<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 1998
REGISTRATION NO. 333-48091
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TWINLAB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2833 11-3317986
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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2120 SMITHTOWN AVENUE
RONKONKOMA, NEW YORK 11779
(516) 467-3140
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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COPIES TO:
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<S> <C> <C>
PHILIP M. KAZIN, ESQ. HOWARD A. SOBEL, ESQ. MARK C. SMITH, ESQ.
CHIEF LEGAL OFFICER AND KRAMER, LEVIN, NAFTALIS & FRANKEL SKADDEN, ARPS, SLATE, MEAGHER &
GENERAL COUNSEL 919 THIRD AVENUE FLOM LLP
TWINLAB CORPORATION NEW YORK, NEW YORK 10022 919 THIRD AVENUE
2120 SMITHTOWN AVENUE (212) 715-9100 NEW YORK, NEW YORK 10022
RONKONKOMA, NEW YORK 11779 (212) 735-3000
(516) 467-3140
(NAME, ADDRESS, INCLUDING ZIP
CODE,
AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par value $1.00 per share........... $277,150,000 $81,760
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(c) of the Securities Act, based on the average of high and low
price reported on the Nasdaq National Market on March 13, 1998.
(2) Previously paid.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
SUBJECT TO COMPLETION, DATED APRIL 3, 1998
PROSPECTUS
[TWINLAB LOGO] 8,000,000 SHARES
TWINLAB CORPORATION
COMMON STOCK
Of the 8,000,000 shares of common stock, par value $1.00 per share (the
"Common Stock"), offered hereby (the "Offering"), 4,000,000 shares are being
offered for sale by Twinlab Corporation ("Twinlab" or the "Company") and
4,000,000 shares are being offered for sale by certain stockholders of the
Company (the "Selling Stockholders"). Management of the Company will not sell
any shares of Common Stock in the Offering. The Company will not receive any of
the proceeds from the sale of shares by the Selling Stockholders. See "Principal
and Selling Stockholders."
The Common Stock is traded on the Nasdaq National Market under the symbol
"TWLB." On March 19, 1998, the last sale price of the Common Stock, as reported
on the Nasdaq National Market, was $38.875 per share. See "Price Range of Common
Stock."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2)
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<S> <C> <C> <C> <C>
Per Share............................... $ $ $ $
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Total(3)................................ $ $ $ $
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(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses related to the Offering payable by the Company
(including certain expenses payable on behalf of the Selling Stockholders),
estimated at $800,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to an additional 1,200,000 shares of Common
Stock on the same terms and conditions as set forth above solely to cover
overallotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions,
Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively.
------------------------------
The shares of Common Stock are being offered by the Underwriters, subject
to prior sale, when, as and if delivered to and accepted by the Underwriters
against payment therefor and subject to various prior conditions, including
their right to reject orders in whole or in part. It is expected that delivery
of the certificates representing the Shares will be made against payment
therefor on or about , 1998, at the offices of Bear, Stearns & Co.
Inc., 245 Park Avenue, New York, New York 10167.
------------------------------
Joint Book-Running Managers
BEAR, STEARNS & CO. INC. DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENTS, STABILIZING AND SHORT-COVERING TRANSACTIONS AND THE
IMPOSITION OF PENALTY BIDS. SEE "UNDERWRITING."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ALSO ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED. SEE "UNDERWRITING."
------------------------
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C. a Registration Statement on Form S-3 (the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. As used herein, the term "Registration Statement" means
the initial Registration Statement and any and all amendments thereto. This
Prospectus omits certain information contained in the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto.
Statements herein concerning the contents of any contract or other document are
not necessarily complete and in each instance reference is made to such contract
or other document filed with the Commission as an exhibit to the Registration
Statement, each such statement being qualified by and subject to such reference
in all respects.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and in accordance therewith
files reports and other information with the Commission. Reports, registration
statements, proxy statements and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, and at the Commission's Regional Offices: 500 West
Madison Avenue, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such materials can be obtained
at prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Washington, D.C. 20549. The Commission also
maintains a site on the World Wide Web, the address of which is
http://www.sec.gov, that contains reports, proxy and information statements and
other information regarding issuers, such as the Company, that file
electronically with the Commission. The Company has been an electronic filer
since September 1996.
The Common Stock is quoted for trading on the Nasdaq National Market, and
the Registration Statement and such reports and other information concerning the
Company may also be inspected at the offices of the Nasdaq National Market
located at 1735 K Street, N.W., Washington, D.C. 20006.
The Company will furnish holders of the Common Stock with annual reports
containing among other information, audited financial statements certified by an
independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. The Company also intends to furnish such other reports as it may determine
or as may be required by law.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
pursuant to the 1934 Act, are hereby incorporated and made a part of this
Prospectus by reference, except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1997;
2. The description of the Company's Common Stock contained in the
Company's Form 8-A, dated October 21, 1996; and
3. The Company's proxy statement on Schedule 14A, dated May 19, 1997.
All documents subsequently filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the 1934 Act prior to the termination of the Offering to
which this Prospectus relates shall be deemed to be incorporated by reference
into this Prospectus and to be part of this Prospectus from the date of filing
thereof. Any statement incorporated herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, upon
the written or oral request of any such person, a copy of any or all documents
incorporated by reference herein (not including exhibits to those documents
unless such exhibits are specifically incorporated by reference into the
information incorporated into this Prospectus). Requests for such copies should
be directed to Philip M. Kazin, Esq., General Counsel, Twinlab Corporation, 2120
Smithtown Avenue, Ronkonkoma, N.Y. 11779, telephone (516) 467-3140.
4
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere or incorporated by reference in
this Prospectus. 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"). Except where otherwise indicated, the information in this
Prospectus assumes that the over-allotment option granted to the Underwriters
will not be exercised.
THE COMPANY
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:
- 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 Market, 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 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.
5
<PAGE> 6
- 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. See "Recent Trends and Developments -- First
Quarter Trends."
- 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).
The Company believes it is well positioned to capitalize on the continued
growth of the vitamin, herb and nutritional supplements market and the multiple
distribution channels through which these products are sold. 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. Leading this increase, the retail market for
supplements (primarily herbal products) has grown at a compound annual rate of
41.7% from $570 million in 1992 to $2.3 billion in 1996. In addition, according
to Packaged Facts, the retail market for sports nutrition products has grown at
a compound annual rate of 10.7% from $585 million in 1992 to $880 million in
1996. 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. 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.
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Vitamins 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.
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. See "Recent Trends and Developments -- Bronson
Acquisition." 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 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.
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<PAGE> 8
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 complement or extend its
existing product line, expand its distribution channels or are 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. See "Recent Trends and Developments -- Bronson
Acquisition."
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.
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 TRENDS AND DEVELOPMENTS
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 Pharmaceutical(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
8
<PAGE> 9
continue to provide sales services and packaging and distribution operations for
Bronson's products through December 31, 1998.
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 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
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.
9
<PAGE> 10
THE OFFERING
Common Stock to be sold by the
Company:............................ 4,000,000 shares
Common Stock to be sold by the
Selling Stockholders:............... 4,000,000 shares
Common Stock to be outstanding after
the Offering:....................... 31,321,500 shares(1)
Use of Proceeds..................... The Company intends to use $56.5
million of the net proceeds from the
Offering to pay the purchase price
for the Bronson Acquisition
(including related fees and
expenses). In addition, the Company
intends to use approximately $40.1
million of the net proceeds from the
Offering to redeem $35.0 million
principal amount (plus accrued and
unpaid interest and the applicable
premium thereon) of Twin's 10 1/4%
Senior Subordinated Notes due 2006
(the "Notes"), and approximately
$9.9 million to reduce outstanding
borrowings under the Company's
Revolving Credit Facility (including
accrued and unpaid interest
thereon). The remaining net proceeds
from the Offering will be used for
working capital and other general
corporate purposes. See "Use of
Proceeds."
Nasdaq National Market symbol....... TWLB
- ---------------
(1) Does not include an aggregate of 392,200 shares of Common Stock issuable
upon the exercise of outstanding stock options with a weighted average
exercise price of $23.22 per share.
10
<PAGE> 11
SUMMARY HISTORICAL FINANCIAL DATA
The summary information below presents historical consolidated financial
data for the periods indicated which has been derived from the Consolidated
Financial Statements of the Company. The summary information 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 (as hereinafter
defined). The summary historical financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical Financial Data" and the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................... $99,897 $117,342 $148,735 $170,075 $213,229
Gross profit............................ 37,766 47,095 58,803 70,248 92,282
Operating expenses...................... 21,125 23,022 27,191 30,784 43,433
Income from operations.................. 16,641 24,073 31,612 39,464 48,849
Interest expense........................ 487 761 866 10,005 12,315
Nonrecurring and transaction expenses... -- -- 656 15,700(a) --
Net income.............................. $16,676 $ 21,693 $ 30,224 $ 11,796(a) $ 22,671
======= ======== ======== ======== ========
Basic and diluted net income per
share(b)............................. $ 0.62 $ 0.80 $ 1.12 $ 0.26(a) $ 0.84(c)
======= ======== ======== ======== ========
Diluted weighted average shares
outstanding(d)....................... 27,000 27,000 27,000 27,000 27,078
PRO FORMA RELATING TO CHANGE IN TAX
STATUS:(e)
Historical income before provision for
income taxes and extraordinary
item................................. $16,906 $ 21,938 $ 30,464 $ 14,384
Pro forma provision for income taxes.... 6,644 9,087 12,060 5,466
------- -------- -------- --------
Pro forma income before extraordinary
item................................. 10,262 12,851 18,404 8,918
Extraordinary item...................... -- -- -- (1,792)(f)
------- -------- -------- --------
Pro forma net income.................... $10,262 $ 12,851 $ 18,404 $ 7,126
======= ======== ======== ========
Basic and diluted income before
extraordinary item per share(b)...... -- -- $ 0.68 $ 0.15 --
======== ========
Basic and diluted net income per
share(b)............................. $ 0.68 $ 0.08
======== ========
PRO FORMA FOR THE TRANSACTIONS AND THE IPO:(g)
Net income.............................. -- -- $ 11,429 $ 16,729 --
======== ========
Basic and diluted net income per
share................................ -- -- $ 0.42 $ 0.62 --
======== ========
OTHER DATA:
Income from operations margin(h)........ 16.7% 20.5% 21.3% 23.2% 22.9%
Capital expenditures.................... $ 4,904 $ 1,786 $ 2,641 $ 2,252 $ 3,842
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------
HISTORICAL AS ADJUSTED(I)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 4,029 $ 42,528
Net working capital (excluding cash and cash equivalents
and current debt)...................................... 57,474 68,050
Total assets.............................................. 171,324 266,784
Total debt (including current debt)....................... 114,238 65,488
Shareholders' equity...................................... 30,344 175,105
</TABLE>
(footnotes
on following page)
11
<PAGE> 12
(a) Reflects $15.3 million of nonrecurring non-competition agreement expense and
$0.4 million of Transaction expenses.
(b) 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 (as hereinafter defined)
dividends, by the applicable weighted average shares outstanding.
(c) Supplemental basic and diluted net income per share for the year ended
December 31, 1997, after giving effect to the Redemption (as hereinafter
defined), would be $0.89. Such calculation assumes the Redemption occurred
on January 1, 1997, and includes the assumed issuance of 1,033,000 shares of
Common Stock required to effect the Redemption and the elimination of
interest expense and amortization of deferred finance costs, net of tax,
relating to the redeemed Notes.
(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 (as hereinafter defined) 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 elsewhere in this Prospectus.
(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 (as hereinafter defined) (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 in connection with 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.
(i) Gives effect to the consummation of the Offering (using an assumed offering
price of $38.875 per share) and the application of the estimated net
proceeds therefrom as if they occurred on December 31, 1997. The application
of the net proceeds assumes the consummation of the Bronson Acquisition and
the repayment of approximately $13.9 million of outstanding borrowings under
the Revolving Credit Facility (including accrued and unpaid interest
thereon), which borrowings are expected to have been reduced through
repayments to $9.9 million (including accrued and unpaid interest thereon),
prior to the consummation of the Offering.
12
<PAGE> 13
RISK FACTORS
Prospective purchasers of the Common Stock should carefully consider the
following risk factors, as well as the other information contained, and
incorporated by reference, in this Prospectus before making an investment in the
Common Stock.
This Prospectus contains or incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), which represent the Company's
expectations or beliefs, including, but not limited to, statements concerning
industry performance, the Company's operations, performance, financial
condition, growth and acquisition strategies, margins and growth in sales of the
Company's products. For this purpose, any statements contained or incorporated
by reference in this Prospectus 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," "Prospectus Summary -- Business Strategy," and
"Business -- Business Strategy." No assurance can be given that the future
results covered by the forward-looking statements will be achieved. 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.
UNCERTAINTY RELATED TO ACQUISITIONS; BROAD DISCRETION IN USE OF PROCEEDS
The Company intends 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. Acquisitions
involve a number of risks that could adversely affect the Company's operating
results, including the diversion of management's attention, the assimilation of
operations and personnel of the acquired companies, the amortization of acquired
intangible assets and the potential loss of key employees of the acquired
companies. There can be no assurance that the Company will consummate future
acquisitions on satisfactory terms, if at all, that adequate financing will be
available on terms acceptable to the Company, if at all, or be permitted under
the Company's financing instruments, that any acquired product lines or
businesses will be successfully integrated or that such product lines or
businesses will ultimately have a positive impact on the Company, its financial
condition or results of operations. In addition, such acquisitions could result
in substantial equity dilution to existing stockholders. See
"Business -- Business Strategy."
The Company intends to finance the purchase price of the Bronson
Acquisition with $56.5 million (including related fees and expenses) of the net
proceeds of the Offering. There can be no assurance that the Bronson Acquisition
will be consummated. In the event the Bronson Acquisition is not consummated,
the Company intends to use the resulting excess net proceeds from the Offering
for working capital and other general corporate purposes, including to pursue
acquisition opportunities. Accordingly, the Company may have broad discretion in
using the net proceeds of the Offering. An investor will not have the
opportunity to evaluate the economic, financial and other relevant information
which will be utilized by the Company in determining the application of such
proceeds. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the management and other skills of Brian Blechman, Dean Blechman, Neil
Blechman, Ross Blechman and Steve Blechman (the "Blechman Brothers"), as well as
its ability to retain other key employees and to attract skilled personnel in
the future to manage the growth of the Company. The loss or unavailability of
the services of one or more of the Blechman Brothers could have a material
adverse effect on the Company. The Company has employment
13
<PAGE> 14
agreements with each of the Blechman Brothers and upon completion of the
Offering each of the Blechman Brothers will own approximately 5.3% of the
outstanding Common Stock. See "Management."
CERTAIN GOVERNMENT ACTION AND ADVERSE PUBLICITY REGARDING CERTAIN PRODUCTS
CONTAINING EPHEDRINE
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
United States Food and Drug Administration (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, limit potency,
require warnings, prohibit certain combination products and 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
"Business -- Legal Matters."
LEGAL MATTERS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that the use of its products results in injury.
The Company 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. See
"Business -- Legal Matters." 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 State of California and the National Resources Defense Council (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
14
<PAGE> 15
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 or that any such claim or the existing California lawsuit, if
successful, might not have a material adverse effect on the Company's
operations.
The Company is presently engaged in various other legal actions, and,
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 and financial
condition. See "Business -- Legal Matters."
GOVERNMENT REGULATION
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the 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 such foreign governmental regulations is
generally the
15
<PAGE> 16
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.
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 also "Business -- Legal Matters" and "-- Regulatory Matters."
RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS
The Indenture (as hereinafter defined) 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, all of which may restrict the Company's ability
to expand or to pursue its business strategies. Changes in economic or business
conditions, results of operations or other factors could in the future cause a
violation of one or more covenants in the Company's debt instruments. See
"Description of Certain Indebtedness."
COMPETITION
The business of developing, manufacturing and selling vitamins, herbs,
sports nutrition products, nutritional supplements and other nutraceuticals is
highly competitive. There are numerous companies in the vitamin and nutritional
supplement industry selling products to retailers such as mass merchandisers,
drug store chains, independent drug stores, supermarkets and health food stores.
Certain of the Company's competitors are substantially larger and have greater
financial resources than the Company. See "Business -- Competition."
ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW; EFFECT OF PUBLICITY
While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies on
its products. See "Business -- Manufacturing and Product Quality." The Company's
products consist of vitamins, minerals, herbs and other ingredients that the
Company regards as safe when taken as suggested by the Company. However, because
the Company is highly dependent upon consumers' perception of the safety and
quality of its products as well as similar products distributed by other
companies (which may not adhere to the same quality standards as the Company),
the Company could be adversely affected in the event any of the Company's
products, or any similar products distributed by other companies, should prove
or be asserted to be harmful to consumers. In addition, because of the Company's
dependence upon consumer perceptions, adverse publicity associated with illness
or other adverse effects resulting from consumers' failure to consume the
Company's products as suggested by the Company or other misuse or abuse of the
Company's products or any similar products distributed by other companies could
have a material adverse effect on the Company's results of operations and
financial condition.
Furthermore, the Company believes the recent growth experienced by the
nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain vitamins and other nutritional products. Such
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research
16
<PAGE> 17
to date is preliminary, and there can be no assurance of future favorable
scientific results and media attention or of the absence of unfavorable or
inconsistent findings.
DEPENDENCE ON DISTRIBUTORS
The Company's success depends in part upon its ability to attract, retain
and motivate a large base of distributors, and its ability to maintain a
satisfactory relationship with Tree of Life Inc. ("Tree of Life") and GNC. Tree
of Life and GNC accounted for approximately 19% and 23%, respectively, of the
Company's net sales in 1997. The loss of Tree of Life or GNC as a distributor,
or the loss of a significant number of other distributors, or a significant
reduction in purchase volume by Tree of Life, GNC or such other distributors,
for any reason, would have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Sales and Distribution."
AVAILABILITY OF RAW MATERIALS
Substantially all of the Company's herbal supplements and herb teas contain
ingredients that are harvested by and obtained from third-party suppliers, and
many of those ingredients are harvested internationally and only once per year
or on a seasonal basis. An unexpected interruption of supply, such as a harvest
failure, could cause the Company's results of operations derived from such
products to be adversely affected. Although the Company has generally been able
to raise its prices in response to significant increases in the cost of such
ingredients, the Company has not always in the past been, and may not in the
future always be, able to raise prices quickly enough to offset the effects of
such increased raw material costs.
INTELLECTUAL PROPERTY PROTECTION
The Company's trademarks are valuable assets which are very important to
the marketing of its products. The Company's policy is to pursue registrations
for all of the trademarks associated with its key products. The Company has
approximately 289 trademark registrations with the United States Patent and
Trademark Office. The Company relies on common law trademark rights to protect
its unregistered trademarks. Common law trademark rights do not provide the
Company with the same level of protection as would U.S. federal registered
trademarks. In addition, common law trademark rights extend only to the
geographic area in which the trademark is actually used, while U.S. federal
registration prohibits the use of the trademark by any third party anywhere in
the United States.
CONTROL BY PRINCIPAL STOCKHOLDERS; SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Green Equity Investors II, L.P., an
affiliate of Leonard Green & Partners, L.P. ("GEI") will own 16.8% and the
Blechman Brothers will own 26.5%, of the Common Stock of Twinlab. As a result,
GEI and the Blechman Brothers will have significant influence over all matters
requiring approval by the Company's stockholders without the approval of
minority stockholders. Such influence could adversely affect the market price of
the Common Stock or delay or prevent a change in control of the Company. See
"Principal and Selling Stockholders."
The Blechman Brothers and Stephen L. Welling (collectively, the "Senior
Executive Officers") and GEI are eligible to sell their shares of Common Stock
pursuant to Rule 144 ("Rule 144") under the Securities Act at prescribed times
and subject to the manner of sale, volume, notice and information restrictions
of Rule 144. The Company has granted the Senior Executive Officers and the
Selling Stockholders certain demand and piggyback registration rights covering
an aggregate of 18,176,250 shares of Common Stock (14,176,250 shares after the
consummation of the Offering). The Senior Executive Officers and the Selling
Stockholders, who collectively are the beneficial owners of an aggregate of
18,180,420 shares of Common Stock (14,180,420 shares after the consummation of
the Offering), and the Company have agreed with the Underwriters, subject to
certain exceptions, not to directly or indirectly, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of, without the prior
written consent of Bear, Stearns & Co. Inc. ("Bear Stearns"), any Common Stock,
or any securities convertible into or exchangeable or exercisable for, or
warrants, options or rights to purchase or acquire Common Stock or in any other
manner transfer all or a portion of the economic
17
<PAGE> 18
consequences associated with the ownership of any Common Stock, or enter into
any agreement to do any of the foregoing, for a period of 90 days after the date
of this Prospectus. Upon the expiration of such 90 day period, such holders will
in general be entitled to dispose of their shares of Common Stock, although the
shares of Common Stock held by affiliates of the Company will continue to be
subject to the restrictions of Rule 144 under the Securities Act. Sales of
substantial amounts of such shares in the public market or the perception that
such sales could occur could adversely affect the market price of the shares of
Common Stock and the Company's ability to raise additional capital at a price
favorable to the Company. See "Shares Eligible for Future Sale" and
"Underwriting."
ANTI-TAKEOVER PROVISIONS
The Company's Second Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and its Amended and Restated By-laws (the
"By-laws"), as well as Delaware corporate law, contain certain provisions that
could have the effect of making it more difficult for a third party to acquire,
or discouraging a third party from attempting to acquire, control of the
Company. Certain of these provisions impose various procedural and other
requirements, including advance notice and other provisions, that could make it
more difficult for stockholders to effect certain corporate actions. The
Company's Board of Directors has the authority to issue additional shares of
preferred stock and to determine the designations, preferences and rights and
the qualifications or restrictions of those shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate actions, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of Common Stock.
