms which are defined in
other Articles of this lease or are defined in Schedules or Exhibits annexed
hereto, shall have the meanings specified in such other Articles, Exhibits and
Schedules for all purposes of this lease and all agreements supplemental
thereto, unless the context clearly indicates the contrary.
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PARTNERSHIP TENANT
39. If Tenant is a partnership (or is comprised of two (2)or more
persons, individually or as co-partners of a partnership) or if Tenant's
interest in this lease shall be assigned to a partnership (or to two (2) or more
persons, individually or as copartners of a partnership) pursuant to Article 20
(any such partnership and such persons are referred to in this Section as
"Partnership Tenant"), the following provisions of this Section shall apply to
such Partnership Tenant: (a) the liability of each of the parties comprising
Partnership Tenant shall be joint and several, and (b) each of the parties
comprising Partnership Tenant hereby consents in advance to, and agrees to be
bound by, any modifications of this lease which may hereafter be made, and by
any notices, demands, requests or other communications which may hereafter be
given, by Partnership Tenant or by any of the parties comprising Partnership
Tenant, and (c) any bills, statements, notices, demands, requests and other
communications given or rendered to Partnership Tenant or to any of the parties
comprising Partnership Tenant shall be deemed given or rendered to Partnership
Tenant and to all such parties and shall be binding upon Partnership Tenant and
all such parties, and (d) if Partnership Tenant shall admit new partners, all of
such new partners shall, by their admission to Partnership Tenant, be deemed to
have assumed performance of all of the terms, covenants and conditions of this
lease on Tenant's part to be observed and performed, and (e) Partnership Tenant
shall give prompt notice to Landlord of the admission of any such new partners,
and upon demand of Landlord, shall cause each such new partner to execute and
deliver to Landlord an agreement in form satisfactory to Landlord, wherein each
such new partner shall assume performance of all of the terms, covenants and
conditions of this lease on Tenant's part to be observed and performed (but
neither Landlord's failure to request any such agreement nor the failure of any
such new partner to execute or deliver any such agreement to Landlord shall
vitiate the provisions of subdivision (d) of this Section).
SUCCESSORS, ASSIGNS, ETC.
40. The terms, covenants, conditions and agreements contained in this
lease shall bind and inure to the benefit of Landlord and Tenant and their
respective heirs, distributees, executors, administrators, successors, and,
except as otherwise provided in this lease, their respective assigns.
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BROKER
41. Landlord and Tenant represent that this lease was brought about by
Cushman & Wakefield of Long Island, Inc. and CB Commercial/Hampshire, LLC. as
brokers and all negotiations with respect to this lease were conducted
exclusively with said brokers. Landlord and Tenant agree that if any claim is
made for commissions by any other broker through or on account of any acts of
Landlord or Tenant, Landlord or Tenant will hold the other free and harmless
from any and all liabilities and expenses in connection therewith, including
reasonable attorney's fees. Landlord shall pay the above broker fees pursuant to
separate Agreements. Tenant shall not be obligated to pay the above brokers a
fee in connection with this lease.
CAPTIONS
42. The captions in this lease are included only as a matter of
convenience and for reference, and in no way define, limit or describe the scope
of this lease nor the intent of any provisions thereof.
NOTICE OF ACCIDENTS
43. Tenant shall endeavor to give notice to Landlord, promptly after
Tenant learns thereof, of (i) any accident in or about the Premises, (ii) all
fires and other casualties within the Premises, (iii) all damages to or defects
in the Premises, including the fixtures, equipment and appurtenances thereof for
the repair of which Landlord might be responsible, and (iv) all damage to or
defects in any parts or appurtenances of the Building's sanitary, electrical,
heating, ventilating, air-conditioning, elevator and other systems located in or
passing through the Premises or any part thereof. Tenant shall give notice to
Landlord, immediately after Tenant learns thereof, of all accidents which result
in material personal injury.
TENANT'S AUTHORITY TO ENTER LEASE
44. In the event that the Tenant hereunder is a corporation, Tenant
represents that the officer or officers executing this lease have the requisite
authority to do so.
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RENEWAL OPTION
45. The Tenant shall have a one time right to be exercised as
hereinafter provided, to extend the term of this lease (including any space then
being leased by Tenant pursuant to Tenant's right of first offer under Article
47 hereof) for either: (A) one period of one (1) year (the "One Year Renewal
Term") or; (B) one period of five (5) years (the "Five Year Renewal Term"), upon
the following terms and conditions:
(i) That at the time of the exercise of such right and at the
commencement of the renewal term, Tenant shall not be in monetary or material
non-monetary default beyond applicable notice and cure periods provided herein
for the cure thereof in the performance of any of the terms, covenants or
conditions which Tenant is required to perform under this lease.
(ii) That Tenant shall notify Landlord in writing that Tenant intends
to exercise this option at least twelve (12) months prior to the expiration of
the initial term set forth in Article 2 of this lease. Upon Tenant's written
request, Landlord shall advise Tenant in writing as to its determination of the
fair market annual minimum rent for comparable space in the building.
(iii) That the renewal term shall be upon the same terms, covenants and
conditions as in this lease provided, except that (a) there shall be no further
option to extend this lease; (b) the Premises shall be delivered in its then "as
is" condition; (c) there shall be no further right of first offer, (d) no
concessions shall be applicable to such renewal term and (e) the minimum annual
rent to be paid by Tenant during the renewal term elected shall be as follows:
(a) The One Year Renewal Term shall be one hundred twenty
percent of the rent payable during the first (1st) month of the fifth (5th) year
of the Term computed on an annualized basis; or
(b) During the first year of the Five Year Renewal Term, the
Rent shall be ninety-five (95%) percent of the then fair market annual minimum
rent being received by Landlord for comparable space in the Building at the time
of commencement of the Five Year Renewal Term, but in no event less than the
amount Tenant was paying during the first (1st) month of the fifth (5th) year of
the Term computed on an annualized basis. Said sum shall be payable in equal
monthly installments.
During each of the second through fifth years of the Five Year Renewal
Term, the rent shall be increased by three and one half (3 1/2%) percent per
annum over the rent payable for the prior year. Said sums shall be payable in
equal monthly installments.
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"Fair market annual minimum rent" shall mean the fair market rental
rate per square foot of rentable areas received by Landlord for comparable space
in the Building at the time of the commencement of the Five Year Renewal Term.
Fair market annual minimum rent shall not mean "net effective rent to Landlord".
In determining fair market annual minimum rent, no adjustment shall be made in
consideration of and Tenant shall not be entitled to a credit for Tenant
improvements, brokerage commissions, rent concessions and other concessions
which Landlord may typically offer to other tenants. In the event Tenant
disputes Landlord's determination of fair market annual minimum rent, Tenant, by
written demand, may commence arbitration strictly in accordance with the terms
and conditions of Article 46 of this lease. The sole issue to be determined by
such arbitration shall be the fair market annual minimum rent in accordance with
this Subparagraph. Notwithstanding anything to the contrary contained herein, in
the event Tenant disputes Landlord's determination of the Fair market annual
minimum rent, Tenant shall nevertheless continue to pay rent at the same rate as
paid during the first (1st) month of the fifth (5th) year computed on an
annualized basis. In the event the rent as determined by arbitration is at
variance with the rent being paid by Tenant, Tenant shall either pay the
difference in a lump sum or receive a credit as the case may be.
This Renewal Option is personal to Twin Laboratories Inc. and any permitted
assignee who acquired its interest in this lease pursuant to subparagraph C of
Article 20 and is otherwise non-transferable by operation of law or otherwise.
ARBITRATION
46. In any situation which may arise under this lease in which
arbitration is explicitly set forth as an available remedy, the party seeking
arbitration must make written demand for same. Such written demand shall contain
the name and address of the arbitrator appointed by the demandant. Within ten
(10) days after its receipt of the written demand, the other party will give the
demandant written notice of the name and address of its arbitrator. Within ten
(10) days after the date of the appointment of the second arbitrator, the two
(2) arbitrators will meet. If the two (2) arbitrators are unable to agree as
provided herein within ten (10) days after their first meeting, they will select
a third arbitrator within ten (10) days of their first meeting. If within said
time period a third arbitrator is not selected, the third arbitrator shall be
selected by the American Arbitration Association, in accordance with their rules
and procedures, within ten (10) days of the request by either Landlord or Tenant
to make such appointment. The third arbitrator will be designated as chairman
and will immediately
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give Landlord and Tenant written notice of its appointment, qualification and
fees. The three (3) arbitrators will meet within ten (10) days after the
appointment of the third arbitrator. If they are unable to agree within ten (10)
days after their first meeting, the third arbitrator will select a time, date
and place for a hearing and will give Landlord and Tenant thirty (30) days prior
written notice of it. The date for the hearing will not be more than sixty (60)
days after the date of appointment of the third arbitrator. The arbitrators must
be licensed real estate appraisers (qualified by an "M.A.I." designation) with
at least ten (10) years experience in real estate leasing and valuation of
commercial properties in the Nassau/Suffolk real estate market and who have been
active during the preceding five (5) year period ending on the date Tenant
exercised the option giving rise to their designation. The arbitrators hereunder
shall disclose to Landlord and Tenant in writing, upon their appointment, any
personal or financial interest in the outcome of the arbitration or any past or
present relationship with the parties. No arbitrator may be an active real
estate broker. The arbitration will be governed by the laws of the State of New
York and, when not in conflict with such law, by the general procedures in the
commercial arbitration rules of the American Arbitration Association. The
arbitrators will not have the power to add to, modify, detract from or alter in
any way the provisions of this lease or any amendments or supplements to this
lease. The arbitrators will not have any power to decide or consider anything
other than the specific issue before them, in accordance with the terms of this
lease. The written decision of at least two (2) arbitrators will be conclusive
and binding upon Landlord and Tenant and said decision shall be rendered within
ten (10) business days following the conclusion of the hearing. No arbitrator is
authorized to make an award for damages of any kind including, without
limitation, an award for punitive, exemplary, consequential or incidental
damages. Landlord and Tenant will each pay for the services of the arbitrator it
appointed and its appointees, attorneys and witnesses plus one-half of all other
proper costs relating to the arbitration, including the fees payable to the
third arbitrator. The decision of the arbitrators will be final and
non-appealable and may be enforced according to the laws of the State of New
York.