Furthermore, certain provisions of the Indenture and the Company's Amended and
Restated Revolving Credit Facility (the "Revolving Credit Facility") provide for
the acceleration of the indebtedness evidenced thereby upon the occurrence of
certain change in control events (as defined in such debt instruments), which
provisions could also tend to prevent or discourage the acquisition of the
Company by a third party. See "Description of Capital Stock" and "Description of
Certain Indebtedness."
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON DIVIDENDS
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. See "Dividend Policy" and "Description of Certain Indebtedness."
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 effect 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.
18
<PAGE> 19
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market. 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
------- -------
<S> <C> <C>
1996
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
1998
First Quarter (through March 19, 1998)...................... $40.250 $22.625
</TABLE>
On March 19, 1998, the last reported sale price of the Common Stock on the
Nasdaq National Market was $38.875. As of March 19, 1998, there were
approximately 119 registered holders of record of the Common Stock.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
Common Stock offered by the Company hereby (using an assumed offering price of
$38.875 per share) are estimated to be approximately $147.7 million, after
deducting the estimated underwriting discounts and commissions and offering
expenses payable by the Company. The Company intends to use $56.5 million of the
net proceeds from the Offering to pay the purchase price of the Bronson
Acquisition (including related fees and expenses). 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
$9.9 million to reduce outstanding borrowings under the Company's Revolving
Credit Facility (including accrued and unpaid interest thereon). The remaining
net proceeds from the Offering will be used for working capital and other
general corporate purposes. Borrowings under the Revolving Credit Facility were
used for general corporate purposes, including the payment of the cash portion
of the purchase price of Changes International. See "Prospectus
Summary -- Business Strategy -- Supplement Internal Growth Through Strategic
Acquisitions" and "-- Recent Trends and Developments -- Bronson Acquisition."
Pending the use of the net proceeds for such purposes, the Company will invest
such proceeds in short-term, interest-bearing investments.
In the event the Bronson Acquisition is not consummated, the Company
intends to use the resulting excess net proceeds from the Offering for working
capital and other general corporate purposes, including to pursue acquisitions.
See "Risk Factors -- Uncertainty Related to Acquisitions; Broad Discretion in
Use of Proceeds."
For information with respect to the Revolving Credit Facility and the Notes
(including applicable interest rates and the maturity dates thereof), see
"Description of Certain Indebtedness."
The Company will not receive any proceeds from the sale of shares of Common
Stock offered by the Selling Stockholders.
19
<PAGE> 20
DIVIDEND POLICY
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. See
"Description of Certain Indebtedness." The payment of cash dividends in the
future will depend upon, among other things, the Company's results of
operations, financial condition, cash requirements and other factors deemed
relevant by the Company's Board of Directors.
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of December 31, 1997, and as adjusted to reflect the sale by the Company in the
Offering of 4,000,000 shares of Common Stock at an assumed price of $38.875 per
share and the application by the Company of the estimated net proceeds therefrom
(including the consummation of the Bronson Acquisition) as if they occurred on
December 31, 1997. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
the Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents................................... $ 4,029 $ 42,528
======== ========
Long-term debt (including current portion)
Revolving Credit Facility................................. $ 13,750(a) $ --
Notes..................................................... 100,000 65,000
Other debt................................................ 330 330
Capital lease obligations................................. 158 158
-------- --------
Total long-term debt...................................... 114,238 65,488
Total shareholders' equity.................................. 30,344 175,105
-------- --------
Total capitalization........................................ $144,582 $240,593
======== ========
</TABLE>
- ---------------
(a) The application of the net proceeds assumes the repayment of approximately
$13.9 million of outstanding borrowings under the Revolving Credit Facility
(including accrued and unpaid interest thereon), which borrowings are
expected to have been reduced through repayments to $9.9 million (including
accrued and unpaid interest thereon), prior to the consummation of the
Offering.
20
<PAGE> 21
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data as of December 31, 1993, 1994, 1995,
1996 and 1997 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, 1996 and 1997, 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 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 elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996(A) 1997
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales.......................................... $99,897 $117,342 $148,735 $170,075 $213,229
Gross profit....................................... 37,766 47,095 58,803 70,248 92,282
Operating expenses................................. 21,125 23,022 27,191 30,784 43,433
Income from operations............................. 16,641 24,073 31,612 39,464 48,849
Interest expense................................... 487 761 866 10,005 12,315
Nonrecurring and transaction expenses.............. -- -- 656 15,700(b) --
Net income......................................... $16,676 $ 21,693 $ 30,224 $ 11,796(b) $ 22,671
======= ======== ======== ======== ========
Basic and diluted net income per share(c).......... $ 0.62 $ 0.80 $ 1.12 $ 0.26(b) $ 0.84(d)
======= ======== ======== ======== ========
Diluted weighted average shares outstanding(e)..... 27,000 27,000 27,000 27,000 27,078
PRO FORMA RELATING TO CHANGE IN TAX STATUS:(F)
Historical income before provision for income taxes
and extraordinary item.......................... $16,906 $ 21,938 $ 30,464 $ 14,384
Pro forma provision for income taxes............... 6,644 9,087 12,060 5,466
------- -------- -------- --------
Pro forma income before extraordinary item......... 10,262 12,851 18,404 8,918
Extraordinary item................................. -- -- -- (1,792)(g)
------- -------- -------- --------
Pro forma net income............................... $10,262 $ 12,851 $ 18,404 $ 7,126
======= ======== ======== ========
Basic and diluted income before extraordinary item
per share(c).................................... -- -- $ 0.68 $ 0.15 --
======== ========
Basic and diluted net income per share(c).......... $ 0.68 $ 0.08
======== ========
PRO FORMA FOR THE TRANSACTIONS AND THE IPO:(H)
Net income......................................... -- -- $ 11,429 $ 16,729 --
======== ========
Basic and diluted net income per share............. -- -- 0.42 0.62 --
======== ========
OTHER DATA:
Income from operations margin(i)................... 16.7% 20.5% 21.3% 23.2% 22.9%
Capital expenditures............................... $ 4,904 $ 1,786 $ 2,641 $ 2,252 $ 3,842
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------
1993 1994 1995 1996(A) 1997
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Net working capital (excluding cash and cash
equivalents, marketable securities and current
debt)........................................... $25,437 $ 35,056 $ 39,405 $ 43,569 $ 57,474
Property, plant and equipment, net................. 10,732 12,071 13,036 14,157 13,958
Total assets....................................... 55,587 64,706 75,309 141,537 171,324
Total debt (including current debt)................ 8,039 9,288 8,792 120,654 114,238
Shareholders' equity............................... 40,543 48,671 55,405 1,688 30,344
</TABLE>
(footnotes on following page)
21
<PAGE> 22
(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 non-voting junior
redeemable preferred stock of Twinlab (the "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 nonvoting senior redeemable preferred stock of
Twinlab (the "Senior Preferred Stock," and, 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 10 1/4% Senior
Subordinated Notes due 2006 (the "Note Offering"; and, 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 Company consummated an initial public offering of 8,500,000
shares of Common Stock in November 1996 (the "IPO"). 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
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 elsewhere in this
Prospectus.
(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.
(d) Supplemental basic and diluted net income per share for the year ended
December 31, 1997, after giving effect to the Redemption, would be $0.89.
Such calculation assumes the Redemption occurred on January 1, 1997 and
includes the assumed issuance of 1,033,000 shares of Common Stock required
to effect the Redemption and the elimination of interest expense and
amortization of deferred finance costs, net of tax, relating to the redeemed
Notes.
(e) 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 elsewhere in
this Prospectus.
(f) 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.
(g) Represents the write-off of previously deferred finance costs incurred in
connection with the Original Credit Facility (the "Extraordinary Item").
(h) 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 (f) 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.
(i) Income from operations margin equals income from operations as a percentage
of net sales.
22
<PAGE> 23
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
Prospectus.
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 and also sets forth
certain of such data as a percentage of net sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1996 1997
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
TWINLAB Division..................... $132.2 88.8% $150.4 88.4% $174.9 82.0%
Herbal Supplements &
Phytonutrients..................... 19.8 13.3 23.1 13.6 41.1 19.3
Herb Teas............................ 5.8 3.9 8.1 4.8 8.4 3.9
Network Marketing.................... NA NA NA NA 7.0 3.3
Publishing........................... 4.8 3.3 5.4 3.1 5.2 2.4
------ ------ ------ ------ ------ ------
Gross Sales.......................... 162.6 109.3 187.0 109.9 236.6 110.9
Discounts & Allowances............... (13.9) (9.3) (16.9) (9.9) (23.4) (10.9)
------ ------ ------ ------ ------ ------
Net Sales............................ 148.7 100.0 170.1 100.0 213.2 100.0
Gross Profit......................... 58.8 39.5 70.2 41.3 92.3 43.3
Operating Expenses................... 27.2 18.3 30.8 18.1 43.4 20.4
Income From Operations............... 31.6 21.3 39.5 23.2 48.8 22.9
</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 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
23
<PAGE> 24
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
24
<PAGE> 25
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 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.
25
<PAGE> 26
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 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 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. See "Prospectus
Summary -- Recent Trends and Developments -- Bronson Acquisition" and "Risk
Factors -- Uncertainty Related to Acquisitions; Broad Discretion in Use of
Proceeds."
In addition, the Company intends to use approximately $40.1 million of the
net proceeds from the Offering to pay for the Redemption and approximately $9.9
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. Accordingly, the possibility
26
<PAGE> 27
that an Offer may be made or consummated should not be considered by prospective
purchasers of the Common Stock.
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 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.
27
<PAGE> 28
BUSINESS
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
trademark, a full line of herbal supplements and phytonutrients marketed under
the Nature's Herbs and HealthCare Naturals trademarks and herb teas marketed
under the Alvita 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:
- 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 GNC,
WFM, 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 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.
- 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, 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
28
<PAGE> 29
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. See
"Prospectus Summary -- Recent Trends and Developments -- First Quarter
Trends."
- 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 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).
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
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<PAGE> 30
acquisitions. See "Recent Trends and Developments -- Bronson Acquisition." 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 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. See "Prospectus Summary -- Recent Trends and
Developments -- Bronson Acquisition."
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 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.
INDUSTRY
Based on estimates in the Packaged Facts Report, the retail market for 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
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<PAGE> 31
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
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
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<PAGE> 32
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
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(R) trademark, a full line of herbal supplements and
phytonutrients and herb teas marketed under the Nature's Herbs(R), HealthCare
Naturals(R) and Alvita(R) 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 Phytonutrients............ 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.
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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 Q(10), 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 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
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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 Q(10); 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
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
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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.
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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 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 Prospectus.
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
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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 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,
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.
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
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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 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 FDA, the FTC, the Consumer Product Safety
Commission, the United States Department of Agriculture and the Environmental
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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 DSHEA. This new law
revises the provisions of the FFDC Act concerning the composition and labeling
of dietary supplements and, in the judgment of the Company, is favorable to the
dietary supplement industry. The legislation creates a new statutory class of
"dietary supplements." This new class includes vitamins, minerals, herbs, amino
acids and other dietary substances for human use to supplement the diet, and the
legislation grandfathers, with certain limitations, dietary ingredients on the
market before October 15, 1994. A dietary supplement which contains a new
dietary ingredient, one not on the market before October 15, 1994, will require
evidence of a history of use or other evidence of safety establishing that it
will reasonably be expected to be safe. 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 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 pre-approval if certain requirements, including
prominent disclosure on the label of the lack of FDA review of the relevant
statement, possession by the marketer of substantiating evidence for the
statement and post-use notification to the FDA, are met. Such statements may
describe how particular nutritional supplements affect the structure, function
or general well-being of the body (e.g. "promotes your cardiovascular health").
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 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.
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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 also "Business -- Legal Matters."
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
"Business -- Legal Matters."
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.
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,
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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 $754,000 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 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,
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.
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 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.
LEGAL MATTERS
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.
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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 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.
42
<PAGE> 43
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning each of the
Company's directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ross Blechman(1).......................... 44 Chairman of the Board, Chief Executive Officer,
President and Director
Brian Blechman(2)......................... 47 Executive Vice President, Treasurer and Director
Dean Blechman............................. 40 Executive Vice President and Director
Neil Blechman............................. 47 Executive Vice President, Secretary and Director
Steve Blechman............................ 44 Executive Vice President and Director; Chairman of
the Board, Chief Executive Officer, Director and
President of ARP
John McCusker............................. 58 Chief Financial Officer
Stephen L. Welling........................ 43 President of the Nature's Herbs division of Twin and
Director
John G. Danhakl(1)(2)..................... 41 Director
Jennifer Holden Dunbar(1)(2).............. 35 Director
Jonathan D. Sokoloff(1)................... 40 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Ross Blechman became Chairman of the Board, Chief Executive Officer,
President and Director of the Company on May 7, 1996. Mr. Blechman joined Twin
Laboratories Inc. in 1974 and served as Vice President, Operations of the
Company prior to May 7, 1996. Mr. Blechman is Chairman of the Board, President,
Chief Executive Officer and Director of Twin, an Executive Vice President and
Director of ARP and Chairman of the Board and a Director of Changes
International.
Brian Blechman became an Executive Vice President, Treasurer and Director
of the Company on May 7, 1996. Mr. Blechman joined Twin Laboratories Inc. in
1972 and served as Vice President, Purchasing & Quality Control of the Company
prior to May 7, 1996. He is responsible for purchasing, plant operations,
quality control and management. Mr. Blechman is an Executive Vice President and
Director of Twin and ARP, and a Vice President, Treasurer and a Director of
Changes International.
Dean Blechman became an Executive Vice President and Director of the
Company on May 7, 1996. Mr. Blechman joined Twin Laboratories Inc. in 1979 and
served as Vice President, Sales of the Company prior to May 7, 1996. He is
responsible for sales and distribution. Mr. Blechman is an Executive Vice
President and Director of Twin and ARP and a Vice President and Director of
Changes International.
Neil Blechman became an Executive Vice President, Secretary and Director of
the Company on May 7, 1996. Mr. Blechman joined Twin Laboratories Inc. in 1972
and served as Vice President, Marketing & Advertising of the Company prior to
May 7, 1996. He is responsible for marketing and advertising activities,
promotional programs, merchandising strategies, packaging, trade shows and
public relations. Mr. Blechman is an Executive Vice President, Secretary and
Director of Twin and ARP and a Vice President, Secretary and a Director of
Changes International.
Steve Blechman became an Executive Vice President and Director of the
Company and Chairman of the Board, Chief Executive Officer, Director and
President of ARP on May 7, 1996. Mr. Blechman joined Twin Laboratories Inc. in
1974 and served as Vice President, Product Development & Marketing of the
Company prior to May 7, 1996. He is involved in marketing, product development,
customer service, public relations and the operations of ARP. Mr. Blechman is an
Executive Vice President and Director of Twin and a Vice President and Director
of Changes International.
43
<PAGE> 44
John McCusker became the Chief Financial Officer of the Company on November
3, 1997. He is responsible for financial management and the Company's MIS
department. He was previously an independent financial consultant. From 1987 to
1996, Mr. McCusker was Senior Vice President and Chief Financial Officer for
Geraghty & Miller, Inc. Upon its 1995 merger with Arcadis NV, he was appointed
to the additional position of Senior Vice President -- Investor Relations.
Stephen L. Welling became the President of the Nature's Herbs division of
Twin on May 7, 1996, and was elected to the Board of Directors of the Company on
September 16, 1997. Mr. Welling joined Natur-Pharma Inc. in 1977 as the
controller and served as President of Natur-Pharma Inc. prior to May 7, 1996.
Prior to his promotion to President, Mr. Welling served as Vice President of
Operations of Natur-Pharma Inc. with responsibility for manufacturing,
personnel, quality management, legal affairs and finance. Mr. Welling is on the
board of directors of the National Nutritional Foods Association, a leading
trade organization that governs the industry's retailers, distributors,
suppliers and manufacturers.
John G. Danhakl became a director of the Company on May 7, 1996. He has
been an executive officer and an equity owner of Leonard Green & Partners, L.P.
("LGP"), a merchant banking firm which manages GEI, since 1995. Mr. Danhakl had
previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") and had been with DLJ since 1990. Prior to joining DLJ, Mr.
Danhakl was a Vice President at Drexel Burnham Lambert Incorporated ("Drexel").
Mr. Danhakl is also a director of Big 5 Corp., Communications & Power
Industries, Inc., Leslie's Poolmart, Inc., Hechinger Company, The Arden Group,
Inc. and Liberty Group Publishing, Inc. Mr. Danhakl also serves as a director of
Twin and ARP.
Jennifer Holden Dunbar has been a director of the Company since its
formation in February 1996. She joined Leonard Green & Associates, L.P. ("LGA"),
a merchant banking firm, as an associate in 1989, became a principal in 1993,
and through a corporation became a partner in 1994. Since 1994, Ms. Holden
Dunbar has also been an executive officer and equity owner of LGP. Ms. Holden
Dunbar previously was an associate with the merchant banking firm of Gibbons,
Green, van Amerongen and a financial analyst in mergers and acquisitions with
Morgan Stanley & Co. Ms. Holden Dunbar is also a director of Gart Sports
Company. Ms. Holden Dunbar also serves as a director of Twin and ARP.
Jonathan D. Sokoloff became a director of the Company on May 7, 1996. He
has been a partner of LGA since 1990 and has been an executive officer and
equity owner of LGP since its formation in 1994. Mr. Sokoloff had previously
been a Managing Director at Drexel. Mr. Sokoloff is also a director of Carr-
Gottstein Foods Co., Gart Sports Company and Hechinger Company. Mr. Sokoloff
also serves as a director of Twin and ARP.
The Company's By-laws and Certificate of Incorporation provide that the
Company's Board of Directors be comprised of such number of directors as
determined from time to time by the Board of Directors, but in no event less
than eight members. The Board is currently comprised of nine members. Each
Director holds office until his successor is duly elected and qualified, or
until his earlier death, resignation or removal.
Executive officers of the Company are appointed by and serve at the
discretion of the Board of Directors and hold office until their respective
successors are duly elected and qualified. Except for the Blechman Brothers'
familial relationships, there are no family relationships among the executive
officers or Directors of the Company.
EMPLOYMENT AGREEMENTS
On May 7, 1996, the Company entered into employment agreements with each of
the Blechman Brothers (each an "Employment Agreement"). Pursuant to the terms of
each Employment Agreement, the relevant individual will be employed as an
executive of the Company and its subsidiaries until November 15, 1999, renewable
for terms of one year thereafter. The Employment Agreement provides for a base
salary of $400,000 (as adjusted annually for inflation), in addition to other
customary perquisites and benefits. In addition to receiving a base salary, the
executive is also eligible to participate in Twinlab's Bonus Plan which entitles
such individual to a bonus payment of up to 128% of his base salary for the
relevant calendar year based on annual increases in EBITDA (as defined therein)
realized by the Company for each year of the employment term.
44
<PAGE> 45
Each Employment Agreement also provides, subject to certain exceptions, that
upon a termination of the individual's employment during the term thereof (other
than for "cause" as defined therein), the Company is generally obligated to pay
the individual an amount equal to his base salary for the remaining term under
the Employment Agreement (which for this purpose, will be a three year period).
On May 7, 1996, the Company entered into an employment agreement with
Stephen L. Welling to serve as President of the Nature's Herbs division of Twin
(the "Division") (as amended, the "Welling Employment Agreement"). The Welling
Employment Agreement provides that Mr. Welling will be employed as an executive
of the Company for a term of three years, renewable for terms of one year
thereafter. The Welling Employment Agreement provides for a base salary of
$200,000 (as adjusted for inflation), in addition to other customary perquisites
and benefits. In addition to receiving a base salary, Mr. Welling is also
eligible to participate in the Division Bonus Plan which entitles him to a bonus
payment up to 202.5% of his base salary for the relevant calendar year based on
annual increases in EBITDA (as defined therein) realized by the Division for
each year of the employment term. The Welling Employment Agreement also
provides, subject to certain exceptions, that upon a termination of Mr.
Welling's employment during the term thereof (other than for "cause" as defined
therein), the Company is generally obligated to pay Mr. Welling an amount equal
to his base salary for the remaining term under the Welling Employment
Agreement.
45
<PAGE> 46
PRINCIPAL AND SELLING STOCKHOLDERS
The information in the following table sets forth certain information with
respect to the beneficial ownership of the Common Stock of Twinlab as of the
date of this Prospectus, by (i) each person who beneficially owns more than 5%
of the outstanding shares of Twinlab's Common Stock, (ii) each executive officer
of the Company, (iii) each director of the Company, (iv) all directors and
executive officers of the Company as a group, and (v) by the Selling
Stockholders, and as adjusted at that date to reflect the sale by the Company
and the Selling Stockholders of the shares of Common Stock offered hereby.
Except as noted below, each person or entity has sole voting and investment
power with respect to the shares shown.
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
BEFORE THE OFFERING(A) After the Offering(a)(b)
----------------------- NUMBER OF SHARES -------------------------
NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---------- ------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Green Equity Investors II, L.P. ...... 8,880,000 32.5% 3,605,635 5,274,365 16.8%
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
John G. Danhakl(c).................... 8,880,000 32.5 3,605,635 5,274,365 16.8
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Jennifer Holden Dunbar(c)............. 8,880,000 32.5 3,605,635 5,274,365 16.8
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Jonathan D. Sokoloff(c)............... 8,880,000 32.5 3,605,635 5,274,365 16.8
c/o Leonard Green & Partners, L.P.
11111 Santa Monica Blvd., Suite 2000
Los Angeles, CA 90025
Brian Blechman........................ 1,659,246 6.1 0 1,659,246 5.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Dean Blechman......................... 1,660,080 6.1 0 1,660,080 5.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Neil Blechman......................... 1,660,497 6.1 0 1,660,497 5.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Ross Blechman......................... 1,660,497 6.1 0 1,660,497 5.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Steve Blechman........................ 1,660,080 6.1 0 1,660,080 5.3
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
John McCusker......................... 0 0 0 0 0
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
Stephen L. Welling.................... 28,770 * 0 28,770 *
c/o Twin Laboratories Inc.