RIGHT OF FIRST OFFER
47. (A) From and after the date hereof, in the event any space located
on the second floor of the Building as shown on the Drawing A-2 dated October
16, 1997 initialed by the parties and made a part hereof as Exhibit "4" (the
"Offer Premises") becomes available during the first two years of the initial
Term hereof, Tenant shall have the right, subject and subordinate to any
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rights now existing in the Offer Premises, to lease the Offer Premises
immediately after any tenant occupying the space as of the date of this lease
surrenders possession of the Offer Premises to Landlord and the Offer Space
becomes available (except as otherwise provided herein), provided the following
terms and conditions are fully and completely satisfied:
(i) Provided this Lease shall have commenced with
respect to the premises identified in Exhibit "1" annexed hereto, and no event
of monetary or material non-monetary default shall have occurred under the
Lease;
(ii) Tenant shall give written notice to Landlord of
its intent to exercise its right to lease the Offer Premises hereunder (
"Tenant's Offer Notice") within ten (10) business days after Landlord gives
Tenant notice of the availability of the Offer Premises (which notice shall
provide information to enable Tenant to reasonably determine the size and
location of the Offer Premises and shall also include Landlord's determination
of the fair market rental rate); TIME BEING OF THE ESSENCE WITH RESPECT TO ALL
OF TENANT'S OBLIGATIONS HEREUNDER. The minimum annual rent (the "Offered Rent")
shall equal the then current fair market rental rate for the Offer Premises. In
the event Landlord and Tenant have not agreed upon the Offered Rent within
fifteen (15) days following the delivery of Tenant's Offer Notice, Tenant shall
nevertheless pay rent at Landlord's determination of fair market rental and the
Offered Rent shall be determined through arbitration in accordance with Article
46 of this lease. The sole issue to be determined by such arbitration shall be
the fair market rental rate in accordance with this Subparagraph. In no event
shall the Offered Rent be less than the rent payable for the second (2nd) month
of the year of the Term in which the Tenant exercises its rights under this
Article 47, computed on an annualized basis (each calculated on a per rentable
square foot basis). In the event that Tenant elects not to lease the Offer
Premises, or fails to deliver to Landlord written notice of Tenant's intent to
exercise its rights to lease the Offer Premises in strict accordance with the
terms hereof, Tenant's option to lease the Offer Premises shall automatically
expire and be of no further force or effect.
(B) For purposes hereof, the term "Offer Premises Effective
Date" shall mean fifteen (15) days from the receipt (or refusal) by Landlord of
timely notice by Tenant of its intention to lease the Offer Premises. The Offer
Premises Expiration Date shall be the same date as the Expiration Date
hereunder, so that both this lease and the lease of the Offer Premises shall run
coterminously. Landlord's obligation to obtain a subordination, non-disturbance
and attornment agreement under Article 22 of this lease shall also apply to the
Offer Premises hereunder.
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(C) Upon the exercise by Tenant of its option hereunder, and
within five (5) days of Landlord's providing Tenant with a lease modification
agreement, Landlord and Tenant shall enter into a lease modification agreement,
to be effective as of the Offer Premises Effective Date, which shall reflect the
lease by Tenant of the entire premises (including the Premises and the Offer
Premises), as then constituted, in accordance with all of the terms and
conditions of this lease, except that (i) the rental rate for the Offer Premises
shall be equal to the Offered Rental, and (ii) Tenant's percent of the rentable
area of the Building shall be equal to a fraction, the numerator of which shall
be the total number of rentable square feet contained in the Entire Premises, as
then constituted, and the denominator of which shall be the total rentable
square footage in the Building, which, in the absence of an increase in the size
of the Building as of the date hereof, shall be the amount set forth in Article
1 of this lease.
(D) In the event Tenant shall exercise its option to lease the
Offer Premises in accordance with this Paragraph, Tenant shall take the Offer
Premises in its "as is" condition as of the Offer Premises Effective Date and
Landlord shall have no obligation to perform any work in, on or to the Offer
Premises in order to prepare same for occupancy by Tenant.
(E) This option to lease the Offer Premises is personal to
Twin Laboratories Inc. and any permitted assignee who acquires its interest
pursuant to Article 20(c) hereof, and shall not otherwise be transferrable by
operation by law or otherwise.
(F) Notwithstanding anything contained in this Article, Tenant
shall not have the right to lease Suite 203 hereunder until the date which is
one year from the Rent Commencement Date. Within twenty (20) days following the
expiration of that one year period, Tenant shall give Landlord written notice of
its intention to lease Suite 203, and all applicable provisions of this Article
must be fully and completely satisfied.
(G) As of the Offer Premises Effective Date, Article 9 shall
be modified to provide that Tenant shall have the right to use an additional
five (5) parking spaces per 1,000 square feet of the Offer Premises or Suite 203
which Tenant leases pursuant to the terms of this Article, of which one parking
space per each 2,500 square feet of Offer Premises or Suite 203 shall be
reserved for Tenant.
(H) If, with respect to the Offer Premises, or Suite 203,
Landlord is unable to deliver possession of said space due to the holdover of
another tenant, Landlord agrees that it will diligently prosecute a proceeding
to dispossess such tenant through completion.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, Landlord and Tenant have respectively
signed and sealed this lease as of the day and year first above written.
Witness for Landlord: RECKSON OPERATING
PARTNERSHIP, L.P.
By: Reckson Associates Realty
Corp., its General Partner
/s/ ILLEGIBLE
- - -------------------------- By: /S/ ILLEGIBLE
-------------------------
Witness for Tenant: TWIN LABORATORIES INC.
/S/ Philip Kazin
- - -------------------------- By: /S/ Brian Blechman
--------------------------
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<PAGE> 57
SCHEDULE "A"
LANDLORD'S INITIAL CONSTRUCTION
1. Initial Office Finishing Schedule
At the Tenant's option, Landlord will design or follow Tenant's plans in
preparing Tenant's office area at Landlord's cost (subject to Article 5 above)
to the following specifications:
Erect the necessary dividing walls constructed of metal stud, 5/8" Fire X gypsum
board, with batts of 3" fiberglass for sound attenuation in Demising walls.
Finish exterior walls with 5/8" sheetrock. Erect per approved plan dry-wall
partitioning of 2- 1/2" metal studs with 5/8" gypsum board on each side to
underside of hung ceiling.
Spackle and tape walls three coats to a smooth and true finish. Paint walls two
coats flat latex and doors and trim coats matching enamel.
Install in executive offices, main conference room and reception area, over
padding, executive grade, 30 ounce cut pile carpet. Balance of space carpeted
with building standard 24 ounce loop pile carpet (glued down).
Install a 2' x 4' acoustical tile ceiling with a Travertine finish.
Provide interior building standard hollow core doors on Tenant's plan.
2. Lavatory Area - Public Spaces
a) Separate male and female toilet facilities.
3. Landscaping
The building will be extensively landscaped with trees, plantings and other
materials. An underground sprinkler system will be provided with a time clock to
maintain proper watering.
4. Electrical Specifications
All electrical work shall be installed in accordance with the National
Electrical Code, and the local building code. A "Certificate of Compliance"
shall be obtained from the New York Board of Fire Underwriters at the completion
of the project.
Lighting throughout the entire finished office area shall be obtained by the use
of recessed light 2' by 4' fluorescent fixtures with parabolic lenses, not to
exceed one (1) fixture for each eighty (80) square feet of usable space (not
less than 60 foot-candles maintained at desk height throughout the Demised
Premises). Local wall switches shall be provided for control of
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<PAGE> 58
lighting. Toilet, corridor, lobby and other similar areas shall be lit to 50
foot candles.
Exit light lighting for all paths of egress shall be provided in accordance with
local building department regulations, if required.
All branch circuit wiring shall be above hung ceiling or within dry-wall
construction in finished areas and shall be type BX. All exposed conduits in
non-finished areas shall be thin-walled "EMT".
Two hundred (200) wall-mounted duplex convenience outlets shall be provided.
However, the exact location of each outlet shall be coordinated with the
Tenant's furniture layout. All duplex outlets are to be considered as normal
convenience outlets and shall be wired up with an average of 5 to 8 outlets on
one 20 ampere, 120 volt circuit. Panel capacity shall be adequate to handle all
tenant lighting and equipment load, providing such equipment load does not
exceed 3 watts per square foot of rentable area.
No credit given for installation less than standard installation.
5. Heating, Ventilation and Air Conditioning Specifications
General
The intent of this specification is to define a design concept for the subject
area.
Design Criteria
Central air conditioning with modular systems with individual zone control shall
be capable of the following performance when the criteria noted are not
exceeded:
A) Between September 1 and June 1, the "heating system" shall be operative and
maintain a minimum of 72 degrees FDB when the outdoor temperature is 0 degrees
FDB and the prevailing wind velocity does not exceed 15 mph.