2120 Smithtown Avenue
Ronkonkoma, NY 11779
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
COMMON STOCK OWNED COMMON STOCK OWNED
BEFORE THE OFFERING(A) After the Offering(a)(b)
----------------------- NUMBER OF SHARES -------------------------
NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---------- ------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Chase Equity Associates, L.P. ........ 323,750 1.2 131,455 192,295 *
380 Madison Avenue
New York, NY 10017
DLJ Investment Partners, L.P.......... 261,609 * 106,223 155,386 *
277 Park Avenue
New York, NY 10172
DLJ Investment Funding, Inc. ......... 37,277 * 15,136 22,141 *
277 Park Avenue
New York, NY 10172
DLJ First ESC L.P. ................... 24,864 * 10,096 14,768 *
277 Park Avenue
New York, NY 10172
PMI Mezzanine Fund L.P. .............. 323,750 1.2 131,455 192,295 *
610 Newport Center Drive
Suite 1100
Newport Beach, CA 92660
All directors and executive officers 17,209,170 63.0 3,605,635 13,603,535 43.4%
as a group (10 persons)(d)..........
</TABLE>
- ---------------
(a) Does not include an aggregate of 392,200 shares of Common Stock issuable
upon exercise of outstanding stock options with a weighted average exercise
price of $23.22 per share.
(b) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters exercise their over-allotment option in full, GEI, Chase
Equity Associates, L.P., DLJ Investment Partners, L.P., DLJ Investment
Funding, Inc., DLJ First ESC L.P., and PMI Mezzanine Fund L.P. would sell
an additional 394,366, 192,295, 155,386, 22,141, 14,768 and 192,295 shares
of Common Stock, respectively, and would beneficially own 15.5%, 0%, 0%,
0%, 0% and 0% of the outstanding shares of Common Stock after the
Offerings.
(c) The shares shown as beneficially owned by Messrs. Danhakl and Sokoloff and
Ms. Holden Dunbar represent 8,880,000 shares owned of record by GEI. GEI is
a Delaware limited partnership managed by LGP, which is an affiliate of the
general partner of GEI. Each of Leonard I. Green, Jonathan D. Sokoloff,
John G. Danhakl, Peter J. Nolan, Gregory J. Annick and Jennifer Holden
Dunbar, either directly (whether through ownership interest or position) or
through one or more intermediaries, may be deemed to control LGP and such
general partner. LGP and such general partner may be deemed to control the
voting and disposition of the shares of Common Stock of Twinlab owned by
GEI. As such, Messrs. Sokoloff and Danhakl and Ms. Holden Dunbar may be
deemed to have shared voting and investment power with respect to all
shares held by GEI. However, such individuals disclaim beneficial ownership
of the securities held by GEI except to the extent of their respective
pecuniary interests therein.
(d) Includes the shares referred to in Note (c) above.
* Less than 1%.
47
<PAGE> 48
TERMS OF THE STOCKHOLDERS AGREEMENT
Upon consummation of the Acquisition, GEI, the Senior Executive Officers
and Twinlab entered into a Stockholders Agreement (the "Stockholders Agreement")
in respect of their holdings of shares of Common Stock of Twinlab. Pursuant to
the Stockholders Agreement, each of GEI and the Senior Executive Officers was
granted certain demand registration rights. The Stockholders Agreement also
contains certain "piggyback" registration rights arising in the event that
Twinlab registers its securities under the Securities Act. The Stockholders
Agreement terminates on the tenth anniversary of the date thereof.
Shares of Common Stock and Senior Preferred Stock of Twinlab were issued to
various institutional investors (the "Institutional Investors") pursuant to a
Stock Subscription Agreement among each such investor and Twinlab. Upon
consummation of the Acquisition, GEI, the Senior Executive Officers, the
Institutional Investors and Twinlab entered into a secondary stockholders
agreement (the "Secondary Stockholders Agreement") in respect of their holdings
of shares of capital stock of Twinlab. Commencing on the fifth anniversary of
the Secondary Stockholders Agreement, the Institutional Investors will be
entitled to exercise one demand registration right with respect to their shares
of Common Stock of Twinlab. Finally, the Institutional Investors will have
certain "piggyback" registration rights on other registrations of equity
securities of the Company. The Secondary Stockholders Agreement terminates on
the tenth anniversary of the date thereof.
DESCRIPTION OF CERTAIN INDEBTEDNESS
THE AMENDED AND RESTATED REVOLVING CREDIT FACILITY
In November 1996, Twinlab and Twin entered into the Revolving Credit
Facility agented by Chase and co-agented by Bank of New York. The Revolving
Credit Facility provides for a revolving credit facility for Twin of $50.0
million expiring on May 7, 2002. The Revolving Credit Facility bears interest at
an annual rate, at the option of Twin equal to the ABR plus the Applicable
Margin ("ABR Loans") or the Eurodollar Rate plus Applicable Margin ("Eurodollar
Loans"). With respect to the Revolving Credit Facility, "Applicable Margin"
means (a) 0%, in the case of ABR Loans and (b) 1.25%, in the case of Eurodollar
Loans. Interest rates on the Revolving Credit Facility are subject to increase
or reduction based on Twin's meeting certain financial tests. Outstanding
borrowings under the Revolving Credit Facility currently bear interest at a rate
of 6.875% per annum.
The proceeds of the Revolving Credit Facility are available for the working
capital requirements of Twin and its subsidiaries and for general corporate
purposes, including up to $35.0 million to fund permitted acquisitions (as
defined), subject in each case to certain conditions and reductions set forth in
the Revolving Credit Facility. 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 of which
approximately $21.3 million was available for acquisitions. See "Use of
Proceeds." A portion of the Revolving Credit Facility not to exceed $15.0
million is available for the issuance of letters of credit which generally will
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 the Company. In
addition, the loans under the Revolving Credit Facility are guaranteed by
Twinlab, ARP, Changes International and certain of Twin's future subsidiaries.
Additionally, Twin is required to apply various percentages of the net proceeds
of (i) certain issuances or sales of equity by Twinlab (provided that in the
case of a public offering by Twinlab of its capital stock, the net proceeds
thereof may be used, at the discretion of Twinlab and Twin, including without
limitation, to redeem or retire the Notes and/or to reduce the Revolving Credit
Facility), (ii) the incurrence of certain indebtedness by Twinlab or its direct
or indirect subsidiaries, or (iii) any disposition of any material assets (other
than inventory in the ordinary course of business), to the repayment of the
Revolving Credit Facility.
48
<PAGE> 49
The Revolving Credit Facility contains certain financial and operating
covenants, including a maximum leverage ratio and a minimum interest coverage
ratio. In addition, Twin and its subsidiaries are limited in the amount of
annual capital expenditures and capital lease obligations they may incur.
The operating covenants of the Revolving Credit Facility include
limitations on the ability of the Company to (i) incur additional indebtedness,
other than certain permitted indebtedness, (ii) permit additional liens or
encumbrances, other than certain permitted liens, (iii) make any investment in
other persons, other than certain permitted investments; (iv) become obligated
with respect to contingent obligations, other than certain permitted contingent
obligations, and (v) make restricted junior payments (including dividends on its
common stock). The operating covenants also include restrictions on certain
specified fundamental changes, such as mergers and asset sales, transactions
with shareholders and affiliates, and business outside the ordinary course as
currently conducted, amendments or waivers of certain specified agreements, and
the issuance of preferred stock, guarantees or other credit enhancements.
DESCRIPTION OF NOTES
The 10 1/4% Senior Subordinated Notes due 2006 (the "Notes") were issued in
a transaction (the "Notes Offering") pursuant to which Twin issued an aggregate
of $100,000,000 principal amount of the Notes to Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Chase Securities Inc. (together with DLJ, the
"Initial Notes Purchasers") on May 7, 1996 (the "Note Offering Closing Date").
The Initial Notes Purchasers subsequently resold the Notes in reliance on Rule
144A and certain other exemptions under the Securities Act. The Company and the
Initial Notes Purchasers also entered into a Registration Rights Agreement,
pursuant to which the Company granted certain registration rights for the
benefit of the holders of the Notes. On October 28, 1996, the Company
consummated a fully-subscribed registered exchange offer under the Securities
Act for the Notes (the "Exchange Offer") to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Notes.
The form and terms of the notes issued under the Exchange Offer are identical in
all material respects to the form and terms of the Notes.
The Notes were issued under an indenture, dated as of the Note Offering
Closing Date (the "Indenture"), among Twinlab, Twin, ARP and Fleet National Bank
as trustee. The Indenture was supplemented as of December 1, 1997 to add Changes
International as a Guarantor (as hereinafter defined) thereunder. The Notes are
not redeemable, in whole or in part, prior to May 15, 2001. Thereafter, the
Notes are redeemable at the redemption prices set forth in the Indenture, plus
interest accrued thereon to the redemption date. Notwithstanding the foregoing,
at any time on or before May 15, 1999, Twin may redeem up to 35% of the original
aggregate principal amount of the Notes, in whole or in part, with the net
proceeds of one or more Equity Offerings (as defined therein) at a redemption
price equal to 109 1/2% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption. Upon the occurrence of a Change of
Control (as defined therein), Twin will be required to make an offer to
repurchase all outstanding Notes at 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
The Notes are general unsecured obligations of Twin subordinated in right
of payment to all existing and future Senior Debt (as defined therein) of Twin,
including borrowings under the Revolving Credit Facility. The payment of the
principal, premium, if any, and interest on the Notes are guaranteed (the
"Guarantees") by Twinlab, ARP and Changes International (the "Guarantors"). The
Guarantees are subordinated in right of payment to all existing and future
Senior Debt of the Guarantors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Indenture permits the Company to incur additional indebtedness,
including additional Senior Debt. The Indenture contains certain covenants with
respect to Twin and the Subsidiary Guarantors (as defined therein) that limit
the ability of Twin and the Subsidiary Guarantors to, among other things, (i)
incur additional Indebtedness (as defined therein) and issue certain preferred
stock, (ii) pay dividends or make other distributions, (iii) layer Indebtedness,
(iv) create certain liens, (v) sell certain assets, (vi) enter into certain
transactions with affiliates, or (vii) enter into certain mergers or
consolidations involving Twin.
49
<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The Company is authorized by its Certificate of Incorporation to issue
75,000,000 shares of Common Stock, $1.00 par value per share, of which
31,321,500 shares will be outstanding upon completion of the Offering, and
2,000,000 shares of preferred stock, $.01 par value per share, none of which
shares will be outstanding upon consummation of the Offering.
The following summary description of the capital stock of Twinlab is
qualified in its entirety by reference to the Certificate of Incorporation and
the By-laws, which are incorporated by reference herein.
COMMON STOCK
Holders of shares of Common Stock vote as a single class on all matters
submitted to a vote of the stockholders, including the election of directors,
with each share of Common Stock entitled to one vote. There is no cumulative
voting with respect to the election of directors, with the result that holders
of more than 50% of the shares voting for the election of directors can elect
all of the directors. Upon completion of the Offering, GEI will own 16.8% and
the Senior Executive Officers of the Company will own 26.6% of the Common Stock
of Twinlab.
Holders of Common Stock on the applicable record date are entitled to share
ratably in such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor, subject to the
rights of the holders of any series of preferred stock. See "Dividend Policy."
Upon the liquidation, dissolution or winding up of the Company, each holder of
Common Stock will be entitled to share ratably in any distribution of the
Company's assets after the payment of all debts and other liabilities, subject
to any superior rights of the holders of any outstanding shares of preferred
stock.
Holders of the shares of Common Stock have no preemptive or other
subscription rights and there are no conversion rights or redemption or sinking
fund provisions with respect to such shares. All of the outstanding shares of
Common Stock are, and the shares of Common Stock offered hereby will be when
issued, fully paid and non-assessable.
Special meetings of stockholders may be called by the Company's Board of
Directors, the Chairman of the Board of Directors, the President or the holders
of twenty-five (25%) of the then outstanding Common Stock.
Stockholders of the Company are required to provide advance notice of
nominations of directors to be made at, and of business proposed to be brought
before, a meeting of stockholders. The failure to deliver proper notice within
the period specified in the Company's By-laws will result in the denial to the
stockholder of the right to make such nominations or propose such action at the
meeting.
PREFERRED STOCK
The Company's Board of Directors has authority (without action by the
stockholders) to issue authorized and unissued shares of preferred stock in one
or more series, to designate the number of shares constituting any series, and
to fix, by resolution, the voting powers, designations, preferences and
relative, optional or other special rights thereof, including liquidation
preferences and the dividend, conversion and redemption rights of each such
series. Under certain circumstances, the Company could issue the preferred stock
as a method of discouraging, delaying or preventing a change of control of the
Company.
CERTAIN PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW ("DGCL")
Section 228 of the DGCL allows any action which is required to be or may be
taken at a special or annual meeting of the stockholders of a corporation to be
taken without a meeting with the written consent of holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted, provided that the certificate of incorporation
of such corporation does not contain a provision to the contrary. The
Certificate of Incorporation contains no such provision, and therefore, pursuant
to Section 228 and the By-
50
<PAGE> 51
laws, stockholders holding a majority of the voting power of the Common Stock
will be able to effect most corporate matters requiring stockholder approval by
written consent, without the need for a duly-noticed and duly-held meeting of
stockholders. See "Risk Factors -- Control by Principal Stockholders."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American
Securities Transfer & Trust, Inc. American Securities Transfer & Trust, Inc. is
located at 1825 Lawrence Street, Suite 444, Denver, Colorado 80202-1817, and its
telephone number is (303) 298-5370.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, Twinlab will have 31,321,500 shares of
Common Stock outstanding, of which 16,832,750 shares will be freely tradeable
without restriction or further registration under the Securities Act, except
that any shares held by "affiliates" of the Company, as that term is defined
under the Securities Act ("Affiliates"), may generally only be sold in
compliance with the limitations of Rule 144 described below.
The remaining 14,488,750 shares of Common Stock (the "Restricted Shares")
constitute restricted securities under Rule 144 and were issued by the Company
in private transactions in reliance upon one or more exemptions under the
Securities Act. Such restricted securities may be resold in a public
distribution only if registered under the Securities Act or pursuant to an
exemption therefrom, including Rule 144. The Senior Executive Officers and the
Selling Stockholders, who collectively are the beneficial owners of an aggregate
of 18,180,420 shares of Common Stock (14,180,420 shares after the consummation
of the Offering), and the Company have agreed with the Underwriters, subject to
certain exceptions, not to directly or indirectly offer, sell, contract to sell,
grant any option to purchase or otherwise dispose of, without the prior written
consent of Bear Stearns, any Common Stock or any securities convertible into or
exchangeable or exercisable for, or warrants, options or rights to purchase or
acquire Common Stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any Common Stock, or
enter into any agreement to do any of the foregoing, for a period of 90 days
after the date of this Prospectus (the "Lock-Up Period"), except (i) offers to
sell and sales to the Underwriters pursuant to the Offering and (ii) the
issuance of shares of Common Stock pursuant to employee benefit arrangements of
the Company. Upon the expiration of such 90 day period, such holders will in
general be entitled to dispose of their shares of Common Stock, although the
shares of Common Stock held by affiliates of the Company will continue to be
subject to the restrictions of Rule 144 under the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect, a
person (or persons whose shares are aggregated) who has beneficially owned
Restricted Shares for at least one year, including a person who may be deemed an
Affiliate of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume in
the Common Stock during the four calendar weeks preceding the date on which
notice of such sale is filed pursuant to Rule 144. Sales under Rule 144 are
subject to certain restrictions relating to manner of sale, notice and the
availability of current public information about the Company. In addition, under
Rule 144(k), a person who is not an Affiliate of the Company at any time 90 days
preceding a sale, and who has beneficially owned shares for at least two years,
would be entitled to sell such shares immediately following the Offering without
regard to the volume limitations, manner of sale provisions or notice or other
requirements of Rule 144.
Upon completion of the Offering, 13,570,595 of the Restricted Shares will
be owned by GEI and the Blechman Brothers. The Company has granted the Senior
Executive Officers and the Selling Stockholders certain demand and piggyback
registration rights covering an aggregate of 18,176,250 shares of Common Stock
(14,176,250 shares after the consummation of the Offering). When and as these
rights are exercised, additional shares will become available for sale upon the
effectiveness of a registration statement filed pursuant to exercise of such
rights. See "Principal and Selling Stockholders -- Terms of the Stockholders
Agreement."
Any sale of substantial amounts of Common Stock in the open market may
adversely affect the market price of the Common Stock offered hereby.
51
<PAGE> 52
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and disposition
of the Common Stock by a "Non-United States Holder." For the purpose of this
summary, a "Non-United States Holder" is any person or entity that is not (a) a
citizen or resident of the United States, (b) a corporation or partnership
created or organized in or under the laws of the United States or of any
political subdivision thereof, (c) an estate that is subject to United States
federal taxation on its income regardless of its source or (d) a trust if a
court within the United States is able to exercise primary supervision over its
administration and one or more United States persons have the authority to
control all substantial decisions of the trust. An individual may be deemed to
be a resident of the United States for federal income tax purposes in several
circumstances, including being present in the United States on at least 31 days
in the calendar year and for an aggregate of 183 days during the three-year
period ending with the current calendar year. For purposes of this
determination, all of the days present in the United States during the current
year, one-third of the days present during the immediately preceding year and
one-sixth of the days present during the second preceding year are taken into
account. Resident aliens are subject to U.S. federal income tax as if they were
U.S. citizens and residents.
This summary does not deal with all aspects of United States federal income
and estate taxation that may be relevant to Non-United States Holders in light
of their personal circumstances and does not address tax consequences under the
laws of any state, municipality, or other taxing jurisdiction or under the laws
of any country other than the United States. Furthermore, this summary is based
on current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing, temporary and proposed regulations promulgated thereunder and
administrative and judicial interpretations, all of which are subject to change,
possibly with retroactive effect. Prospective Non-United States Holders are
urged to consult their tax advisors regarding the United States federal, state,
local and foreign income and other tax consequences of acquiring, owning and
disposing of the Common Stock.
DIVIDENDS
The Company does not expect to pay dividends on its Common Stock in the
foreseeable future. See "Dividend Policy." Generally, any dividends paid with
respect to the Common Stock to a Non-United States Holder will be subject to
withholding of United States federal income tax at a 30% tax rate (or such lower
tax rate as may be specified by an applicable income tax treaty). Dividends
received by a Non-United States Holder that are effectively connected with a
United States trade or business conducted by such Non-United States Holder (and
attributable to a U.S. permanent establishment of the Non-United States Holder,
if any income tax treaty applies) are exempt from such withholding tax. However,
such effectively connected dividends, net of certain deductions and credits, are
taxed at the same graduated rates applicable to United States persons.
Effectively connected dividends received by a corporate Non-United States Holder
may be subject to an additional "branch profits tax" at a 30% tax rate (or such
lower rate as may be specified by an applicable income tax treaty). A Non-United
States Holder may claim exemption from withholding under the effectively
connected income exception by filing Form 4224 (Statement Claiming Exemption
from Withholding of Tax on Income Effectively Connected with the Conduct of
Business in the United States) with the Company or its paying agent.
Under current United States Treasury regulations, dividends paid to an
address in a foreign country are presumed to be paid to a resident of such
country for purposes of the withholding discussed above (unless the payor has
knowledge to the contrary) and, under the current interpretation of United
States Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Recently finalized Treasury regulations generally effective for
payments made after December 31, 1998 (the "Withholding Regulations"), however,
will require Non-United States Holders to file certain new forms to obtain the
benefit of any applicable tax treaty providing for a lower rate of withholding
tax on dividends. Such forms will be required to contain the holder's name,
address and certain other information.
52
<PAGE> 53
DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax on any gain recognized upon the sale or other disposition of
Common Stock unless (i) such gain is effectively connected with a United States
trade or business of the Non-United States Holder (and, if the applicable treaty
so provides, is attributable to such holder's office or other fixed place of
business within the United States), (ii) in the case of a Non-United States
Holder who is a non-resident alien individual and holds the Common Stock as a
capital asset, such holder is present in the United States for 183 or more days
in the taxable year of disposition and either (a) has a "tax home" in the United
States for United States federal income tax purposes or (b) has an office or
other fixed place of business in the United States to which the gain is
attributable and no treaty exemption applies, (iii) the Non-United States Holder
is subject to tax pursuant to the provisions of United States federal income tax
laws applicable to certain expatriates or (iv) the Company is or has been a
"United States real property holding corporation" ("USRPHC") at any time within
the shorter of the five-year period preceding such disposition or such
Non-United States Holder's holding period and, provided that the Common Stock
continues to be "regularly traded on an established securities market" for tax
purposes, the Non-United States Holder held, directly or indirectly, at any time
during the five-year period ending on the date of disposition, more than 5% of
the outstanding Common Stock. The Company has determined that it has not been
and is not currently and does not believe that it will become a USRPHC for
federal income tax purposes. If a Non-United States Holder falls under clause
(i) above, the holder will be subject to United States federal income tax on the
same basis as United States persons generally (and, with respect to corporate
Non-United States Holders, may also be subject to the branch profits tax
described above). If an individual Non-United States Holder falls under clause
(ii) above, the holder generally will be subject to a 30% tax on the gain
derived from the sale, which gain may be offset by U.S. capital losses
recognized within the same taxable year of such sale or disposition.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In the event the Company decides, contrary to its present intention, to pay
dividends with respect to its Common Stock, the Company must report to the IRS
the amount of dividends paid, the name and address of the recipient and the
amount, if any, of tax withheld. A similar report will be sent to the Non-United
States Holder. See "Dividend Policy." Pursuant to tax treaties or other
agreements, the IRS may make such reports available to tax authorities in the
recipient's country of residence.
Dividends paid to a Non-United States Holder at an address within the
United States may be subject to backup withholding at a rate of 31% if the
Non-United States Holder fails to establish that it is entitled to an exemption
or to provide a correct taxpayer identification number and other information to
the payor.