B) Between April 15 and October 14, the "cooling system" shall be operative and
maintain a maximum of 78 degrees FDB and 55% relative humidity when the outdoor
temperature is 95 degrees FDB and 75 degrees FDB with the prevailing wind
velocity not exceeding 13 mph.
C) During the overlapping seasons (April 15 - June 1 and
September 1 - October 15) both systems shall be operative
(cooling and heating).
D) Zoning temperature and balancing controls shall be operated
solely by the Landlord to assure the conditions above.
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<PAGE> 59
E) Maintenance of the foregoing temperature conditions is conditioned upon the
following criteria, which shall not be exceeded by the Tenant in any room, or
area, within the demised premises:
<TABLE>
<S> <C>
a) Population Density .................... 1 person per 150
square feet
b) Lighting and Electrical Load Density... 4 watts per
square foot
c) Exhaust and Ventilation Load........... 5 cfm per person
</TABLE>
6. Ventilation
Bathrooms and similar areas to be ventilated per code using rooftop fans.
7. System Design
Exterior Perimeter Zones
Heating/cooling of exterior offices and areas provided by variable air volume
terminals with integrated thermostats to meet Tenant's requirements for
individual control.
Interior Zones
Heating/cooling provided by variable air volume system terminals with integrated
thermostats for areas of 2,000 square feet.
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<PAGE> 60
SCHEDULE "B"
LANDLORD'S CLEANING SERVICES AND MAINTENANCE OF PREMISES
(to be performed on all business days except those which are union holidays (as
listed in Article 6, and which may be changed by Landlord so long as Landlord
provides Tenant with not less than ten (10) days prior written notice) for the
employees performing cleaning services and maintenance in the Building and
grounds or those days in which the Building is closed)
I. CLEANING SERVICES - PUBLIC SPACES:
A. Floor of entrance lobby and public corridors will be
vacuumed or swept and washed nightly and waxed as necessary.
B. Entranceway glass and metal work will be washed and rubbed
down daily.
C. Wall surfaces and elevator cabs will be kept in polished
condition.
D. Lighting fixtures will be cleaned and polished annually.
Bulbs will be replaced as needed.
E. Elevators and restrooms will be washed and disinfected once
a day. The floors will be mopped as many times as required. All
brightwork and mirrors will be kept in polished condition.
Dispensers will be continuously checked and receptacles
continuously emptied.
F. Exterior surfaces and all windows of the building will be
cleaned quarterly.
II. CLEANING SERVICES - TENANT SPACES:
A. Floors will be swept and spot cleaned nightly. Carpets will
be swept daily with carpet sweeper and vacuumed weekly.
B. Office equipment, furniture, furnishings, telephones, etc.
will be dusted nightly.
C. Normal office waste in receptacles and ashtrays will be
emptied nightly.
D. Interior surface of windows and sills will be washed and
blinds dusted quarterly.
E. There shall be regularly scheduled visits by a qualified
exterminator, as necessary.
F. All lavatories contained within the Demised Premises shall
be cleaned and mopped in the same manner as public lavatories
contained within the Building.
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III. EXTERIOR SERVICES:
A. Parking fields will be regularly swept, cleared of snow in
excess of two inches, and generally maintained so as to be well
drained, properly surfaced and striped.
B. All landscaping, gardening, exterior lighting and irrigation
systems will have regular care and servicing.
IV. EQUIPMENT SERVICE:
A. All air-conditioning and heating equipment and elevators
will be regularly serviced and maintained.
B. Plumbing and electrical facilities, doors, hinges and locks
will be repaired as necessary.
C. All appurtenances, such as rails, stairs, etc. will be
maintained in a safe condition.
V. EXTRA CLEANING SERVICES
Tenant shall pay to Landlord within fifteen (15) days following receipt of a
written itemized statement, on demand, Landlord's reasonable charges for (a)
cleaning work in the Premises required because of (i) misuse or neglect on the
part of Tenant or its employees or visitors, (ii) use of portions of the
Premises for preparation, serving or consumption of food or beverages, or other
special purposes requiring greater or more difficult cleaning work than office
areas; (iii) unusual quantity of interior glass surfaces; (iv) non-building
standard materials or finishes installed by Tenant or at its request; (v)
increases in frequency or scope in any item set forth in Schedule B as shall
have been requested by Tenant; and (b) removal from the Premises and Building of
(i) so much of any refuse and rubbish of Tenant as shall exceed that normally
accumulated in the routine of ordinary business office activity and (ii) all of
the refuse and rubbish of any eating facility requiring special handling (wet
garbage). Notwithstanding anything to the contrary contained herein, the
completion of the Premises in accordance with Landlord's Initial Construction
shall not give rise to any extra cleaning charges under this paragraph.
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SCHEDULE "C"
1. Landlord shall provide at the rates hereinafter set forth and Tenant
shall purchase from Landlord "energy service" for Tenant's requirements. There
shall be the following categories of energy service:
A) NORMAL SERVICE: NORMAL SERVICE is energy consumed during WORKING
HOURS as defined in Article 6 whose power demands do not exceed 5 watts per
square foot of the Demised Premises per WORKING HOUR ("TENANT'S ALLOWABLE USE").
Of this amount, two watts are allocated to Landlord supplied lighting and three
watts are allocated for Tenant's usual office equipment.
B) EXCESS SERVICE: EXCESS SERVICE is energy demanded,
regardless of hours, in excess of TENANT'S ALLOWABLE USE.
C) OVERTIME SERVICE: OVERTIME SERVICE is energy consumed
at all other hours than WORKING HOURS ("OVERTIME HOURS"). For
the purpose of OVERTIME SERVICE, the Demised Premises may be
separated into zones of use. The minimum practical size of these
zones is 2500 square feet. Zones less than 2500 square feet will
be billed at the rate applicable to 2500 square feet.
2. Charges for NORMAL SERVICE: The charge for NORMAL SERVICE is payable
at the rate of $2.00 per annum per square foot of the Demised Premises and is
subject to escalation as hereinafter provided. The charge for NORMAL SERVICE is
included in the monthly rent set forth in Article 3. Any escalation shall be
payable as additional rent. The charge to change WORKING HOURS is $25.00 per
zone. Tenant shall not incur the $25.00 charge for the use of OVERTIME SERVICE.
3. Charges for OVERTIME SERVICE: Subject to escalation as hereinafter
provided, the Landlord's monthly charge for Tenant's OVERTIME SERVICE, payable
in addition to any additional charges for NORMAL SERVICE and EXCESS SERVICE if
applicable, shall be derived as follows:
A) OVERTIME SERVICE: An amount equal to the number of
OVERTIME HOURS in the month, multiplied by the square feet of the
zones in use, multiplied by $.0024.
B) OVERTIME charges shall be increased by the same
percentage the EXCESS SERVICE (if applicable) exceeds TENANT'S
ALLOWABLE USE for NORMAL SERVICE.
C) TWENTY-FOUR HOUR SERVICE: Any energy use for office
equipment in the Tenant's space such as computerized
communication systems, telephone switching systems and CRTs which
require 24-hour service, which energy use is outside of NORMAL
SERVICE and OVERTIME SERVICE, shall be charged at an amount equal
to $1.155 per year, multiplied by the connected watts (or part
thereof, computed and adjusted to the nearest 100th). Low
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wattage accessory equipment, such as refrigerator, water cooler, answering
machine, and electric key telephone system (up to 2 amps or 240 watts) shall be
provided with 24 hour energy services, without charge, provided tenant limits
his request to three (3) such outlets within the Demised Premises and the
information, as to location, is provided prior to construction of the space.
These amounts shall be billed at least once every three months
and shall be payable within fifteen (15) days of the giving of notice of same
(this bill shall be deemed to be in the ordinary course of Landlord's business).
4. Charges for EXCESS SERVICE: The Landlord's monthly charges for
Tenant's EXCESS SERVICE payable in addition to any charges for NORMAL SERVICE,
OVERTIME SERVICE, and TWENTY-FOUR HOUR SERVICE, if applicable, shall be an
amount derived as follows: The excess above TENANT'S ALLOWABLE USE shall be
charged to Tenant at the rate of $.56 per square foot per year, for each excess
watt per square foot (or part thereof, computed and adjusted to the nearest
100th).
5. Escalation of Charges for NORMAL SERVICE, EXCESS SERVICE, OVERTIME
SERVICE and TWENTY-FOUR HOUR SERVICE: The rates referred to in this Schedule "C"
are based upon current rates promulgated by the utility company during the month
prior to the "Rent Commencement Date". All of the rates, fuel and adjustment
costs, state and local government taxes, and all other component parts of the
utility company charges referred to in this Schedule "C" are subject to increase
to reflect changes in rate or classification or other component parts of the
bill employed by the utility company providing services to the Building. Tenant
agrees to pay such increase in utility company charges. Landlord shall give
prompt written notice to Tenant of any such increase or change in charge. Tenant
shall not be or become entitled to a reduction in rent, additional rent or to
other reimbursement in the event it uses less energy than is contemplated by
this Schedule "C".