The payment of the proceeds of the disposition of Common Stock by or
through the United States office of a broker is subject to information reporting
and backup withholding at a rate of 31% unless the holder certifies its name,
address and non-United States status under penalties of perjury or otherwise
establishes an exemption. Information reporting requirements (but not backup
withholding) will apply to a payment of disposition proceeds by or through a
foreign office of (a) a United States broker, (b) a foreign broker that is a
"controlled foreign corporation" for United States federal income tax purposes
or (c) a foreign broker 50% or more of whose gross income for certain periods is
effectively connected with the conduct of a United States trade or business,
unless, in each case, such broker has documentary evidence in its files of the
owner's foreign status and has no actual knowledge to the contrary. Generally,
United States information reporting and backup withholding will not apply to a
payment of disposition proceeds if the payment is made outside the United States
by or through a foreign office of a non-U.S. broker.
The Withholding Regulations will affect the procedures to be followed by a
Non-United States Holder in establishing such holder's status as a Non-United
States Holder for purposes of the withholding, backup withholding and
information reporting rules discussed herein. Among other things, the
Withholding Regulations will provide certain presumptions under which a
Non-United States Holder would be subject to backup withholding in the absence
of certification from the holder as to non-U.S. status. Prospective investors
should
53
<PAGE> 54
consult their tax advisors concerning the effect of the Withholding Regulations
on an investment in Common Stock.
Backup withholding is not an additional tax. Rather, the United States tax
liability of persons subject to backup withholding will be reduced by the amount
of tax withheld. If withholding results in an overpayment of taxes, a refund may
be obtained, provided that the required information is furnished to the IRS.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident of the United States (as specially defined for United States
federal estate tax purposes) at the time of death will be subject to United
States federal estate tax unless an applicable estate tax treaty provides
otherwise. Estates of non-resident aliens are generally allowed a statutory
credit which is the equivalent of an exclusion of $60,000 of assets from the
U.S. estate tax. Tax treaties may permit a larger credit.
54
<PAGE> 55
UNDERWRITING
The underwriters of the Offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Adams, Harkness & Hill, Inc., Lehman Brothers Inc. and Smith Barney Inc. are
acting as representatives, have severally agreed with the Company and the
Selling Stockholders, subject to the terms and conditions of the Underwriting
Agreement (the form of which has been filed as an exhibit to the Registration
Statement on Form S-3 of which this Prospectus is a part), to purchase from the
Company and the Selling Stockholders the aggregate number of Shares set forth
opposite their respective names below.
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ---------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Adams, Harkness & Hill, Inc.................................
Lehman Brothers Inc.........................................
Smith Barney Inc............................................
---------
Total............................................. 8,000,000
=========
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock (other than those covered by the
over-allotment option) must be purchased if any are purchased. Those obligations
are subject, however, to various conditions, including the approval of certain
matters by counsel. The Company and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the Underwriters may be required to make in respect
of such liabilities.
The Company and the Selling Stockholders have been advised that the
Underwriters propose to offer the shares of Common Stock, initially at the
public offering price set forth on the cover page of this Prospectus and to
certain selected dealers at such price less a concession not to exceed $ per
share; that the Underwriters may allow, and such selected dealers may reallow, a
concession to certain other dealers not to exceed $ per share; and that
after the commencement of the Offering, the public offering price and the
concessions may be changed.
The Company and the Selling Stockholders have granted the Underwriters an
option to purchase in the aggregate up to 1,200,000 additional shares of Common
Stock solely to cover over-allotments, if any. The option may be exercised in
whole or in part at any time within 30 days after the date of this Prospectus.
To the extent the option is exercised, the Underwriters will be severally
committed, subject to certain conditions, to purchase the additional shares of
Common Stock in proportion to their respective commitments as indicated in the
preceding tables.
55
<PAGE> 56
No action has been taken in any jurisdiction by the Company or the
Underwriters that would permit a public offering of the Common Stock offered
pursuant to the Offering in any jurisdiction where action for that purpose is
required, other than the United States. The distribution of this Prospectus and
the offering or sale of the shares of Common Stock offered hereby in certain
jurisdictions may be restricted by law. Accordingly, the shares of Common Stock
offered hereby may not be offered or sold, directly or in directly, and neither
this Prospectus nor any other offering material or advertisements in connection
with the Common Stock may be distributed or published, in or from any
jurisdiction, except under circumstances that will result in compliance with
applicable rules and regulations of any such jurisdiction. Such restrictions may
be set out in applicable Prospectus supplements. Persons into whose possession
this Prospectus comes are required by the Company and the Underwriters to inform
themselves about and to observe any applicable restrictions. This Prospectus
does not constitute an offer of, or an invitation to subscribe for purchase of,
any shares of Common Stock and may not be used for the purpose of an offer to,
or solicitation by, anyone in any jurisdiction or in any circumstances in which
such offer or solicitation is not authorized or is unlawful.
The Senior Executive Officers and the Selling Stockholders, who
collectively are the beneficial owners of an aggregate of 18,180,240 shares of
Common Stock (14,180,420 shares after consummation of the Offering), and the
Company, have agreed with the Underwriters, subject to certain exceptions, not
to, directly or indirectly, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of, without the prior written consent of Bear
Stearns, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for, or warrants, options or rights to purchase or
acquire, Common Stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any Common Stock, or
enter into any agreement to do any of the foregoing, for a period of 90 days
after the date of this Prospectus. See "Shares Eligible for Future Sale."
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the Common Stock during and after the Offering. Specifically, the
Underwriters may over-allot or otherwise create a short position in the Common
Stock for their own account by selling more shares of Common Stock than have
been sold to them by the Company. The Underwriters may elect to cover any such
short position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment options granted to the Underwriters. In addition,
such persons may stabilize or maintain the price of the Common Stock by bidding
for or purchasing shares of Common Stock in the open market and may impose
penalty bids, under which selling concessions allowed to syndicate
56
<PAGE> 57
members or other broker-dealers participating in the Offering are reclaimed if
shares previously distributed in the Offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions, if
commenced, may be discontinued at any time.
Certain persons participating in the Offering may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the 1934 Act. Rule 103 permits,
upon the satisfaction of certain conditions, underwriting and selling group
members participating in a distribution that are also registered Nasdaq market
makers in the security being distributed (or a related security) to engage in
limited passive market making transactions during the period when Regulation M
would otherwise prohibit such activity. In general, a passive market maker may
not bid for or purchase a security at a price that exceeds the highest
independent bid for those securities by a person that is not participating in
the distribution and must identify its passive market making bids on the Nasdaq
electronic inter-dealer reporting system. In addition, the net daily purchases
made by a passive market maker generally may not exceed 30% of such market
maker's average daily trading volume in the security for the two full
consecutive calendar months (or any 60 consecutive days ending within 10 days)
immediately preceding the date of filing of the Registration Statement of which
this Prospectus forms a part.
Certain of the Underwriters have in the past provided, and may in the
future provide, investment banking services for the Company. In particular, Bear
Stearns, DLJ and Adams, Harkness & Hill, Inc. and certain of their respective
affiliates served as underwriters for the Company's initial public offering in
November 1996. In addition, in May 1996 DLJ acted as an initial purchaser of the
Company's 10 1/4% Senior Subordinated Notes due 2006.
DLJ Investment Partners, L.P., DLJ Investment Funding, Inc. and DLJ First
ESC L.P. (collectively, the "DLJ Affiliates"), each of which is an affiliate of
DLJ, are collectively the owners of 323,750 shares of Common Stock and will be
Selling Stockholders in the Offering. The DLJ Affiliates will be selling 131,455
shares in the Offering and as a result will receive approximately $4.9 million
of the net proceeds of the Offering (using an assumed offering price of $38.875
per share). In addition, Bear Stearns and DLJ each have in the past provided,
and may in the future provide, investment banking services for GEI and its
affiliates. Affiliates of Bear Stearns and DLJ each own approximately 1.6% of
the limited partnership interests in GEI.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Kramer, Levin, Naftalis & Frankel, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP, New York, New York.
EXPERTS
The consolidated financial statements of Twinlab as of December 31, 1996
and 1997 and for each of the three years in the period ended December 31, 1997
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
57
<PAGE> 58
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and
1997................................................... F-3
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997....................... F-4
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997........... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997....................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 59
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, 1996 and 1997, 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. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Twinlab Corporation and
subsidiaries as of December 31, 1996 and 1997, 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.
DELOITTE & TOUCHE LLP
Jericho, New York
February 4, 1998
F-2
<PAGE> 60
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
ASSETS (NOTE 8)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,794 $ 4,029
Accounts receivable, net of allowance for bad debts of
$208 and $406, respectively (Note 13).................. 31,027 44,059
Inventories (Note 4)...................................... 29,443 37,254
Deferred tax assets (Note 10)............................. 1,218 1,615
Prepaid expenses and other current assets................. 1,076 1,288
--------- ---------
Total current assets.............................. 66,558 88,245
PROPERTY, PLANT AND EQUIPMENT, Net (Note 5)................. 14,157 13,958
DEFERRED TAX ASSETS (Note 10)............................... 52,858 48,777
OTHER ASSETS (Note 6)....................................... 7,964 20,344
--------- ---------
Total............................................. $ 141,537 $ 171,324
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8)................ $ 20,231 $ 13,993
Accounts payable.......................................... 10,313 16,534
Accrued expenses and other current liabilities (Note 7)... 8,882 10,208
--------- ---------
Total current liabilities......................... 39,426 40,735
LONG-TERM DEBT, less current portion (Note 8)............... 100,423 100,245
--------- ---------
Total liabilities................................. 139,849 140,980
--------- ---------
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; 27,000,000 shares outstanding as of
December 31, 1996 and 27,320,100 as of December 31,
1997................................................... 27,000 27,320
Additional paid-in capital................................ 141,338 147,003
Accumulated deficit....................................... (166,650) (143,979)
--------- ---------
Total shareholders' equity........................ 1,688 30,344
--------- ---------
Total............................................. $ 141,537 $ 171,324
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 61
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
NET SALES (Note 13)......................................... $148,735 $170,075 $213,229
COST OF SALES............................................... 89,932 99,827 120,947
-------- -------- --------
GROSS PROFIT................................................ 58,803 70,248 92,282
OPERATING EXPENSES.......................................... 27,191 30,784 43,433
-------- -------- --------
INCOME FROM OPERATIONS...................................... 31,612 39,464 48,849
-------- -------- --------
OTHER (EXPENSE) INCOME:
Interest income........................................... 313 593 204
Interest expense.......................................... (866) (10,005) (12,315)
Transaction expenses (Note 1)............................. (656) (400) --
Nonrecurring non-competition agreement expense (Note 1)... -- (15,300) --
Other..................................................... 61 32 27
-------- -------- --------
(1,148) (25,080) (12,084)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES AND EXTRAORDINARY
ITEM...................................................... 30,464 14,384 36,765
PROVISION FOR INCOME TAXES (Note 10)........................ 240 796 14,094
-------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM............................ 30,224 13,588 22,671
EXTRAORDINARY ITEM, net of income tax benefit of $1,134
(Note 1).................................................. -- (1,792) --
-------- -------- --------
NET INCOME.................................................. 30,224 11,796 22,671
PREFERRED STOCK DIVIDENDS................................... -- 4,862 --
-------- -------- --------
NET INCOME APPLICABLE TO COMMON STOCK....................... $ 30,224 $ 6,934 $ 22,671
======== ======== ========
BASIC AND DILUTED INCOME PER SHARE (Note 9):
Income before extraordinary item.......................... $ 1.12 $ 0.33 $ 0.84
Extraordinary item........................................ -- (0.07) --
-------- -------- --------
Net income................................................ $ 1.12 $ 0.26 $ 0.84
======== ======== ========
Basic weighted average shares outstanding................. 27,000 27,000 27,042
======== ======== ========
Diluted weighted average shares outstanding............... 27,000 27,000 27,078
======== ======== ========
PRO FORMA RELATING TO CHANGE IN TAX STATUS
(Note 1):
Historical income before provision for income taxes and
extraordinary item..................................... $ 30,464 $ 14,384
Pro forma provision for income taxes...................... 12,060 5,466
-------- --------
Pro forma income relating to change in tax status before
extraordinary item..................................... 18,404 8,918
Extraordinary item........................................ -- (1,792)
-------- --------
Pro forma net income relating to change in tax status..... 18,404 7,126
Preferred Stock dividends................................. -- 4,862
-------- --------
Pro forma net income relating to change in tax status
applicable to common stock............................. $ 18,404 $ 2,264
======== ========
PRO FORMA BASIC AND DILUTED INCOME PER SHARE
(Note 9):
Income before extraordinary item.......................... $ 0.68 $ 0.15
Extraordinary item........................................ -- (0.07)
-------- --------
Net income................................................ $ 0.68 $ 0.08
======== ========
Basic and diluted weighted average shares outstanding..... 27,000 27,000
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 62
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(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-5
<PAGE> 63
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 30,224 $ 11,796 $ 22,671
Adjustment to reconcile net income to net cash provided by
operating activities:
Extraordinary item...................................... -- 1,792 --
Depreciation and amortization........................... 1,011 1,880 1,949
Gain on sale of equipment............................... (58) -- (3)
Bad debt expense........................................ 169 125 200
Deferred income taxes................................... -- (3,484) 3,684
Nonrecurring non-competition agreement expense.......... -- 15,300 --
Changes in operating assets and liabilities (net of
effect of business acquired):
Accounts receivable................................... (6,649) (6,780) (13,232)
Inventories........................................... (2,541) (4,170) (7,093)
Prepaid expenses and other current assets............. 307 (204) (212)
Accounts payable...................................... 3,242 3,459 5,494
Accrued expenses and other current liabilities........ 1,123 5,758 (2,047)
-------- --------- --------
Net cash provided by operating activities........... 26,828 25,472 11,411
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired................ -- -- (3,726)
Maturities of marketable securities....................... 1,178 201 --
Proceeds from sales of property, plant and equipment...... 825 10 3,099
Acquisition of property, plant and equipment.............. (2,641) (2,252) (3,842)
(Increase) decrease in other assets....................... 6 411 (417)
-------- --------- --------
Net cash used in investing activities............... (632) (1,630) (4,886)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt............................ 4,685 173,000 --
Proceeds from issuance of Preferred Stock................. -- 67,000 --
Dividends on Preferred Stock.............................. -- (4,862) --
Distributions to shareholders............................. (23,490) (8,929) --
Payments of debt.......................................... (5,056) (61,002) (6,270)
Redemption of Preferred Stock............................. -- (67,000) --
Issuance of common stock.................................. -- 5,500 126
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........... (125) (136) (146)
-------- --------- --------
Net cash used in financing activities............... (23,986) (27,993) (6,290)
-------- --------- --------
Net increase (decrease) in cash and cash equivalents........ 2,210 (4,151) 235
Cash and cash equivalents at beginning of year.............. 5,735 7,945 3,794
-------- --------- --------
Cash and cash equivalents at end of year.................... $ 7,945 $ 3,794 $ 4,029
======== ========= ========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest................................................ $ 853 $ 8,020 $ 12,251
======== ========= ========
Income taxes............................................ $ 216 $ 3,063 $ 9,726
======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 64
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(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 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 $656 and $400 of
professional fees for the year ended December 31, 1995 and 1996, respectively
(the "Transaction Expenses").
F-7
<PAGE> 65
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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.
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Net sales................................................... $148,735 $170,075
Interest expense............................................ 15,684 15,395
Income before extraordinary item............................ 9,418 14,942
Basic and diluted income before extraordinary item per
share..................................................... 0.35 0.55
Weighted average shares outstanding (in thousands).......... 27,000 27,000
</TABLE>
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
F-8
<PAGE> 66
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
results of operations would have been had the Transactions and the subsequent
IPO in fact occurred on January 1, 1995.
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Net sales................................................... $148,735 $170,075
Interest expense............................................ 12,355 12,372
Net income.................................................. 11,429 16,729
Basic and diluted net income per share...................... 0.42 0.62
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.
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 $1,140, $1,119 and $1,095 for the years ended December 31, 1995,
1996 and 1997, 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.
F-9
<PAGE> 67
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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.
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>
1996 1997
-------- --------
<S> <C> <C>
Net sales................................................... $189,879 $247,636
Net income.................................................. 11,154 23,628
Basic and diluted net income per share...................... 0.23 0.87
Diluted weighted average shares outstanding (in
thousands)................................................ 27,313 27,391
</TABLE>
F-10
<PAGE> 68
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Raw materials............................................... $10,802 $16,340
Work in process............................................. 8,712 7,393
Finished goods.............................................. 9,929 13,521
------- -------
Total............................................. $29,443 $37,254
======= =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Land, building and leasehold improvements................... $12,197 $12,322
Plant equipment............................................. 7,006 7,461
Office equipment............................................ 2,292 2,606
Automobiles................................................. 12 33
------- -------
21,507 22,422
Less: accumulated depreciation and amortization............. 7,350 8,464
------- -------
Property, plant and equipment -- net...................... $14,157 $13,958
======= =======
Depreciation and amortization expense..................... $ 1,121 $ 1,120
======= =======
</TABLE>
Included in plant equipment at December 31, 1996 and 1997 are assets held
under capital leases with net carrying values totalling $343 and $206,
respectively. Accumulated amortization on these assets at December 31, 1996 and
1997 was $343 and $480, respectively.
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Goodwill and related intangible assets, net of accumulated
amortization of $131 and $274, respectively............... $ 573 $13,197
Deferred finance costs, net of accumulated amortization of
$321 and $872, respectively............................... 4,915 4,337
Trademarks, net of accumulated amortization of $213 and
$324, respectively........................................ 1,400 1,391
Other....................................................... 1,076 1,419
------ -------
Total............................................. $7,964 $20,344
====== =======
</TABLE>
F-11
<PAGE> 69
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
7. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
1996 1997
------ -------
<S> <C> <C>
Accrued salaries, employee benefits and payroll taxes....... $1,957 $ 2,477
Other....................................................... 6,925 7,731
------ -------
Total............................................. $8,882 $10,208
====== =======
</TABLE>
8. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Revolving Credit Facility(a)................................ $ 20,000 $ 13,750
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.................................... 277 266
Obligations under capital lease............................. 304 158
Other....................................................... 73 64
-------- --------
120,654 114,238
Less: current portion....................................... 20,231 13,993
-------- --------
Total............................................. $100,423 $100,245
======== ========
</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 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,
F-12
<PAGE> 70
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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 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.
F-13
<PAGE> 71
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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 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 $14 and $188 in 1996 and 1997,
respectively. The weighted average fair value of the options granted during 1996
and 1997 is estimated at $6.81 and $10.89 on the date of grant (using
Black-Scholes option pricing model) with the following weighted average
assumptions for 1996 and 1997, respectively: volatility of 45 percent and 46
percent, risk-free interest rate of 6.09 percent and 5.75 percent, and an
expected life of seven years.
F-14
<PAGE> 72
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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>
1995 1996 1997
---------------------------- ---------------------------- ----------------------------
PER- PER- PER-
SHARE SHARE 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............... $30,224 $13,588 $22,671
Less: Preferred
dividends.......... -- (4,862) --
------- ------- -------
BASIC INCOME PER
SHARE
Income before
extraordinary
item............. 30,224 27,000(a) $1.12 8,726 27,000(a) $0.33 22,671 27,042 $0.84
===== ===== =====
EFFECT OF DILUTIVE
SECURITIES:
Options............ -- -- -- -- -- 36
------- ------ ------- ------ ------- ------
DILUTED INCOME PER
SHARE
Income before
extraordinary
item............. $30,224 27,000 $1.12 $ 8,726 27,000 $0.33 $22,671 27,078 $0.84
======= ====== ===== ======= ====== ===== ======= ====== =====
</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.
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.
F-15
<PAGE> 73
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ------- -------
<S> <C> <C> <C>
Current:
Federal................................................ $ -- $ 3,662 $ 8,916
State and local........................................ 240 618 1,494
---- ------- -------
-- 4,280 10,410
---- ------- -------
Deferred:
Federal................................................ -- (3,108) 3,515
State and local........................................ -- (376) 169
---- ------- -------
-- (3,484) 3,684
---- ------- -------
$240 $ 796 $14,094
==== ======= =======
</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>
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Statutory Federal income tax rate........................... 34.0% 34.0% 35.0%
State and local income taxes (net of Federal tax benefit)... 0.8 1.1 2.9
Exempt income due to "S" Corporation status................. (34.0) (26.8) --
Other....................................................... -- (2.8) 0.4
----- ----- ----
Effective tax rate.......................................... 0.8% 5.5% 38.3%
===== ===== ====
</TABLE>
At December 31, 1996 and 1997, the deferred tax assets, which required no
valuation allowance, consisted of:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Accounts receivable......................................... $ 856 $ 1,099
Inventories................................................. 238 380
Property, plant and equipment............................... 464 34
Intangible and other assets................................. 52,394 48,743
Other....................................................... 124 136
------- -------
$54,076 $50,392
======= =======
</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.
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 $287, $164 and $375 for the years ended December 31, 1995,
1996 and 1997, respectively.
F-16
<PAGE> 74
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
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, 1995, 1996 and 1997 was
approximately $1,370, $1,579, and $1,874, 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.
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
27 and 21 percent, respectively, of net sales for 1995; 25 and 20 percent,
respectively, of net sales for 1996; and 19 and 23 percent, respectively, of net
sales for 1997. No other customer accounted for more than 10 percent of net
sales in any of the three years ended December 31, 1997.