6. Landlord's energy management system will be conclusive evidence of
the computation of NORMAL SERVICE, EXCESS SERVICE, OVERTIME SERVICE and
TWENTY-FOUR HOUR SERVICE. However, Landlord hereby reserves to itself the right,
from time to time, to use an independent, reputable electric engineering
company, reasonably acceptable to Tenant and licensed to practice electrical
engineering in the state of New York(the "Engineer") to make a survey of
Tenant's energy usage requirements to determine whether the TENANT'S ALLOWABLE
USE limitation has been exceeded and, if so, to what extent. If these surveys
indicate at the time that the cost to Landlord by reason thereof, computed on an
annual basis at rates which would be charged by a public utility company
servicing the Building for such purposes, is in excess of the initial cost
similarly computed, then the additional rent provided for in this Schedule shall
be increased as provided for herein, commencing with the first day of the month
immediately following the computation of such survey and the submission of a
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copy thereof to Tenant. In the event Tenant disputes the findings of the survey,
Tenant may submit such dispute to arbitration by submitting written demand for
same to Landlord, within ten (10) business days of Tenant's receiving a copy of
the survey. Arbitration under this Paragraph shall be conducted by the American
Arbitration Association("AAA") in accordance with the AAA's expedited
arbitration procedures. In the event there is an arbitration hereunder, Tenant
shall nevertheless pay at the rate provided by the survey. If the amount
determined by arbitration is at variance with the survey, Tenant or Landlord, as
the case may be, shall promptly pay or refund, as the case may be the difference
in a lump sum.
7. Subject to the provisions of Articles 21 and 35 of this lease and
Landlord's obligations contained therein, Landlord shall have full and
unrestricted access to all air-conditioning and heating equipment, and to all
other utility installations servicing the Building and the Demised Premises.
Landlord reserves the right temporarily to interrupt, curtail, stop or suspend
air-conditioning and heating service, and all other utilities, or other
services, because of Landlord's inability to obtain, or difficulty or delay in
obtaining, labor or materials necessary therefor, or in order to comply with
governmental restrictions in connection therewith, or for any other cause beyond
Landlord's reasonable control. No diminution or abatement of Rent, additional
rent, or other compensation shall be granted to Tenant, nor shall this Lease or
any of the obligations of Tenant hereunder be affected or reduced by reason of
such interruptions, stoppages or curtailments, the causes of which are
hereinabove enumerated, nor shall the same give rise to a claim in Tenant's
favor that such failure constitutes actual or constructive, total or partial,
eviction from the Demised Premises, unless such interruptions, stoppages or
curtailments have been due to the arbitrary, willful or negligent act, or
failure to act, of Landlord or its agents.
8. Telephone and service shall be the responsibility of Tenant. Tenant
shall make all arrangements for telephone service with the company supplying
said service, including the deposit requirement for the furnishing of service.
Landlord shall not be responsible for any delays occasioned by failure of the
telephone company to furnish service.
9. At Landlord's option, it shall furnish and install all lighting
tubes, bulbs and ballasts used in the Premises and Tenant shall pay Landlord's
reasonable charges therefor, within fifteen (15) days of the giving of notice of
same (this bill shall be deemed to be in the ordinary course of Landlord's
business), as additional rent.
10. Tenant has been advised that the meters installed to measure
Tenant's consumption of electric current as provided herein may curtail or cut
off overhead lighting within the Premises after WORKING HOURS subject to
restoration at Tenant's election by a means which, among other things, may
record such election as conclusive evidence of Tenant's occupancy of the
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<PAGE> 65
Premises after WORKING HOURS so as to require Tenant to pay for OVERTIME SERVICE
as provided herein.
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SCHEDULE "D"
1. The sidewalks, entrances, driveways, passages, courts, elevators,
vestibules, stairways, corridors or halls shall not be obstructed or encumbered
by any Tenant or used for any purpose other than for ingress to and egress from
the Demised Premises and for delivery of merchandise and equipment in a prompt
and efficient manner using elevators and passageways designated for such
delivery by Landlord. There shall not be used in any space, or in the public
hall of the building, either by any Tenant or by jobbers or others in the
delivery or receipt of merchandise, any hand trucks, except those equipped with
rubber tires and sideguards.
2. The water and wash closets and plumbing fixtures shall not be used
for any purposes other than those for which they were designed or constructed
and no sweepings, rubbish, rags, acids or other substances shall be deposited
therein, and the expense of any breakage, stoppage, or damage resulting from the
violation of this rule shall be borne by the Tenant who, or whose clerks,
agents, employees or visitors, shall have caused it.
3. No Tenant shall sweep or throw or permit to be swept or thrown from
the Premises any dirt or other substances into any of the corridors or halls,
elevators, or out of the doors or windows or stairways of the building, and the
Tenant shall not use, keep or permit to be used or kept any burner, or oven, or
noxious gas or substance in the Demised Premises, or permit or suffer the
Demised Premises to be occupied or used in a manner offensive or objectionable
to Landlord or other occupants of the Building by reason of noise, odors and/or
vibrations, or interfere in any way with other tenants or those having business
therein, nor shall any animals or birds be kept in or about the Building.