F-17
<PAGE> 75
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
The Company's customers are primarily large independent distributors of
health food products. At December 31, 1996 and 1997, approximately 64 and 58
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 1996 1997
- ------------------------ --------- ---------
<S> <C> <C>
ASSETS
Cash........................................................ $ 162 $ 169
Investment in subsidiaries.................................. 1,526 30,175
--------- ---------
$ 1,688 $ 30,344
========= =========
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;
27,000,000 and 27,320,100 shares outstanding,
respectively)............................................. 27,000 27,320
Additional paid-in capital.................................. 141,338 147,003
Accumulated deficit......................................... (166,650) (143,979)
--------- ---------
$ 1,688 $ 30,344
========= =========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME 1995 1996 1997
- ------------------------------ ------- ------- -------
<S> <C> <C> <C>
Equity interest in net income of subsidiaries......... $30,224 $11,742 $22,856
Interest income....................................... -- 54 7
------- ------- -------
Income before provision for income taxes.............. 30,224 11,796 22,863
Provision for income taxes............................ -- -- 192
------- ------- -------
Net income............................................ $30,224 $11,796 $22,671
======= ======= =======
</TABLE>
F-18
<PAGE> 76
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS 1996 1997
- ---------------------------------- --------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 11,796 $ 22,671
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity investment in subsidiaries......................... 119,771 (19,064)
--------- --------
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.................................. 5,500 126
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............. (131,405) (3,600)
--------- --------
Net increase in cash........................................ 162 7
Cash at beginning of year................................... -- 162
--------- --------
Cash at end of year......................................... $ 162 $ 169
========= ========
</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>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets..................................... $ 58,663 $ 68,100 $ 88,077
Noncurrent assets.................................. 16,646 74,979 83,079
Current liabilities................................ 14,233 39,426 44,825
Noncurrent liabilities............................. 5,671 100,423 100,245
Shareholder's equity............................... 55,405 3,230 26,086
Net sales.......................................... 148,735 170,075 213,229
Gross profit....................................... 58,803 70,248 92,282
Net income......................................... 30,224 11,742 22,856
</TABLE>
F-19
<PAGE> 77
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
Summarized financial information of ARP is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Current assets............................. $ 1,266 $ 1,577 $ 1,399
Noncurrent assets.......................... 168 182 193
Current liabilities........................ 1,211 1,200 568
Noncurrent liabilities..................... -- -- --
Shareholder's equity....................... 223 559 1,024
Net sales.................................. 5,200 5,862 5,661
Gross profit............................... 259 886 1,329
Net income (loss).......................... (128) 392 465
</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 shares will be sold by certain of the Company's stockholders.
The net proceeds to the Company from the Offering are estimated to be
approximately $147,700. 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 $9,900 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 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> 78
======================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. UNDER NO
CIRCUMSTANCES SHALL THE DELIVERY OF THIS PROSPECTUS OR ANY SALE MADE PURSUANT TO
THIS PROSPECTUS CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................. 3
Incorporation of Certain Information By
Reference............................ 4
Prospectus Summary..................... 5
Summary Historical Financial Data...... 11
Risk Factors........................... 13
Price Range of Common Stock............ 19
Use of Proceeds........................ 19
Dividend Policy........................ 20
Capitalization......................... 20
Selected Historical Financial Data..... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 23
Business............................... 28
Management............................. 43
Principal and Selling Stockholders..... 46
Description of Certain Indebtedness.... 48
Description of Capital Stock........... 50
Shares Eligible for Future Sale........ 51
Certain United States Federal Tax
Consequences to Non-United States
Holders.............................. 52
Underwriting........................... 55
Legal Matters.......................... 57
Experts................................ 57
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
8,000,000 SHARES
[TWINLAB LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
Joint Book-Running Managers
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
------------------
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS
SALOMON SMITH BARNEY
, 1998
======================================================
<PAGE> 79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company estimates that expenses payable by the Company in connection
with the offering described in this Registration Statement (other than the
underwriting discounts and commissions) will be as follows:
<TABLE>
<CAPTION>
TOTAL
--------
<S> <C>
SEC registration fee (actual)............................... $ 81,760
NASD filing fee (actual).................................... 28,215
Accounting fees and expenses................................ 130,000
Legal fees and expenses..................................... 200,000
Printing and engraving expenses............................. 175,000
Transfer Agent and Registrar fees and expenses.............. 3,000
Miscellaneous expenses...................................... 182,025
--------
Total.................................................. $800,000
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which permits a corporation in its certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director for violations of the director's fiduciary duty, except
(i) for any breach of the director's fiduciary duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
pursuant to Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions), or
(iv) for any transaction from which the director derived an improper personal
benefit. The Company's Second Amended and Restated Certificate of Incorporation
contains provisions permitted by Section 102(b)(7) of the DGCL.
Reference is made to Section 145 of the DGCL which provides that a
corporation may indemnify any persons, including directors and officers, who
are, or are threatened to be made, parties to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such director, officer, employee or agent acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal actions or
proceedings, had no reasonable cause to believe that his conduct was unlawful. A
Delaware corporation may indemnify directors and/or officers in an action or
suit by or in the right of the corporation under the same conditions, except
that no indemnification is permitted without judicial approval if the director
or officer is adjudged to be liable to the corporation. Where a director or
officer is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such director or officer actually and reasonably incurred.
The Company's Second Amended and Restated Certificate of Incorporation and
Amended and Restated By-laws provide for the indemnification of directors and
officers of the Company to the fullest extent permitted by the DGCL.
II-1
<PAGE> 80
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriters have agreed to indemnify the directors,
officers and controlling persons of the Company against certain civil
liabilities that may be incurred in connection with the Offering, including
certain liabilities under the Securities Act.
The Company provides liability insurance for each director and officer for
certain losses arising from claims or charges made against them while acting in
their capacities as directors or officers of the Company.
ITEM 16. EXHIBITS.
(a)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
4.1 Indenture, dated May 7, 1996, among Twin, and ARP and the
Company, as 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 therefore (incorporated by reference to Exhibit 4.1
to the Company's 1996 Annual Report on Form 10-K).
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 Company, 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.**
5.1 Opinion of Kramer, Levin, Naftalis & Frankel.*
23.1 Consent of Deloitte & Touche LLP.*
23.2 Consent of Kramer, Levin, Naftalis & Frankel (contained in
the opinion to be filed as Exhibit 5.1 hereto).*
27 Financial Data Schedule.**
</TABLE>
(b) Schedule II: Valuation and Qualifying Accounts.
- ---------------
* Filed herewith.
** Previously filed.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to provisions described in Item 15 above, or otherwise, the Company has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the Common Stock covered hereby, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Company hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, each filing of the Company's annual report pursuant to
Section 13(a) or 15(d) of the 1934 Act (and, where applicable,
each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the 1934 Act) that is incorporated by
reference in the registration statement shall be deemed to be a
new registration statement relating to the Common Stock therein,
and the offering of such Common Stock at that time shall be deemed
to be the initial bona fide offering thereof.
II-2
<PAGE> 81
(b) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Company pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it
was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The Company hereby undertakes to deliver or cause to be delivered with the
Prospectus, to each person to whom the Prospectus is sent or given, the latest
annual report to security holders that is incorporated by reference in the
Prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3
or Rule 14c-3 under the 1934 Act.
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, State of New York, on April
3, 1998.
TWINLAB CORPORATION
By: /s/ ROSS BLECHMAN
------------------------------------
Ross Blechman
Chairman of the Board, Chief
Executive Officer
and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ross Blechman his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments, including post-effective amendments, to this Registration
Statement and any registration statement related to this Registration Statement
and filed pursuant to Rule 462 under the Securities Act of 1933, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act, and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that each of said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ ROSS BLECHMAN Chairman of the Board, Chief April 3, 1998
- --------------------------------------------------- Executive Officer, President
Ross Blechman and Director (Principal
Executive Officer)
/s/ NEIL BLECHMAN Executive Vice President and April 3, 1998
- --------------------------------------------------- Director
Neil Blechman
/s/ BRIAN BLECHMAN Executive Vice President and April 3, 1998
- --------------------------------------------------- Director
Brian Blechman
/s/ STEVE BLECHMAN Executive Vice President and April 3, 1998
- --------------------------------------------------- Director
Steve Blechman
</TABLE>
II-4
<PAGE> 83
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
/s/ DEAN BLECHMAN Executive Vice President and April 3, 1998
- --------------------------------------------------- Director
Dean Blechman
/s/ JOHN MCCUSKER Chief Financial Officer April 3, 1998
- --------------------------------------------------- (Principal Accounting and
John McCusker Financial Officer)
/s/ STEPHEN L. WELLING Director April 3, 1998
- ---------------------------------------------------
Stephen L. Welling
/s/ JONATHAN D. SOKOLOFF Director April 3, 1998
- ---------------------------------------------------
Jonathan D. Sokoloff
/s/ JOHN G. DANHAKL Director April 3, 1998
- ---------------------------------------------------
John G. Danhakl
/s/ JENNIFER HOLDEN DUNBAR Director April 3, 1998
- ---------------------------------------------------
Jennifer Holden Dunbar
</TABLE>
II-5
<PAGE> 84
SCHEDULE II
TWINLAB CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<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
------------ ---------- ---------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for bad debts.......... $ 63 $169 $ -- $ 55(1) $ 177
==== ==== ==== ==== ======
Reserve for excess and slow
moving inventory.............. $100 $415 $ -- $ -- $ 515
==== ==== ==== ==== ======
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, 1997:
Allowance for bad debts.......... $208 $200 $ -- $ 2(1) $ 406
==== ==== ==== ==== ======
Reserve for excess and slow
moving inventory.............. $625 $375 $ -- $ -- $1,000
==== ==== ==== ==== ======
</TABLE>
- ---------------
(1) Amounts written off.
S-1
<PAGE> 85
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.*
4.1 Indenture, dated May 7, 1996, among Twin, and ARP and the
Company, as 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 therefore (incorporated by reference to Exhibit 4.1
to the Company's 1996 Annual Report on Form 10-K).
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 Company, 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.**
5.1 Opinion of Kramer, Levin, Naftalis & Frankel.*
23.1 Consent of Deloitte & Touche LLP.*
23.2 Consent of Kramer, Levin, Naftalis & Frankel (contained in
the opinion to be filed as Exhibit 5.1 hereto).*
27 Financial Data Schedule.**
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
<PAGE> 1
Exhibit 1.1
8,000,000 Shares
TWINLAB CORPORATION
Common Stock
UNDERWRITING AGREEMENT
April , 1998
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
As representatives of the several U.S. underwriters
named in Schedule I hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE SECURITIES INTERNATIONAL
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS INTERNATIONAL
SMITH BARNEY INC.
As representatives of the several international
managers named in Schedule II hereto
c/o Bear, Stearns International Limited
Dear Sirs:
TWINLAB CORPORATION, a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters (as defined below), and
certain stockholder(s) of the Company named in Schedule III hereto (the "SELLING
STOCKHOLDERS") severally propose to sell to the several Underwriters, an
aggregate of 8,000,000 shares of Common Stock, par value $1.00 per share, of the
Company (the "FIRM SHARES"), of which 8,000,000 shares are to be issued and sold
by the Company and 8,000,000 shares are to be sold by the Selling Stockholders,
each Selling Stockholder selling the amount set
<PAGE> 2
forth opposite such Selling Stockholder's name in Schedule III hereto. It is
understood that, subject to the conditions hereinafter stated, 6,400,000 Firm
Shares (the "U.S. FIRM SHARES") will be sold to the several U.S. Underwriters
named in Schedule I hereto (the "U.S. UNDERWRITERS") in connection with the
offering and sale of such U.S. Firm Shares in the United States and Canada to
United States and Canadian Persons (as such terms are defined in the Agreement
Between U.S. Underwriters and International Managers of even date herewith), and
1,600,000 Firm Shares (the "INTERNATIONAL SHARES") will be sold to the several
International Managers named in Schedule II hereto (the "INTERNATIONAL
MANAGERS") in connection with the offering and sale of such International Shares
outside the United States and Canada to persons other than United States and
Canadian Persons. Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Adams, Harkness & Hill, Inc., Lehman Brothers Inc. and
Smith Barney Inc. shall act as representatives (the "U.S. REPRESENTATIVES") of
the several U.S. Underwriters, and Bear, Stearns International Limited,
Donaldson, Lufkin & Jenrette Securities International, Adams, Harkness & Hill,
Inc., Lehman Brothers International and Smith Barney Inc. shall act as
representatives of the several International Managers. The U.S. Underwriters and
the International Managers are hereinafter collectively referred to as the
"UNDERWRITERS".
The Company also proposes to issue and sell and the Selling
Stockholders also propose to sell, severally and not jointly, to the several
U.S. Underwriters not more than an additional 1,200,000 shares of its Common
Stock, par value $1.00 per share (the "ADDITIONAL SHARES"), if requested by the
U.S. Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter referred to collectively as the "SHARES". The
shares of common stock of the Company to be outstanding after giving effect to
the sales contemplated hereby are hereinafter referred to as the "COMMON STOCK".
The Company and the Selling Stockholders are hereinafter sometimes referred to
collectively as the "SELLERS."
1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "ACT"), a registration statement on Form S-3 (File No.
333-48091), including a prospectus, relating to the Shares. The registration
statement contains two prospectuses to be used in connection with the offering
and sale of the Shares: the U.S. prospectus, to be used in connection with the
offering and sale of Shares in the United States and Canada to United States and
Canadian Persons, and the international prospectus, to be used in connection
with the offering and sale of Shares outside the United States and Canada to
persons other than United States and Canadian Persons (including, in the case of
all references to the Registration Statement or the Prospectus, documents
incorporated therein by reference). The international prospectus is identical to
the U.S. prospectus except for the outside front and back cover pages. The
registration statement, as amended at the time it became effective, including
the information (if any) deemed to be part of the registration statement at the
time of
2
<PAGE> 3
effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as
the "REGISTRATION STATEMENT"; and the U.S. prospectus and the international
prospectus in the respective forms first used to confirm sales of Shares are
hereinafter collectively referred to as the "PROSPECTUS". If the Company has
filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement. The terms
"SUPPLEMENT" and "AMENDMENT" or "AMEND" as used in this Agreement with respect
to the Registration Statement or the Prospectus shall include all documents
subsequently filed by the Company with the Commission pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "EXCHANGE ACT") that are deemed to be
incorporated by reference in the Prospectus.
2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, (i) the Company agrees to issue and sell 4,000,000 Firm
Shares, (ii) each Selling Stock holder agrees, severally and not jointly, to
sell the number of Firm Shares set forth opposite such Selling Stockholder's
name under the caption "Number of Firm Shares Being Sold" in Schedule III hereto
and (iii) each Underwriter agrees, severally and not jointly, to purchase from
each Seller at a price per Share of $______ (the "PURCHASE PRICE") the number of
Firm Shares (subject to such adjustments to eliminate fractional shares as you
may determine) that bears the same proportion to the total number of Firm Shares
to be sold by such Seller as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedules I and II hereto bears to the total number
of Firm Shares.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to issue and sell and the Selling Stockholders agree to sell, severally and not
jointly, the Additional Shares and the U.S. Underwriters shall have the right to
purchase, severally and not jointly, up to 1,200,000 Additional Shares from the
Company and the Selling Stockholders at the Purchase Price. Additional Shares
may be purchased solely for the purpose of covering over-allotments made in
connection with the offering of the Firm Shares. The U.S. Underwriters may
exercise their right to purchase Additional Shares in whole or in part from time
to time by giving written notice thereof to the Company and the Attorneys (as
hereinafter defined) within 30 days after the date of this Agreement. The U.S.
Representatives shall give any such notice on behalf of the U.S. Underwriters
and such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given (and, in any event, no earlier than the
Closing Date (as hereinafter defined)) and (ii) no later than ten business days
after such notice has been given. If any Additional Shares are to be purchased,
each U.S. Underwriter, severally and not jointly, agrees to purchase from the
Company and the
3
<PAGE> 4
Selling Stockholders the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) which bears the same proportion to the total number of Additional
Shares to be purchased from the Company and the Selling Stockholders as the
number of U.S. Firm Shares set forth opposite the name of such U.S. Underwriter
in Schedule I bears to the total number of U.S. Firm Shares. If any Additional
Shares are to be purchased, the Company and each Selling Stockholder agree,
severally and not jointly, to sell the U.S. Underwriters the respective number
of Additional Shares specified in such notice by a fraction the numerator of
which is 228,749 in the case of the Company and, in the case of the Selling
Stockholders, the number of Additional Shares set forth opposite each such
Selling Stockholder's name under the caption "Number of Additional Shares" in
Schedule III hereto and the denominator of which is the total number of
Additional Shares.
The Company and the Selling Stockholders hereby agree and the
Company shall, concurrently with the execution of this Agreement, deliver an
agreement, dated as of the date of this Agreement, executed by it, each of its
directors and officers and each stockholder listed on Annex I hereto, pursuant
to which it and each such person agrees, not to, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase or sell, or otherwise
dispose of any Common Stock of the Company or any securities convertible into or
exercisable or exchangeable for, or warrants, options or rights to purchase or
acquire, Common Stock or in any other manner transfer all or a portion of the
economic consequences associated with the ownership of any Common Stock
(collectively "Issue"), except to the Underwriters pursuant to this Agreement,
for a period of 90 days after the date of the Prospectus without the prior
written consent of Bear, Stearns & Co. Inc. Notwithstanding the foregoing,
during such period the Company may (a) Issue shares of Common Stock pursuant to
the Company's stock option plan substantially as in effect as of the Closing
Date and (b) Issue shares of Common Stock in connection with employee benefit
arrangements of the Company, which issuances, as set forth in clauses (a) and
(b) above, shall not exceed 2.0% of the outstanding Common Stock of the Company.
The Company also agrees not to file any registration statement with respect to
any shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock for a period of 90 days after the date of the
Prospectus without the prior written consent of Bear, Stearns & Co. Inc. In
addition, each Selling Stockholder agrees that, for a period of 90 days after
the date of the Prospectus without the prior written consent of Bear, Stearns &
Co. Inc., it will not make any demand for, or exercise any right with respect
to, the registration of any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock.
3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus. Each U.S. Underwriter hereby
makes to the Company the representations and agreements
4
<PAGE> 5
of such U.S. Underwriter contained in the fifth paragraph of Section 3 of the
Agreement Between U.S. Underwriters and International Managers of even date
herewith. Each International Manager hereby makes to the Company the
representations and agreements of such International Manager contained in the
seventh, eighth, ninth and tenth paragraphs of Section 3 of such Agreement.
4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Bear, Stearns & Co. Inc. shall request no later than
two business days prior to the Closing Date or the applicable Option Closing
Date (as defined below), as the case may be. The Shares shall be delivered by or
on behalf of the Sellers, with any transfer taxes thereon duly paid by the
respective Sellers, to Bear, Stearns & Co. Inc. through the facilities of The
Depository Trust Company ("DTC"), for the respective accounts of the several
Underwriters, against payment to the Sellers of the Purchase Price therefore by
wire transfer of Federal or other funds immediately available in New York City.
The certificates representing the Shares shall be made available for inspection
not later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date, as the case may be, at the
office of DTC or its designated custodian (the "DESIGNATED OFFICE"). The time
and date of delivery and payment for the Firm Shares shall be 9:00 A.M., New
York City time, on April __, 1998 or such other time on the same or such other
date as Bear, Stearns & Co. Inc. and the Company shall agree in writing. The
time and date of delivery and payment for the Firm Shares are hereinafter
referred to as the "CLOSING DATE". The time and date of delivery and payment for
any Additional Shares to be purchased by the U.S. Underwriters shall be 9:00
A.M., New York City time, on the date specified in the applicable exercise
notice given by the U.S. Representatives pursuant to Section 2 or such other
time on the same or such other date as Bear, Stearns & Co. Inc. and the Company
shall agree in writing. The time and date of delivery and payment for any
Additional Shares are hereinafter referred to as an "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any
Option Closing Date on behalf of the parties hereto pursuant to Section 9 of
this Agreement shall be delivered at the offices of Skadden, Arps, Slate,
Meagher & Flom LLP, 919 Third Avenue, New York, New York, 10022 and the Shares
shall be delivered at the Designated Office, all on the Closing Date or such
Option Closing Date, as the case may be.
5. Agreements of the Company. The Company agrees with you
that:
(a) It will, if the Registration Statement has not
heretofore become effective under the Act, and, if necessary or
required by law, file an amendment to the Registration Statement or, if
necessary pursuant to Rule 430A under the Act, a post-effective
amendment to the Registration Statement, in each case as soon as
practicable after the execution and delivery of this Agreement and will
use
5
<PAGE> 6
its reasonable best efforts to cause the Registration Statement or such
post-effective amendment to become effective at the earliest possible
time. If the Registration Statement has become effective and the
Company, omitting from the Prospectus certain information in reliance
upon Rule 430A of the Act, elects not to file a post-effective
amendment pursuant to Rule 430A of the Act, it will file the form of
Prospectus required by Rule 424(b) of the Act within the time period
specified by Rule 430A and Rule 424(b) of the Act. The Company will
otherwise comply fully and in a timely manner with the applicable
provisions of Rule 424 and Rule 430A under the Act.
(b) It will advise you promptly and, if requested by
you, confirm such advice in writing, (i) if and when the Prospectus is
sent for filing pursuant to Rule 424 under the Act (including any term
sheet within the meaning of Rule 434 under the Act), when the
Registration Statement has become effective, when any Rule 462
Registration Statement is filed and becomes effective, and when any
post-effective amendment to it becomes effective, (ii) of the receipt
of any comment that relates to the Registration Statement from the
Commission or any other regulatory authority or any request by the
Commission for amendments to the Registration Statement or amendments
or supplements to the Prospectus or for additional information, (iii)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement, or of the suspension of
qualification of the Shares for offering or sale in any jurisdiction,
or the initiation of any proceeding for such purposes by the Commission
or any state securities commission or regulatory authority, (iv) when
any amendment to the Registration Statement becomes effective, (v) if
the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, when the Rule 462(b)
Registration Statement has become effective and (vi) of the happening
of any event during the period referred to in Section 5(e) below which
makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to
or changes in the Registration Statement or Prospectus in order to make
the statements therein not misleading or that makes any statement of a
material fact made in the Prospectus (as amended or supplemented from
time to time) untrue or which requires the making of any additions to
or changes in the Prospectus (as amended or supplemented from time to
time) in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company
will use its reasonable best efforts to prevent the issuance of any
stop order or order suspending the qualification or exemption of the
Shares under any Federal or state securities or Blue Sky laws, and, if
at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities
commission or other regulatory authority shall issue an order
suspending the qualification or exemption of the Shares under any state
securities or Blue Sky laws, the Company
6
<PAGE> 7
will use its reasonable best efforts to obtain the withdrawal or
lifting of such order at the earliest possible time.