Smoking or carrying lighted cigars or cigarettes in the elevators of the
Building is prohibited. Tenant may keep a coffee machine, refrigerator,
microwave oven and a vending machine in the Demised Premises.
4. No awnings or other projections shall be attached to the outside
walls of the Building without the prior written consent of the Landlord.
5. No sign, advertisement, notice or other lettering and/or window
treatment shall be exhibited, inscribed, painted or affixed by any Tenant on any
part of the outside of the Demised Premises or the Building or on the inside of
the Demised Premises if the same is visible from the outside of the Demised
Premises without the prior written consent of the Landlord. In the event of the
violation of the foregoing by any Tenant, Landlord may remove same without any
liability, and may charge the expense incurred by such removal to Tenant or
Tenants violating this rule. Interior signs on doors and directory tables shall
be inscribed, painted or affixed for each Tenant by Landlord at the reasonable
expense of such Tenant, and shall be of a size, color and style acceptable to
Landlord.
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6. No Tenant shall mark, paint, drill into, or in any way deface any
part of the Demised Premises or the Building of which they form a part. No
boring, cutting or stringing of wires shall be permitted, except with the prior
written consent of Landlord, and as Landlord may direct. No tenant shall lay
linoleum or other similar floor covering so that the same shall come in direct
contact with the floor of the Demised Premises and, if linoleum or other similar
floor covering is desired to be used, an interlining of builder's deadening felt
shall be first affixed to the floor, by a paste or other water soluble material,
the use of cement or other similar adhesive material being expressly prohibited.
7. No additional locks or bolts of any kind shall be placed upon any of
the doors or windows by any Tenant, nor shall any changes be made in existing
locks or in the mechanisms thereof. Each Tenant must, upon the termination of
his tenancy, restore to Landlord all keys of stores, offices and toilet rooms,
either furnished to, or otherwise procured by, such Tenant, and in the event of
the loss of any keys, so furnished, such Tenant shall pay to Landlord the cost
thereof.
8. Freight, furniture, business equipment, merchandise and bulky matter
of any description shall be delivered to and removed from the Premises only
through the service entrances and corridors, and only during hours and in a
manner approved by Landlord. Landlord reserves the right to inspect all freight
to be brought into the Building and to exclude from the Building all freight
which violates any of these Rules and Regulations or the lease of which these
Rules and Regulations are a part.
9. Canvassing, soliciting and peddling in the building is prohibited
and each Tenant shall cooperate to prevent the same.
10. Landlord reserves the right to exclude from the building between
the hours of 6:00 P.M. and 8:00 A.M. and at all hours on Sundays and legal
holidays, all persons who do not present a pass to the building signed by
Landlord. Landlord will furnish passes to persons for whom any Tenant requires
same in writing. Each Tenant shall be responsible for all persons for whom he
requires such a pass and shall be liable to Landlord for all acts of such
persons.
11. Landlord shall have the right to prohibit any advertising by any
Tenant that makes reference to Landlord or the building which, in Landlord's
reasonable opinion, tends to impair the reputation of the Building or its
desirability as an office building, and upon written notice from Landlord,
Tenant shall refrain from or discontinue such advertising.
12. Tenant shall not bring or permit to be brought or kept in or on the
Premises, any inflammable, combustible, hazardous or explosive fluid, material,
chemical or substance, except as otherwise specifically provided in this lease,
or cause or permit any odors of cooking or other processes, or any unusual or
other objectionable odors, to permeate in or emanate from the Premises.
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13. Tenant agrees to use the entry doors to its premises
only for ingress and egress purposes and to keep such doors
closed at all other times.
64
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EXHIBIT 1
RENTAL PLAN
65
<PAGE> 1
Exhibit 21.1
Subsidiaries
Twin Laboratories Inc.
Advanced Research Press, Inc.
Changes International of Fort Walton Beach, Inc.
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-18047 of Twinlab Corporation on Form S-8 of our report dated February 4,
1998, appearing in this Annual Report on Form 10-K of Twinlab Corporation for
the year ended December 31, 1997.
DELOITTE & TOUCHE LLP
Jericho, New York
March 16, 1998
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 4,029
<SECURITIES> 0
<RECEIVABLES> 44,465
<ALLOWANCES> 406
<INVENTORY> 37,254
<CURRENT-ASSETS> 88,245
<PP&E> 22,422
<DEPRECIATION> 8,464
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<BONDS> 0
0
0
<COMMON> 27,320
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<TOTAL-LIABILITY-AND-EQUITY> 171,324
<SALES> 213,229
<TOTAL-REVENUES> 213,229
<CGS> 120,947
<TOTAL-COSTS> 120,947
<OTHER-EXPENSES> 43,433
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 12,315
<INCOME-PRETAX> 36,765
<INCOME-TAX> 14,094
<INCOME-CONTINUING> 22,671
<DISCONTINUED> 0
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