(c) It will furnish to each of the U.S.
Representatives, without charge, one signed copy of the Registration
Statement as first filed with the Commission and of each amendment to
it, including all exhibits and documents incorporated therein by
reference (plus one additional signed copy, including exhibits, to your
legal counsel), and it will furnish to each of the U.S. Representa-
tives, your legal counsel and each Underwriter designated by the U.S.
Representatives such number of conformed copies of the Registration
Statement as so filed and of each amendment to it, without exhibits but
including documents incorporated therein by reference, as the U.S.
Representatives may reasonably request.
(d) It will prepare the Prospectus, the form and
substance of which shall be reasonably satisfactory to you, and file
the Prospectus in such form with the Commission within the applicable
period specified in Rule 424(b) under the Act; during the period
specified in Section 5(e) below, it will not file any further amendment
to the Registration Statement and not make any amendment or supplement
to the Prospectus of which you shall not previously have been advised
or to which you shall reasonably object after being so advised; and,
during such period, it will prepare and file with the Commission,
promptly upon your reason able request, any amendment to the
Registration Statement or supplement to the Prospectus which may be
necessary or advisable in connection with the distribution of the
Shares by the Underwriters, and it will use its reasonable best efforts
to cause any such amendment to the Registration Statement to become
promptly effective.
(e) Prior to 10:00 A.M., New York City time, on the
first business day after the date of this Agreement and from time to
time thereafter for such period as in your reasonable judgment a
prospectus is required by law to be delivered in connection with sales
by an Underwriter or a dealer, it will furnish in New York City to each
Underwriter and any dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement to the Prospectus and
any documents incorporated therein by reference) as such Underwriter or
such dealer may reasonably request.
(f) If during the period specified in Section 5(e)
any event shall occur or condition shall exist as a result of which, in
the opinion of counsel for the Underwriters, it becomes necessary to
amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is
delivered to a purchaser, not misleading, or if, in the opinion of
counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, it will promptly prepare
and file with the Com-
7
<PAGE> 8
mission an appropriate amendment or supplement to the Prospectus so
that the statements in the Prospectus, as so amended or supplemented,
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with applicable law,
and to furnish to each Underwriter and to such dealers as the
Underwriters shall specify, without charge, such number of copies
thereof as such Underwriter or such dealers may reasonably request.
(g) Prior to any public offering of the Shares, it
will cooperate with you and counsel for the Underwriters in connection
with the registration or qualification of the Shares for offer and sale
by the several Underwriters and by dealers under the state securities
or Blue Sky laws of such jurisdictions as you may request, to continue
such registration or qualification in effect so long as required for
distribution of the Shares and it will file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification; provided, however, that the Company
shall not be required in connection therewith to qualify as a foreign
corporation in any jurisdiction in which it is not now so qualified or
to take any action that would subject it to general consent to service
of process or taxation other than as to matters and transactions
relating to the Prospectus, the Registration Statement, any preliminary
prospectus or the offering or sale of the Shares, in any jurisdiction
in which it is not now so subject.
(h) It will mail and make generally available to its
stockholders as soon as reasonably practicable an earnings statement
covering the twelve-month period ending ____, 1999 that shall satisfy
the provisions of Section 11(a) of the Act, and it will advise you in
writing when such statement has been so made avail able.
(i) It will timely complete all required filings and
otherwise comply in all material respects in a timely manner with all
provisions of the Securities Exchange Act of 1934, as amended,
including the rules and regulations thereunder (collectively, the
"EXCHANGE ACT"), in connection with the registration of the Shares
thereunder.
(j) During the period of five years after the date of
this Agreement, it will promptly file all reports and any definitive
proxy or information statements required to be filed by the Company
with the Commission pursuant to the Exchange Act and will promptly mail
all such reports to the recordholders of its Common Stock to the extent
required by the Exchange Act.
(k) During the period referred to in paragraph (j),
it will furnish to you as soon as available copies of all reports or
other communications furnished to the record holders of Common Stock or
furnished to or filed with the Commission or any national securities
exchange on which any class of securities of the
8
<PAGE> 9
Company is listed and such other publicly available information
concerning the Company and its subsidiaries as you may reasonably
request.
(l) Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, it
will pay or cause to be paid all costs, expenses, fees and taxes
incident to (i) the preparation, printing (including word processing),
filing and distribution under the Act of the Registration Statement
(including, without limitation, financial statements and exhibits),
each preliminary prospectus and all amendments and supplements to any
of them prior to or during the period specified in paragraph 5(e), (ii)
the printing (including word processing), distribution and delivery of
the Prospectus and all amendments or supplements to it during the
period specified in paragraph 5(e), (iii) the printing, execution,
distribution and delivery of this Agreement, the Preliminary and
Supplemental Blue Sky Memoranda and all other agreements, memoranda,
correspondence and other documents printed, distributed and delivered
in connection with the offering of the Shares (including in each case
any disbursements of counsel for the Underwriters relating to such
printing and delivery), (iv) the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of the
several states referred to in paragraph 5(g) (including, without
limitation, in each case the fees and disbursements of counsel for the
Underwriters relating to such registration or qualification and any
memoranda relating thereto and any filing fees in connection
therewith), (v) the filing, registration and clearance of the
Underwriters' compensation with the National Association of Securities
Dealers, Inc. in connection with the offering of the Shares (including,
without limitation, any filing fees in connection therewith), (vi) the
quotation of the Shares on the Nasdaq National Market ("NASDAQ"), (vii)
furnishing such copies of the Registration Statement, the Prospectus
and all amendments and supplements thereto as may be requested for use
in connection with the offering or sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, and (viii) the
performance by the Company of its other obligations under this
Agreement, including (without limitation) the fees and expenses of the
Transfer Agent, the costs of its personnel and other internal costs,
the cost of printing and engraving the certificates representing the
Shares, and all expenses and taxes incident to the sale and delivery of
the Shares to you, including, without limitation, filing and recording
fees and expenses and fees and expenses of counsel for the Company for
providing such opinions as you may reasonably request.
(m) It will use its reasonable best efforts to
maintain the inclusion of the Common Stock on NASDAQ (or on a national
securities exchange) for a period of five years after the effective
date of the Registration Statement.
(n) It will use its reasonable best efforts to do and
perform all things required or necessary to be done and performed under
this Agreement by
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<PAGE> 10
the Company prior to the Closing Date or any Option Closing Date, as
the case may be, and to use its reasonable best efforts to satisfy all
conditions precedent to the delivery of the Shares.
(o) It will use the proceeds from the sale of Shares
in the manner described in the Registration Statement under the caption
"Use of Proceeds."
(p) If the Registration Statement at the time of the
effectiveness of this Agreement does not cover all of the Shares, it
will file a Rule 462(b) Registration Statement with the Commission
registering the Shares not so covered in compliance with Rule 462(b) by
10:00 P.M., New York City time, on the date of this Agreement and to
pay to the Commission the filing fee for such Rule 462(b) Registration
Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under
the Act.
(q) The Company agrees that it will use the net
proceeds to it from the Shares in the manner described in the
Prospectus under the caption "Use of Proceeds". The Company further
agrees that on the Closing Date it will, in accordance with terms of
the indenture (the "INDENTURE") relating to its 10 1/4% Senior
Subordinated Notes due 2006 (the "NOTES"), give such notices to the
trustee and the holders of the relevant Notes and take such other
actions as may be required to exercise, at the earliest possible date,
its optional redemption right under the second paragraph of Section 3.1
of the Indenture with respect to the maximum amount of Notes redeemable
with such net proceeds under the terms of the Indenture.
6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective
(other than any Rule 462(b) Registration Statement to be filed by the
Company after the effectiveness of this Agreement); any Rule 462(b)
Registration Statement filed after the effectiveness of this Agreement
will become effective no later than 10:00 P.M., New York City time, on
the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement is in effect, and no
proceedings for such purpose are pending before or, to the best
knowledge of the Company, threatened by the Commission.
(b)(i) Each document, if any, filed or to be filed
pursuant to the Exchange Act and incorporated by reference in the
Prospectus complied or will comply when so filed in all material
respects with the Exchange Act; (ii) each part of the Registration
Statement, as amended or supplemented, if applicable, when such part
became or becomes effective, did not contain and will not contain any
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<PAGE> 11
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, (iii) the Registration Statement and the
Prospectus comply and, as amended or supplemented, if applicable, will
comply, in all material respects with the Act and (iv) the Prospectus
does not contain and, as amended or supplemented, if applicable, will
not contain, any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, except
that the representations and warranties set forth in this paragraph (b)
shall not apply to statements or omissions in the Registration
Statement or the Prospectus (or any supplement or amendment to them)
based upon and conforming with information relating to any Underwriter
furnished to the Company in writing by or on behalf of such Underwriter
through the Representatives expressly for use therein. The Sellers and
the Underwriters acknowledge for all purposes under this Agreement
(including this paragraph, Section 6(c) hereof, Section 7(II)(a) hereof
and Section 8 hereof) that the statements with respect to price and
discount and the last paragraph on the cover page of the Prospectus and
the fourth, sixth, seventh, eighth, ninth, twelfth and thirteenth
paragraphs of the section entitled "Underwriting" in the Prospectus and
the information regarding stabilization on the inside front cover of
the preliminary Prospectus and the Prospectus (or any amendment or
supplement thereto) constitute the only information (the
"UNDERWRITERS' INFORMATION") furnished to the Company by or on behalf
of any Underwriter through the Representatives expressly for use in
the Registration Statement, the preliminary prospectus or the Prospec-
tus and that the Underwriters shall not be deemed to have provided any
other information (and therefore are not responsible for any statements
or omissions) pertaining to any arrangement or agreement with respect
to any party other than the Underwriters or any party to an arrangement
or agreement with the Under writers. No contract or document of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement
has not been described and filed as required.
(c) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Act, complied when so
filed in all material respects with the Act; and did not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any
Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
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<PAGE> 12
(d) Each of the Company and its subsidiaries has been
duly incorporated, is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation or
organization and has full corporate power and authority to carry on
its business as described in the Prospectus and to own, lease and
operate its properties, and each is duly qualified and is in good
standing as a foreign corporation (or other entity) authorized to do
business in each jurisdiction in which the nature of its business or
its ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not, individually or
in the aggregate, have a material adverse effect on the financial
condition or results of operation or business of the Company and its
subsidiaries, taken as a whole (a "MATERIAL ADVERSE EFFECT").
(e) There are no outstanding subscriptions, rights,
warrants, options, calls, convertible securities, commitments of sale
or Liens granted or issued by the Company or any of its subsidiaries
relating to or entitling any person to purchase or otherwise to acquire
any shares of the capital stock of the Company or any of its
subsidiaries, except as otherwise specifically referred to in the
Registration Statement or as contained in the Stockholders Agreement or
in the Secondary Stockholders Agreement (as such terms are defined in
the Prospectus), and except for Liens which, individually or in the
aggregate, would not have a Material Adverse Effect.
(f) The authorized, issued and outstanding capital
stock of the Company will be, as of the Closing Date, as set forth in
the Prospectus under the captions "Capitalization" and "Description of
Capital Stock" and in the Consolidated Financial Statements and the
notes thereto; all the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Stockholders)
have been duly authorized and validly issued and are fully paid,
non-assessable and not subject to any preemptive or similar rights; and
the Shares to be issued and sold by the Company have been duly
authorized and, when issued and delivered to the Underwriters against
payment therefor as provided by this Agreement, will be validly issued,
fully paid and non-assessable, and the issuance of such Shares will not
be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock
of, or other ownership interests in, each of the Company's subsidiaries
have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, directly or indirectly
through one or more subsidiaries, free and clear of any security
interest, mortgage, pledge, claim, lien, encumbrance or adverse
interest of any nature (each, a "LIEN"), other than Liens securing
indebtedness under or granted in connection with the Revolving Credit
Facility (as defined in the Prospectus), and except for Liens which,
individually or in the aggregate, would not have a Material Adverse
Effect.
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<PAGE> 13
(h) The authorized capital stock of the Company,
including the Common Stock, conforms as to legal matters to the
description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries
is in violation of its respective charter or by-laws or in default in
the performance of any obligation, agreement or condition contained in
any bond, note, debenture, or other evidence of indebtedness or any
indenture, mortgage, deed of trust or other contract, lease, or other
instrument to which the Company or any of its subsidiaries is a party
or by which it or any of its subsidiaries or their respective property
is bound, which violations or defaults, individually or in the
aggregate, would have a Material Adverse Effect.
(j) The Company has all the requisite corporate power
to execute, deliver and perform its obligations under this Agreement
and to authorize, issue and sell the Shares. Except as disclosed in the
Registration Statement, the execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby do not
and on the Closing Date and on any Option Closing Date, as applicable,
will not (i) conflict with or result in a breach or violation of any of
the respective charter or bylaws of the Company or any of its
subsidiaries or of any of the terms or provisions thereof as in effect
on such respective dates, or (ii) constitute a default or cause an
acceleration of any obligation under or result in the imposition or
creation of (or the obligation to create or impose) a Lien (as herein
after defined) with respect to, any of the respective charters or
bylaws of the Company or any of its subsidiaries or any material bond,
note, debenture or other evidence of indebtedness or any indenture,
mortgage, deed of trust or other material contract, lease, or other
instrument, as applicable, to which the Company or any of its
subsidiaries is a party or by which any of them is bound, or to which
any of the property or assets of the Company or any of its subsidiaries
is or may be subject, except for any such violation or default which,
individually or in the aggregate, would not have a Material Adverse
Effect, or (iii) contravene any order of any court or governmental
agency or authority having jurisdiction over the Company, any of its
subsidiaries or any of their respective properties entered in any
proceeding to which the Company or any of its subsidiaries was or is a
party or by which any of them is bound or violate or conflict with any
applicable Federal, state or local law, rule, administrative regulation
or ordinance or administrative or court decree applicable to the
Company, any of its subsidiaries or their respective properties except
for such defaults, accelerations or contraventions that, individually
or in the aggregate, would not have a Material Adverse Effect.
(k) Except as otherwise set forth in the Prospectus
and except for such actions, suits or proceedings which, individually
or in the aggregate, would not have a Material Adverse Effect, there is
no action, suit or proceeding
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<PAGE> 14
before or by any court or governmental agency or body, domestic or
foreign, pending against the Company or any of its subsidiaries or of
which any of their respective property is the subject, and, to the
best of the Company's knowledge, no such proceedings are threatened or
contemplated.
(l) In each case, except as would not, individually
or in the aggregate, have a Material Adverse Effect: neither the
Company nor any of its subsidiaries is in violation of any Federal,
state, local or foreign laws and regulations relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or
subsurface strata), including, without limitation, laws and regulations
relating to emissions, discharges, releases or threatened releases of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products ("MATERIALS OF
ENVIRONMENTAL CONCERN"), or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Materials of Environmental Concern in connection with
protection of human health or the environment (collectively,
"ENVIRONMENTAL LAWS"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or any of its
subsidiaries, under applicable Environmental Laws, or noncompliance
with the terms and conditions thereof, nor has the Company, received
any communication (written or oral), whether from a govern mental
authority, citizens group, employee or otherwise, that alleges that the
Company or any of its subsidiaries is in violation and there are no
circumstances, either past, present or that are reasonably foreseeable,
that will or could reason ably be expected to lead to such violation in
the future. In addition, except as disclosed in the Registration
Statement or the Prospectus, or in each case as would not, individually
or in the aggregate, have a Material Adverse Effect: there is no claim,
action, cause of action, investigation or notice (written or oral) by
any person or entity alleging potential liability for investigatory
costs, cleanup costs, governmental responses costs, natural resources
damages, property damages, personal injuries, attorneys' fees or
penalties arising out of, based on or resulting from (a) the presence,
or release into the environment, of any Material of Environmental
Concern at any location owned or operated by the Company or any of its
subsidiaries, now or in the past, or (b) circumstances forming the
basis of any violation, or alleged violation, of any Environmental Law
(collectively, "ENVIRONMENTAL CLAIMS"), pending or, to the knowledge
of the Company, threatened against the Company or any of its
subsidiaries or, to the knowledge of the Company, against any person
or entity whose liability for any Environmental Claim the Company or
any such subsidiary has retained or assumed either contractually or by
operation of law; to its knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge,
presence or disposal of any Material of Envi-
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<PAGE> 15
ronmental Concern, that will or could reasonably be expected to result
in a violation of any Environmental Law or form the basis of any
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental
Claim the Company has retained or assumed either contractually or by
operation of law.
(m) As of the Closing Date and at each Option Closing
Date, if any, the Company and its subsidiaries will possess such
licenses, certificates, authorizations, approvals, franchises, permits
and other rights issued by local, state, Federal or foreign regulatory
agencies or bodies (collectively, "PERMITS") as are necessary to own,
lease and operate its respective properties and to conduct the
businesses now conducted by them except where the failure to possess
any such Permit would not have a Material Adverse Effect; as of the
Closing Date and at each Option Closing Date, if any, the Company and
each of its subsidiaries will have fulfilled and performed all of its
material obligations with respect to such Permits and neither the
Company nor its subsidiaries will have received any notice of
proceedings relating to the revocation or modification of any such
Permit that is reasonably likely to have a Material Adverse Effect.
(n) Neither the Company nor any of its subsidiaries
has any knowledge of any actionable violation of any Federal, state or
local law relating to employment and employment practices,
discrimination in the hiring, promotion or pay of employees nor any
applicable wage or hour laws, except for any such violation which,
individually or in the aggregate, would not result in a Material
Adverse Effect. There is (A) no significant unfair labor practice
complaint pending against the Company or any of its subsidiaries or,
to the knowledge of the Company, threatened against any of them, before
the National Labor Relations Board or any state or local labor
relations board, and no significant grievance or significant
arbitration proceeding arising out of or under any collective
bargaining agreement is pending against the Company or any of its
subsidiaries or, to the knowledge of the Company, threatened against
any of them, (B) no labor strike, dispute, slowdown or stoppage ("LABOR
DISPUTE") in which the Company or any of its subsidiaries is involved
nor, to the knowledge of the Company, is any Labor Dispute imminent;
other than routine disciplinary and grievance matters, the Company is
not aware of any existing or imminent Labor Dispute by the employees
of any of its principal suppliers, manufacturers or contractors and (C)
no question concerning union representation within the meaning of the
National Labor Relations Act existing with respect to the employees of
the Company and, to the knowledge of the Company, no union organizing
activities are taking place, except (with respect to any matter
specified in clause (A), (B) or (C) above, singly or in the aggregate)
such as would not have a Material Adverse Effect.
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<PAGE> 16
(o) Subject to Liens securing indebtedness under the
Revolving Credit Facility or disclosed in the Registration Statement,
including capitalized leases, the Company and each of its subsidiaries
has good and marketable title, free and clear of all Liens, to all
property and assets described in the Prospectus as being owned by it
excluding any Liens that would not have a Material Adverse Effect. All
leases to which the Company or any of its subsidiaries is a party are
valid and binding and no default by the Company or any Subsidiary or,
to the Company's knowledge, any other party has occurred or is
continuing thereunder, except for any such defaults which, individually
or in the aggregate, would not result in a Material Adverse Effect, and
the Company and its subsidiaries enjoy peaceful and undisturbed
possession under all such leases to which any of them is a party as
lessee with such exceptions as would not, individually or in the aggre-
gate, have a Material Adverse Effect.
(p) The Company and its subsidiaries maintain
insurance covering their properties, operations, personnel and
businesses, including without limitation, product liability insurance.
Neither the Company nor any of its subsidiaries has received written
notice from any insurer or agent of such insurer that substantial
capital improvements or other similar expenditures will have to be made
in order to continue such insurance. All such insurance is outstanding
and duly in force on the date hereof and will be outstanding and duly
in force on the Closing Date and on any Option Closing Date, as
applicable.
(q) This Agreement has been duly authorized, executed
and delivered by the Company.
(r) Deloitte & Touche LLP are independent public
accountants with respect to the Company and its subsidiaries, as
required by the Act.
(s) The consolidated financial statements of the
Company, together with related notes and schedules, set forth or
incorporated by reference in the Registration Statement and the
Prospectus (and any amendments or supplements thereto) comply as to
form in all material respects with the requirements of the Act and the
Exchange Act and fairly present the consolidated financial position of
the Company and its subsidiaries at the respective dates indicated and
the results of their operations and their cash flows for the respective
periods indicated, in accordance with generally accepted accounting
principles in the United States of America consistently applied
throughout such periods. The pro forma financial data included in the
Registration Statement and the Prospectus have been prepared on a basis
consistent with such historical statements, except for the pro forma
adjustments specified therein, and give effect to assumptions made on a
reasonable basis and present fairly the transactions reflected thereby
as indicated in the Registration Statement and the Prospectus and
comply in all material respects with the
16
<PAGE> 17
applicable accounting requirements of rule 11-02 of Regulation S-X and
the pro forma adjustments have been properly applied to the historical
amounts in the compilation of those statements.
(t) Except as otherwise disclosed in the Registration
Statement, tax returns required to be filed by the Company and its
subsidiaries in any jurisdiction have been filed, other than those
filings that are being contested in good faith, except where failure to
so file would not have a Material Adverse Effect, and all taxes,
including withholding taxes, penalties and interest, assessments, fees
and other governmental charges due or claimed to be due from such
entities have been paid other than those being contested in good faith
and for which adequate reserves have been provided, except where
failure to so pay would not have a Material Adverse Effect.
(u) As of the Closing Date and each Option Closing
Date, the Company and each of its subsidiaries will own or possess all
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names (collectively, the "INTEL
LECTUAL PROPERTY") presently employed by it in connection with the
businesses now operated by them, except where the failure to so own or
possess would not, individually or in the aggregate, have a Material
Adverse Effect, and neither the Company nor any of its subsidiaries
will have received any notice of infringement of or conflict with
asserted rights of others with respect to any of the foregoing, except
where such infringement or conflict would not individually, or in the
aggregate, have a Material Adverse Effect. To the Company's knowledge,
the use of the Intellectual Property in connection with the business
and operations of the Company and its subsidiaries does not infringe on
the rights of any person, except where such infringement does not,
individually or in the aggregate, have a Material Adverse Effect. The
representations in this clause (u) exclude Intellectual Property
matters with respect to any foreign country that has not accounted for
more than 1% of the sales of the Company and its subsidiaries in either
of the last two fiscal years.
(v) The Company and each of its subsidiaries
maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to assets
is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for inventory
assets is compared with the existing inventory
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<PAGE> 18
assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) Neither the Company nor any of its subsidiaries
has, directly or indirectly, paid or delivered any fee, commission or
other sum of money or item of property, however characterized, to any
finder, agent, government official or other party, in the United
States or any other country, which is in any manner related to the
business or operations of the Company or its subsidiaries which the
Company or any of its subsidiaries knows or has reason to believe to
have been illegal under any Federal, state or local laws of the United
States or any other country having jurisdiction, except as would not
have a Material Adverse Effect; neither the Company nor any of its
subsidiaries, has participated, directly or indirectly, in any boycotts
or other similar practices in contravention of law affecting any of
its actual or potential customers.
(x) The Company is not and, after giving effect to
the offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, (i) an "investment
company" or a company "controlled" by an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended, or
(ii) a "holding company" or a "subsidiary company" of a holding
company, or an "affiliate" thereof within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
(y) There are no contracts, agreements or
understandings between the Company and any person granting such person
the right (i) to require the Company to file a registration statement
under the Act with respect to any securities of the Company, except
for such rights as exist under the Stockholders Agreement and the
Secondary Stockholders Agreement or (ii) to require the Company to
include any securities with the Shares registered pursuant to the
Registration Statement, except such rights as have been duly waived in
writing by such person.
(z) The Company has complied with all provisions of
Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(aa) Except as disclosed or incorporated by reference
in the Prospectus, there are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation
S-K of the Commission.
(ab) The Company has applied to have the Shares
listed on NASDAQ.
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<PAGE> 19
(ac) Except as contemplated by the Registration
Statement and the Prospectus, subsequent to the respective dates as of
which information is given in the Registration Statement and the
Prospectus, (i) neither the Company nor any of its subsidiaries has
incurred any liabilities or obligations, direct or contingent, which
are material to the Company and its subsidiaries, taken as a whole, nor
entered into any transaction not in the ordinary course of business
that is material to the Company and its subsidiaries, taken as a whole,
(ii) there has been no decision or judgment in any litigation to which
the Company or any of its subsidiaries are a party which could,
individually or in the aggregate, result in a Material Adverse Effect,
and (iii) there has been no material adverse change in the financial
condition or in the results of operations or business of the Company
and its subsidiaries, taken as a whole (any of the items set forth in
clauses (i), (ii), or (iii), above, a "MATERIAL ADVERSE CHANGE").
(ad) To the Company's knowledge, no action has been
taken with respect to the Company or any of its subsidiaries, and no
statute, rule or regulation or order has been enacted, adopted or
issued by any governmental agency which prevents the issuance of the
Shares, suspends the effectiveness of the Registration Statement,
prevents or suspends the use of any preliminary Prospectus or suspends
the sale of the Shares in any jurisdiction referred to in Section 5(g)
hereof; no injunction, restraining order or order of any nature by a
Federal or state court of competent jurisdiction has been issued with
respect to the Company or any of its subsidiaries which would prevent
or suspend the issuance or sale of the Shares, the effectiveness of the
Registration Statement or the use of any preliminary prospectus or the
Prospectus in any jurisdiction referred to in Section 5(g) hereof; no
action, suit or proceeding before any court or arbitrator or any
governmental body, agency or official (domestic or foreign) is pending
against or, to the knowledge of the Company, threatened against, the
Company or any of its subsidiaries which, if adversely determined,
could reasonably be expected to prevent the issuance of the Shares or
in any manner invalidate this Agreement; and every request of the Com
mission or any securities authority or agency of any jurisdiction for
additional in formation (to be included in the Registration Statement
or the Prospectus or other wise) that has been communicated to the
Company has been complied with in all material respects or responded to
in a manner acceptable to the Commission or such other securities
authority.
7. Representation and Warranties of the Selling Stockholders.
(I) Each Selling Stockholder represents and warrants to each
Underwriter that:
(a) Such Selling Stockholder is the lawful owner of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement and has, and
on the Closing
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<PAGE> 20
Date and on the Option Closing Date will have, good and clear
title to the Shares to be sold on the Closing Date or the Option Closing Date,
free of all restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever.
(b) The Shares to be sold by such Selling Stockholder have
been duly authorized and are validly issued, fully paid and non-assessable.
(c) Such Selling Stockholder has, and on the Closing Date and
the Option Closing Date will have, full legal right, power and authority, and
all authorization and approval required by law, to enter into this Agreement,
the Custody Agreement signed by such Selling Stockholder and American Securities
Transfer & Trust, Inc., as Custodian, relating to the deposit of the Shares to
be sold by such Selling Stockholder (the "CUSTODY AGREEMENT") and the Power of
Attorney of such Selling Stockholder appointing certain individuals as such
Selling Stockholder's attorneys-in-fact (the "ATTORNEYS") to the extent set
forth therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder in the manner provided herein and therein.
(d) This Agreement has been duly authorized, executed and
delivered by or on behalf of such Selling Stockholder.
(e) The Custody Agreement of such Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and is a
valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms.
(f) The Power of Attorney of such Selling Stockholder has been
duly authorized, executed and delivered by such Selling Stockholder and is a
valid and binding instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of Attorney, such Selling
Stockholder has, among other things, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Stockholder's behalf this Agreement
and any other document that they, or any one of them, may deem necessary or
desirable in connection with the transactions contemplated hereby and thereby
and to deliver the Shares to be sold by such Selling Stockholder pursuant to
this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by
such Selling Stockholder pursuant to this Agreement, good and clear title to
such Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement
and the Custody Agreement and Power of Attorney of such Selling Stockholder by
or on
20
<PAGE> 21
behalf of such Selling Stockholder, the compliance by such Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the organiza-
tional documents of such Selling Stockholder, if such Selling Stockholder is not
an individual, or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Stockholder is a party or by which
such Selling Stock holder or any property of such Selling Stockholder is bound
or (iii) violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or agency having
jurisdiction over such Selling Stockholder or any property of such Selling
Stockholder.
(i) The information in the Registration Statement under the
caption "Principal and Selling Stockholders" which specifically relates to such
Selling Stockholder does not, and will not on the Closing Date or the Option
Closing Date, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(j) At any time during the period described in Section 5(d),
if there is any change in the information referred to in Section 7(i), such
Selling Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of such Selling
Stockholder and delivered to the Underwriters or counsel for the Underwriters
shall be deemed to be a representation and warranty by such Selling Stockholder
to the Underwriters as to the matters covered thereby.
(II) In addition to the representations and warranties set forth in
Section 7(I) above, Green Equity Investors II, L.P. ("GEI") represents and
warrants to each Under writer that:
(a) To the knowledge of GEI, the Prospectus does not contain
and, as amended or supplemented, if applicable, will not contain, any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph (a) shall not apply to statements or omissions in the
Prospectus (or any supplement or amendment to them) based upon and conforming
with information relating to any Underwriter furnished to the Company in writing
by or on behalf of such Underwriter through the Representatives expressly for
use therein.
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(b) GEI has no knowledge of any material event or occurrence
which is not disclosed in the Prospectus which has materially and adversely
affected the operations or financial condition of the Company and its
subsidiaries taken as a whole; and the sale of Shares by GEI pursuant hereto is
not prompted by any material information concerning the Company which is not set
forth in the Prospectus.
8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act from and against any and all losses, claims,
damages, liabilities and judgments (including, without limitation, any legal or
other expenses incurred in connection with investigating or defending any
matter, including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement (or
any amendment thereto), the Prospectus (or any amendment or supplement thereto)
or any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus, as then
amended or supplemented, (so long as the Prospectus and any amendment or
supplement thereto was provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages,
liabilities or judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in the preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior to the written
confirmation of sale to such person.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each
Selling Stockholder and each person, if any, who controls such Selling
Stockholder within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such Underwriter through you
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<PAGE> 23
expressly for use in the Registration Statement (or any amendment thereto), the
Prospectus (or any amendment or supplement thereto) or any preliminary
prospectus.
(c) Each Selling Stockholder agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors, its officers
who sign the Registration Statement, each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act, each Underwriter, its directors, its officers and each person, if
any, who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act to the same extent as the foregoing indemnity
from the Company to the Underwriters set forth in Section 8(a) above, but only
with reference to information relating to such Selling Stockholder furnished in
writing to the Company by such Selling Stockholder expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus. Notwithstanding
the foregoing, the aggregate liability of any Selling Stockholder pursuant to
this Section 8(c) shall be limited to an amount equal to the total proceeds
(before deducting underwriting discounts and commissions and expenses) received
by such Selling Stockholder from the Underwriters for the sale of the Shares
sold by such Selling Stockholder hereunder.
(d) In case any action shall be commenced involving any person
in respect of which indemnity may be sought pursuant to Section 8(a), 8(b) or
8(c) (the "INDEMNIFIED PARTY"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in
writing and the indemnifying party shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Section (b) on the one hand and either or both of
Sections 8(a) or 8(c) on the other hand, the Underwriter shall not be required
to assume the defense of such action pursuant to this Section 8(d), but may
employ separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but
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<PAGE> 24
substantially similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances, be liable for (i) the fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) for all Underwriters, their officers and directors and all persons, if
any, who control any Underwriter within the meaning of either Section 15 of the
Act or Section 20 of the Exchange Act, (ii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for the
Company, its directors, its officers who sign the Registration Statement and all
persons, if any, who control the Company within the meaning of either such
Section and (iii) the fees and expenses of more than one separate firm of
attorneys (in addition to any local counsel) for all Selling Stockholders and
all persons, if any, who control any Selling Stockholder within the meaning of
either such Section, and all such fees and expenses shall be reimbursed as they
are incurred. In the case of any such separate firm for the Under writers, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Bear, Stearns & Co. Inc. In the case of any
such separate firm for the Company and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
In the case of any such separate firm for the Selling Stockholders and such
control persons of any Selling Stockholders, such firm shall be designated in
writing by the Attorneys. The indemnifying party shall indemnify and hold
harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action (i)
effected with its written consent or (ii) effected without its written consent
if the settlement is entered into more than twenty business days after the
indemnifying party shall have received a request from the indemnified party for
reimbursement for the fees and expenses of counsel (in any case where such fees
and expenses are at the expense of the indemnifying party) and, prior to the
date of such settlement, the indemnifying party shall have failed to comply with
such reimbursement request. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement or compromise
of, or consent to the entry of judgment with respect to, any pending or
threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(e) To the extent the indemnification provided for in this
Section 8 is unavailable to an indemnified party or insufficient in respect of
any losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(e)(i) above is not
permitted by
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applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 8(e)(i) above but also the relative
fault of the Company, the Selling Stockholders and the Underwriters in
connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholders on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(e) were determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, (i) no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares under written by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, (ii) in no case shall
any Underwriter be liable or responsible for any amount in excess of the
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (iii) in no case shall any Selling Stockholder be liable or
responsible for any amount in excess of the proceeds received by such Selling
Stockholder from the sale of Shares sold by such Selling Stockholder hereunder.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 8(e) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
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(f) The remedies provided for in this Section 8 are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
(g) Each Selling Stockholder hereby designates [Twinlab
Corporation, 2120 Smithtown Avenue, Ronkonkoma, New York 11779, Attention:
General Counsel], as its authorized agent, upon which process may be served in
any action which may be instituted in any state or federal court in the State of
New York by any Underwriter, any director or officer of any Underwriter or any
person controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and each Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to such Selling Stockholder, at the address for notices specified in
Section 13 hereof.
9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company
contained in this Agreement shall be true and correct in all material
respects on the Closing Date with the same force and effect as if made
on and as of the Closing Date.
(b) The Registration Statement shall have become effective not
later than 5:00 P.M. (and, in the case of a Registration Statement
filed under Rule 462(b) of the Act, not later than 10:00 P.M.), New
York City time, on the date of this Agreement or at such later date and
time as you may approve in writing, and at the Closing Date no stop
order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that purpose shall have been
commenced or shall be pending before or contemplated by the Commission.
(c)(i) Since the date of the latest balance sheet included in
the Registration Statement and the Prospectus, there shall not have
been any Material Adverse Change, or any development involving a
prospective Material Adverse Change, (ii) since the date of the latest
balance sheet included in the Registration Statement and the Prospectus
there shall not have been any material change, or any development
involving a prospective material change in the capital stock or in the
long-term debt of the Company from that set forth or referred to in the
Registration Statement and Prospectus, (iii) the Company and its
subsidiaries shall have no liability or obligation, direct or
contingent, which is material to the Company and its subsidiaries,
taken as a whole, other than those reflected in the Registration
Statement and the Prospectus and (iv) on the Closing Date you shall
have received a certificate dated the Closing Date, signed by the
President and Chief Executive
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Officer and a principal financial or accounting officer of the Company,
confirming the matters set forth in paragraphs (a), (b) and (c) of this
Section 9.
(d) All the representations and warranties of each Selling
Stockholder contained in this Agreement shall be true and correct on
the Closing Date with the same force and effect as if made on and as of
the Closing Date and you shall have received on the Closing Date a
certificate dated the Closing Date from each Selling Stockholder to
such effect and to the effect that such Selling Stockholder has
complied with all of the agreements and satisfied all of the conditions
herein contained and required to be complied with or satisfied by such
Selling Stock holder on or prior to the Closing Date.
(e) You shall have received on the Closing Date an opinion
satisfactory to you and counsel for the Underwriters, dated the
Closing Date, of Philip M. Kazin, Esq., General Counsel of the Company,
to the effect that:
(i) the Company and each of the Subsidiaries is duly
qualified and is in good standing as a foreign corporation
authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified or to be in good standing would not, individually or
in the aggregate, have a Material Adverse Effect;
(ii) based solely upon a review of the stock record
books of the Subsidiaries, inquiries of certain officers of
the Subsidiaries and a review of corporate resolutions of the
Subsidiaries, all of the outstanding shares of capital stock
of each of the Subsidiaries are owned directly or indirectly,
as applicable, by the Company free and clear of any security
interest, mortgage, pledge, claim, lien or encumbrance of any
nature (each, a "LIEN") except for Liens incurred pursuant to
the terms of the Revolving Credit Facility and Liens which,
individually or in the aggregate, would not have a Material
Adverse Effect;
(iii) based solely upon a review of the material
agreements and instruments to which the Company or the
Subsidiaries is a party, to the best of such counsel's
knowledge, there are no material agreements or instruments to
which the Company or the Subsidiaries is a party or by which
any of them or any of their property may be bound which is re-
quired to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit thereto that is not
described or filed as required;
(iv) based solely upon a review of auditors' response
letters and inquiry of responsible officers of the Company and
the Subsidiaries, to
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the best of such counsel's knowledge there are no material
legal or govern mental actions, suits or proceeding pending or
threatened to which the Company, any of the Subsidiaries or
any of their respective property is subject which are required
to be disclosed in the Registration Statement or the
Prospectus, other than those disclosed therein;
(v) neither the Company nor any of the Subsidiaries
is in violation of its respective charter or by-laws. To the
best of such counsel's knowledge, neither the Company nor any
of the Subsidiaries is in default or violation of, and the
execution and delivery by the Company of this Agreement and
the sale by the Company to the Underwriters of the Shares
pursuant thereto does not violate the terms of, any
obligation, agreement or condition contained in any bond,
note, debenture, or other evidence of indebtedness or any
indenture, mortgage, deed of trust or other contract, lease or
instrument to which the Company or any of the Subsidiaries is
a party or by which the Company or any of the Subsidiaries or
their respective property is bound, except for such violations
as will not, individually or in the aggregate, have a Material
Adverse Effect;
(vi) to the best of such counsel's knowledge, the
Company and each of the Subsidiaries have such Permits, as are
necessary to own, lease and operate its respective properties
and to conduct its business in the manner described in the
Prospectus, except for such Permits, the absence of which will
not, individually or in the aggregate, have a Material Ad
verse Effect. To the best of such counsel's knowledge, the
Company and each of the Subsidiaries have fulfilled and
performed all of their respective material obligations with
respect to such Permits and no event has occurred which
allows, or after notice or lapse of time would allow, revoca-
tion or termination thereof, subject in each case to such
qualification as many be set forth in the Prospectus, and
except for such revocation or terminations, as the case may
be, as would not, individually or in the aggregate, have a
Material Adverse Effect;
(vii) the authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under
"Capitalization" and "Description of Capital Stock" and in
the Consolidated Financial Statements of Twinlab Corporation
and Subsidiaries and the notes thereto; and
(viii) to the best of such counsel's knowledge,
neither the Company nor any of the Subsidiaries has violated
any Federal or New York state law relating to discrimination
on the hiring, promotion or pay of employees nor any
applicable Federal or New York state wages and
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hours law which in each case is likely to result in a Material
Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and its subsidiaries and discussions with auditors of the Company and
its subsidiaries in connection with the preparation of the Registration
Statement and the Prospectus and such counsel shall advise you that nothing has
come to the attention of such counsel that has led such counsel to believe that
the Registration Statement, as amended or supplemented, at the time such
Registration Statement, such 462(b) Registration Statement (if applicable) or
any post-effective amendment became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and that
the Prospectus, as amended or supplemented, if applicable, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In giving his opinion with respect to the matters covered by
the immediately preceding paragraph, such counsel may state that his opinion
and belief are based upon his participation in the preparation of the
Registration Statement, the 462(b) Registration Statement (if applicable) and
the Prospectus and any amendments or supplements thereto and documents
incorporated therein by reference and review and discussion of the contents
thereof, but are without independent check or verification except as required to
give the opinions covered by clauses (iii), (iv), (vi) and (vii) of paragraph
(e) above. In addition, such counsel may state that such counsel's opinion does
not include or cover the financial statements and notes thereto and related
schedules and other financial, numerical, statistical and accounting data
contained in or omitted from the Registration Statement.
(f) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of Kramer, Levin, Naftalis & Frankel ("KRAMER LEVIN")
counsel for the Company and the Selling Stockholders, to the effect
that:
(i) the Company has been duly incorporated and is a
corporation validly existing and in good standing under the
laws of Delaware. The Company's direct subsidiary, Twin
Laboratories Inc. ("TWIN"), is duly qualified as foreign
corporation and in good standing under the laws of the State
of New York. The Company's indirect subsidiaries, Advanced
Research Press, Inc. and Changes International of Fort Walton
Beach, Inc. ("ARP" and "CHANGES," respectively, and together
with Twin, the "SUBSIDIARIES"), are corporations validly
existing and in good standing under the laws of the State of
New York and __, respectively;
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(ii) each of the Company, ARP and Changes has the
requisite corporate power and authority to own, lease and
operate its properties and to conduct its business as
described in the Registration Statement;
(iii) all of the shares of issued and outstanding
capital stock of the Company have been duly authorized and
validly issued and are fully-paid and non-assessable. All of
the issued and outstanding shares of capital stock of ARP and
Changes have been duly authorized and validly issued and are
fully-paid and non-assessable;
(iv) the Shares to be issued and sold by the Company
hereunder have been duly authorized and, when issued and
delivered to the Underwriters against payment therefor as
provided by this Agreement, will be validly issued, fully paid
and non-assessable, and the issuance of such Shares is not
subject to preemptive or other similar rights arising by
operation of law or the Company's Certificate of Incorporation
and ByLaws;
(v) the Company has the corporate power and authority
to execute, deliver and perform its obligations under this
Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement
of the Company, enforceable in accordance with its terms;
(vi) the Registration Statement has become effective
under the Act and, to the best of such counsel's knowledge, no
stop order suspending the effectiveness of the Registration
statement has been issued under the Act or proceedings
therefor initiated or threatened by the Commission;
(vii) at the time the Registration Statement became
effective and on the Closing Date, the Registration Statement
(other than the financial statements and the notes thereto and
related schedules and other financial, numerical, statistical
or accounting data included therein or omitted there from, as
to which we express no opinion) complied as to form in all
material respects with the requirements of the Act and the
Regulations;
(viii) the capital stock of the Company, including
the Common Stock, conforms in all material respects to the
statements relating thereto contained in the Prospectuses
under the caption "Description of Capital Stock;"
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<PAGE> 31
(ix) the statements in the Prospectus under the
captions "Risk Factors - Shares Eligible for Future Sale,"
"Management - Employment Agreements," "Principal and Selling
Stockholders - Terms of the Stock holders Agreement,"
"Description of Certain Indebtedness," "Shares Eligible for
Future Sale," "Certain United States Tax Consequences to
Non-United States Holders" and Items 14 and 15 of Part II of
the Registration Statement, insofar as such statements
constitute summaries of legal matters, documents or
proceedings referred to therein (other than numerical
computations as to which we express no opinion), conform in
all material respects to such legal matters, documents or
proceedings, as the case may be;
(x) no authorization, approval, consent or order of
any court or governmental body or agency is legally required
to be obtained by the Company for the issuance and sale by the
Company to the Underwriters of the Shares pursuant to this
Agreement except such as have been obtained under the Act and
the Regulations (except such as may be required under state
securities and Blue Sky laws or regulations or foreign laws or
regulations, as to which we express no opinion);
(xi) the execution, delivery and performance by the
Company of this Agreement and the sale by the Company to the
Underwriters of the Shares pursuant hereto does not (a)
violate the certificate of incorporation or by-laws of the
Company or any of the Subsidiaries or (b) violate any
statutes, rules or regulations of the State of New York, the
Federal laws of the United States or the General Corporation
Law of the State of Delaware which in our experience are
normally applicable to the transactions contemplated by the
Agreement (other than state securities or Blue Sky laws as to
which we express no opinion) (collectively, "Applicable Laws")
by which the Company or any of the Subsidiaries is bound or to
which any of their properties is subject, which violations,
individually or in the aggregate, would have a Material
Adverse Effect or (c) violate the terms of any agreement or
instrument filed as an exhibit to the Registration Statement
or any Exchange Act filing incorporated by reference in the
Registration Statement, which violations, individually or in
the aggregate, would have a Material Adverse Effect;
(xii) none of the Company or any of the Subsidiaries
is required to be registered as an "investment company" within
the meaning of the Investment Company Act of 1940, as amended;
(xiii) to the best of such counsel's knowledge, no
holder of any security of the Company has the right to require
registration of shares of
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<PAGE> 32
Common Stock or any other securities of the Company under the
Registration Statement, except for such registration rights
that have been duly waived in writing;
(xiv) each document, if any, filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus
(except for financial statements and other financial data
included therein as to which no opinion need be expressed)
complied when so filed as to form with the Exchange Act;
(xv) to the best of such counsel's knowledge, neither
the Company nor any of its subsidiaries has violated any
Environmental Laws, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations
promulgated thereunder, which in each case might result in any
material adverse change in the business, prospects, financial
condition or results of operation of the Company and its
subsidiaries, taken as a whole; and
(xvi) to the best of such counsel's knowledge, the
Company and each of the Subsidiaries have such Permits under
applicable Environmental Laws ("ENVIRONMENTAL PERMITS"), as
are necessary to own, lease and operate its respective
properties and to conduct its business in the manner described
in the Prospectus, except for such Environmental Permits, the
absence of which will not, individually or in the aggregate,
have a Material Adverse Effect. To the best of such counsel's
knowledge, the Company and each of the Subsidiaries have
fulfilled and performed all of their respective material
obligations with respect to such Environmental Permits and no
event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof, subject
in each case to such qualification as many be set forth in the
Prospectus, and except for such revocation or terminations, as
the case may be, as would not, individually or in the
aggregate, have a Material Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company and its subsidiaries and discussions with auditors of the Company and
its subsidiaries in connection with the preparation of the Registration
Statement and the Prospectus and such counsel shall advise you that nothing has
come to the attention of such counsel that has led such counsel to believe that
the Registration Statement (including any 462(b) Registration Statement (if
any)), as amended or supplemented, at the time such Registration Statement, such
462(b) Registration Statement (if applicable) or any post-effective amendment
became effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and that
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<PAGE> 33
the Prospectus, as amended or supplemented, if applicable, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In giving such opinion with respect to the matters covered by
the immediately preceding paragraph, such counsel may state that their opinion
and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and review and discussion of the contents thereof, but are without independent
check or verification except as required to give the opinions covered by clauses
(ii), (vii), (viii) and (ix) of paragraph (f) above. In addition, such counsel
may state that such counsel's opinion does not include or cover the financial
statements and notes thereto and related schedules and other financial,
numerical, statistical and accounting data contained in or omitted from the
Registration Statement.
The opinion of Kramer, Levin described in paragraph (f) above
shall be rendered to you at the request of the Company and shall so state
therein.
(g) You should have received on the Closing date an opinion
(satisfactory to you and counsel for the Underwriters), of Ray,
Quinney & Nebeker, counsel for Twin Laboratories Inc. ("TWIN"), a
subsidiary of the Company, to the effect that:
(i) Twin has been duly incorporated, is validly
existing as a corporation in good standing under the laws of
the State of Utah and has the requisite corporate power and
corporate authority to own, lease and operate its properties
and to conduct its business as it is currently being conducted
and described in the Registration Statement; and
(ii) all of the outstanding shares of capital stock
of Twin have been duly authorized and validly issued, are
non-assessable, and to the knowledge of such counsel, are
fully paid.
(h) You shall have received on the Closing Date an opinion (in
a form reasonably satisfactory to you and your counsel), dated the
Closing Date, of Sidley & Austin, regulatory counsel for the Company,
to the effect that:
(i) to such counsel's knowledge, there are
no material legal proceedings by the U.S. Food and Drug
Administration ("FDA") or similar Federal or state regulatory
officials and bodies pending or threatened that relate to the
Company that are not described in the Prospectus;
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<PAGE> 34
(ii) the Company has complied with all
applicable federal, Utah and New York food-and-drug-related
licenses, registrations, permits, and other approvals relating
to the manufacture, sale and distribution of its products;
and
(iii) the statements in the Prospectus under
the captions "Risk Factors -- Governmental Regulation", "--
California Proposition 65" and "--Certain Government Action
and Adverse Publicity Regarding Certain Products Containing
Ephedrine" and "Business -- Regulatory Matters" and "--Legal
Matters" that relate to matters of food and drug law insofar
as such statements constitute a summary of legal matters,
documents or proceedings referred to therein, are accurate in
all material respects and provide a fair summary of such
matters;
(iv) the Company has represented to such
counsel that it is in substantial compliance with applicable
decrees of the FDA, the Federal Trade Commission and other
state regulatory agencies and such counsel does not know of
any facts that contradict such representation; and
(v) the product labeling, advertising and
other promotional materials that the Company has submitted to
such counsel for re view, which to the knowledge of such
counsel relate to major products of the Company, do not give
rise to a substantial expectation that enforcement action
would be initiated against those products.
(i) You shall have received on the Closing Date an opinion
(satisfactory to you and counsel for the Underwriters), dated the
Closing Date, of legal counsel for each of the Selling Stockholders, to
the effect that:
(i) This Agreement has been duly authorized, executed
and delivered by or on behalf of such Selling Stockholder and
is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms;
(ii) such Selling Stockholder has full legal right,
power and authority, and all authorization and approval
required by law, to enter into this Agreement and the Custody
Agreement and the Power of Attorney of such Selling
Stockholder and to sell, assign, transfer and deliver the
Shares to be sold by such Selling Stockholder in the manner
provided herein and therein;
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<PAGE> 35
(iii) the Custody Agreement of such Selling
Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in
accordance with its terms;
(iv) the Power of Attorney of such Selling
Stockholder has been duly authorized, executed and delivered
by such Selling Stockholder and is a valid and binding
instrument of such Selling Stockholder, enforceable in
accordance with its terms, and, pursuant to such Power of
Attorney, such Selling Stockholder has, among other things,
authorized the Attorneys, or any one of them, to execute and
deliver on such Selling Stockholder's behalf this Agreement
and any other document they, or any one of them, may deem
necessary or desirable in connection with the transactions
contemplated hereby and thereby and to deliver the Shares to
be sold by such Selling Stockholder pursuant to this
Agreement;
(v) upon delivery of and payment for the Shares to be
sold by each Selling Stockholder pursuant to this Agreement,
good and clear title to such Shares will pass to the
Underwriters, free of all restrictions on transfer, liens,
encumbrances, security interests, equities and claims
whatsoever; and
(vi) the execution, delivery and performance of this
Agreement and the Custody Agreement and Power of Attorney of
such Selling Stock holder by such Selling Stockholder, the
compliance by such Selling Stockholder with all the provisions
hereof and thereof and the consummation of the transactions
contemplated hereby and thereby will not (A) require any
consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue
Sky laws of the various states), (B) conflict with or
constitute a breach of any of the terms or provisions of, or
a default under, the organizational documents of such Selling
Stockholder, if such Selling Stockholder is not an individual,
or any indenture, loan agreement, mortgage, lease or other
agreement or instrument to which such Selling Stockholder is a
party or by which any property of such Selling Stockholder is
bound or (C) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court
or any governmental body or agency having jurisdiction over
such Selling Stockholder or any property of such Selling
Stockholder.
The opinions described in paragraph (i) above shall be
rendered to you at the request of the Selling Stockholders and shall so state
therein.
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<PAGE> 36
(j) You shall have received on the Closing Date an opinion,
dated the Closing Date, of, Skadden, Arps, Slate, Meagher & Flom LLP
counsel for the Underwriters, as to certain matters requested by you.
(k) You shall have received a letter on and as of the Closing
Date, in form and substance satisfactory to you, from Deloitte & Touche
LLP, independent public accountants, with respect to the financial
statements and certain financial information contained or incorporated
by reference in the Registration Statement and the Prospectus and
substantially in the form and substance of the letter delivered to you
by on the date of this Agreement.
(l) The Company shall not have failed at or prior to the
Closing Date to perform or comply in all material respects with any of
the agreements herein contained and required to be performed or
complied with by the Company at or prior to the Closing Date.
(m) The Shares shall have been duly listed, subject to notice
of issuance, on NASDAQ.
(n) The Company and the Selling Stockholders shall not have
failed on or prior to the Closing Date to perform or comply with any of
the agreements herein contained and required to be performed or
complied with by the Company or the Selling Stockholders, as the case
may be, on or prior to the Closing Date.
(o) You shall have received on the Closing Date, a certificate
of each Selling Stockholder who is not a U.S. Person (as defined under
applicable U.S. federal tax legislation) to the effect that such
Selling Stockholder is not a U.S. Person, which certificate may be in
the form of a properly completed and executed United States Treasury
Department Form W-8 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
The several obligations of the U.S. Underwriters to purchase any
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the applicable Option Closing Date of such documents as they
may reasonably request with respect to the good standing of the Company, the due
authorization and issuance of such Additional Shares and other matters related
to the issuance of such Additional Shares.
10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the later of (i) execution of this Agreement and
(ii) when notification of the effectiveness of the Registration Statement has
been released by the Commission.
36
<PAGE> 37
This Agreement may be terminated at any time on or prior to
the Closing Date by you by written notice to the Sellers if any of the following
has occurred: (i) since the respective dates as of which information is given in
the Registration Statement and the Prospectus, any Material Adverse Change or
development involving a prospective Material Adverse Change, whether or not
arising in the ordinary course of business, which would, in your judgment, make
it impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus, (ii) any outbreak or escalation of hostilities
or other national or international calamity or crisis or material adverse change
in the financial markets of the United States or elsewhere or any other
substantial national or international calamity or emergency if the effect of
such outbreak, escalation, calamity, crisis or emergency would, in your
judgment, make it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus or to enforce contracts for the sale of
the Shares, (iii) any suspension or trading limitation of trading generally in
securities on the New York Stock Exchange, the American Stock Exchange, the
NASDAQ National Market System or in the over-the-counter markets or any setting
of minimum prices for trading on any such exchange or markets, (iv) the
enactment, publication, decree or other promulgation of any Federal or state
statute, regulation, rule or order of any court or other governmental authority
which would, in your judgment, have a Material Adverse Effect, (v) any
declaration of a general banking moratorium by either Federal or New York State
authorities, (vi) the taking of any action by any Federal, state or local
government or agency in respect of its monetary or fiscal affairs which in your
judgment has a material adverse effect on the financial markets in the United
States and would, in your judgment, make it impracticable or inadvisable to
market the Shares to enforce contracts for the sale of the Shares, or (vii) any
securities of the Company shall have been downgraded or placed on any "watch
list" for possible downgrading by any nationally recognized statistical rating
organization, provided, that in the case of such "watch list" placement,
termination shall be permitted only if such placement would, in the judgment of
any Underwriter, make it impracticable or inadvisable to market the Shares or to
enforce contracts for the sale of the Shares or materially impair the investment
quality of the Shares.
11. Default. If on the Closing Date or on an Option Closing
Date, as the case may be, any one or more of the Underwriters shall fail or
refuse to purchase the Firm Shares or Additional Shares, as the case may be,
which it has or they have agreed to purchase hereunder on such date and the
aggregate number of Firm Shares or Additional Shares, as the case may be, which
such defaulting Underwriter or Underwriters, as the case may be, agreed but
failed or refused to purchase is not more than one-tenth of the total number of
Shares to be purchased on such date by all Underwriters, each non-defaulting
Underwriter shall be obligated severally, in the proportion which the number of
Firm Shares set forth opposite its name in Schedule I bears to the total number
of Firm Shares which all the non-defaulting Underwriters, as the case may be,
have agreed to purchase, or in such other proportion as you may specify, to
purchase the Firm Shares or Additional Shares, as the case may be, which such
defaulting Underwriter or Underwrit-
37
<PAGE> 38
ers, as the case may be, agreed but failed or refused to purchase on such date;
provided that in no event shall the number of Firm Shares or Additional Shares,
as the case may be, which any Underwriter has agreed to purchase pursuant to
Section 2 hereof be increased pursuant to this Section 10 by an amount in excess
of one-ninth of such number of Firm Shares or Additional Shares, as the case may
be, without the written consent of such Underwriter. If on the Closing Date or
an Option Closing Date, as the case may be, any Underwriter or Underwriters
shall fail or refuse to purchase Firm Shares, or Additional Shares, as the case
may be, and the aggregate number of Firm Shares or Additional Shares, as the
case may be, with respect to which such default occurs is more than one-tenth of
the aggregate number of Shares to be purchased on such date by all Underwriters
and arrangements satisfactory to you and the Company for purchase of such Shares
are not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter, the Company or
the Selling Stockholders. In any such case which does not result in termination
of this Agreement, either you or the Company shall have the right to postpone
the Closing Date or the applicable Option Closing Date, as the case may be, but
in no event for longer than seven days, in order that the required changes, if
any, in the Registration Statement and the Prospectus or any other documents or
arrangements may be effected. If, on an Option Closing Date, any Under writer or
Underwriters shall fail or refuse to purchase Additional Shares and the aggre-
gate number of Additional Shares with respect to which such default occurs is
more than one-tenth of the aggregate number of Additional Shares to be purchased
on such date, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase such Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
12. Agreements of the Selling Stockholders. Each Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable
in connection with the transfer of the Shares to be sold by such
Selling Stockholder to the Underwriters.
(b) To do and perform all things to be done and performed by
such Selling Stockholder under this Agreement prior to the Closing Date
and to satisfy all conditions precedent to the delivery of the Shares
to be sold by such Selling Stockholder pursuant to this Agreement.
13. Notice. Notices given pursuant to any provision of this
Agreement shall be addressed as follows: (a) if to the Company, to Twinlab
Corporation, 2120 Smithtown Avenue, Ronkonkoma, New York 11779, Attention:
General Counsel, (b) if
38
<PAGE> 39
to any Underwriter or to you, to you c/o Bear, Stearns & Co. Inc., 245 Park
Avenue, New York, New York 10167, Attention: Syndicate Department, and in each
case, with a copy to each of Skadden, Arps, Slate, Meagher & Flom LLP at 919
Third Avenue, New York, New York 10022, Attention: Mark C. Smith, Esq. and to
Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York, New York 10022,
Attention: Howard A. Sobel, Esq., or in any case to such other address as the
person to be notified may have requested in writing.
14. Survival. The respective indemnities, contribution
agreements, representations, warranties and other statements of the Company, its
officers and directors, and the Selling Stockholders and of the several
Underwriters set forth in or made pursuant to this Agreement shall remain
operative and in full force and effect, and will survive delivery of and payment
for the Shares, regardless of (i) any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Stockholder or any person controlling such Selling
Stockholder, (ii) acceptance of the Shares and payment for them hereunder and
(iii) termination of this Agreement
15. Expenses. If for any reason the Shares are not delivered
by or on behalf of any Seller as provided herein (other than as a result of any
termination of this Agreement pursuant to Section 10), the Sellers agree,
jointly and severally, to reimburse the several Underwriters for all
out-of-pocket expenses (including the fees and disbursements of counsel)
incurred by them. Notwithstanding any termination of this Agreement, the Company
shall be liable for all expenses which it has agreed to pay pursuant to Section
5(i) hereof. The Sellers also agree, jointly and severally, to reimburse the
several Underwriters, their directors and officers and any persons controlling
any of the Under writers for any and all fees and expenses (including, without
limitation, the fees disbursements of counsel) incurred by them in connection
with enforcing their rights hereunder (including, without limitation, pursuant
to Section 8 hereof).
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PER FORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. THE COMPANY AND THE UNDER WRITERS EACH HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN
THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING
IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT,
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDI-
39
<PAGE> 40
TIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE COMPANY AND THE
UNDERWRITERS EACH IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY
DO SO UNDER APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO
THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY
SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
17. Successors. Except as otherwise provided, this Agreement
has been and is made solely for the benefit of and shall be binding upon the
Company, the Selling Stockholders, the Underwriters, the Underwriters' directors
and officers, any controlling persons referred to herein, the Company's
directors and the Company's officers who sign the Registration Statement and
their respective successors and assigns, all as and to the extent provided in
this Agreement, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successors and assigns" shall not include a
purchaser of any of the Shares from any of the several Underwriters merely
because of such purchase.
18. Counterparts. This Agreement may be signed in various
counterparts which together shall constitute one and the same instrument.
40
<PAGE> 41
Please confirm that the foregoing correctly sets forth the
agreement among the Company, the Selling Stockholders and the several
Underwriters.
Very truly yours,
TWINLAB CORPORATION
By:____________________________
Name:
Title:
THE SELLING STOCKHOLDERS NAMED IN
SCHEDULE III HERETO, ACTING
SEVERALLY
By:____________________________
Attorney-in-Fact
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
Acting severally on behalf of themselves and the several
U.S. Underwriters named in Schedule I hereto
By: BEAR, STEARNS & CO. INC.
By:__________________________
Name:
Title:
BEAR, STEARNS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE SECURITIES INTERNATIONAL
ADAMS, HARKNESS & HILL, INC.
LEHMAN BROTHERS INTERNATIONAL
SMITH BARNEY INC.
Acting severally on behalf of themselves and the several
International Managers named in Schedule II hereto
By: BEAR, STEARNS INTERNATIONAL LIMITED
By:__________________________
Name:
Title:
41
<PAGE> 42
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
U.S. Underwriters Shares to be Purchased
----------------- ----------------------
<S> <C>
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Adams, Harkness & Hill, Inc.
Lehman Brothers Inc.
Smith Barney Inc.
---------
Total 6,400,000
=========
</TABLE>
42
<PAGE> 43
SCHEDULE II
<TABLE>
<CAPTION>
Number of Firm
International Managers Shares to be Purchased
- ---------------------- ----------------------
<S> <C>
Bear, Stearns International
Limited
Donaldson, Lufkin & Jenrette
Securities International
Adams, Harkness & Hill, Inc.
Lehman Brothers International
Smith Barney Inc.
---------
Total 1,600,000
=========
</TABLE>
43
<PAGE> 44
SCHEDULE III
Selling Stockholders
<TABLE>
<CAPTION>
Number of Firm Number of
Name Shares Being Sold Additional Shares
---- ----------------- -----------------
<S> <C> <C> <C> <C>
Chase Equity Associates, L.P. 131,455 192,295
DLJ Investment Partners, L.P. 106,223 155,386
DLJ Investment Funding, Inc. 15,136 22,141
DLJ First ESC L.P. 10,096 14,768
PML Mezzanine Fund L.P. 131,455 192,295
Green Equity Investors II, L.P. 3,605,635 394,366
--------- -------
Total 4,000,000 971,251
========= =======
</TABLE>
44
<PAGE> 45
Annex I
Brian Blechman
Dean Blechman
Neil Blechman
Ross Blechman
Steve Blechman
Stephen Welling
John G. Danhakl
Jennifer Holden Dunbar
Jonathan D. Sokoloff
Green Equity Investors II, L.P.
45
<PAGE> 1
Kramer, Levin, Naftalis & Frankel
919 Third Ave.
New York, NY 10022
April 3, 1998
Twinlab Corporation
2120 Smithtown Avenue
Ronkokoma, New York 11779
Attn: Board of Directors
Re: Twinlab Corporation
Registration Statement on Form S-3
(File No. 333-48091)
Ladies and Gentlemen:
We have acted as counsel to Twinlab Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing of
the above-captioned Registration Statement on Form S-3 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the public offering of (i) 4,000,000 shares of common stock, par
value $1.00 per share of the Company (the "Common Stock"), to be sold by the
Company and 4,000,000 shares of Common Stock to be sold by certain stockholders
of the Company (the "Selling Stockholders") (the "Firm Shares") and up to
1,200,000 shares of Common Stock (the "Additional Shares") to be sold by the
Company and the Selling Stockholders upon exercise of an option granted by the
Company and the Selling Stockholders to Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, Adams, Harkness & Hill, Inc., Lehman
Brothers, Inc. and Salomon Smith Barney, as representatives of the certain
underwriters (the "Representatives"), to cover over-allotments of the Shares,
pursuant to an underwriting agreement to be entered into by and among the
Company, the Selling Stockholders and the Representatives (the "Underwriting
Agreement"). The Firm Shares and the Additional Shares are collectively referred
to herein as the "Shares".
As such counsel, we have examined such corporate records,
certificates and other documents and such questions of law as we have considered
necessary or appropriate for the purposes of this opinion. In rendering this
opinion, we have (a) assumed (i) the genuineness of all signatures on all
documents examined by us, (ii) the authenticity of all documents submitted to us
as originals, and (iii) the conformity to original documents of all documents
submitted to us as photostatic or conformed copies and the authenticity of the
<PAGE> 2
Twinlab Corporation
April 3, 1998
Page 2
originals of such copies; and (b) relied on (i) certificates of public officials
and (ii) as to matters of fact, statements and certificates of officers of the
Company.
We are attorneys admitted to the Bar of the State of New York,
and we express no opinion as to the laws of any other jurisdiction other than
the laws of the United States of America and the General Corporation Law of the
State of Delaware.
Based upon the foregoing, we are of the opinion that (a) the
Shares being offered by the Company have been validly authorized and, when
issued and sold in accordance with the terms set forth in the Underwriting
Agreement, will be validly issued, fully-paid and non-assessable shares of
Common Stock of the Company; and (b) the Shares being offered by the Selling
Stockholders have been duly and validly authorized and issued and are fully paid
and non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Legal
Matters" in the prospectus forming a part of the Registration Statement. In
giving such consent we do not thereby concede that we are within the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations promulgated thereunder.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
Twinlab Corporation
Ronkonkoma, New York
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-48091 of Twinlab Corporation on Form S-3 of our
report dated February 4, 1998 included in the Annual Report on Form 10-K of
Twinlab Corporation for the year ended December 31, 1997 and to the use of our
report dated February 4, 1998, appearing in the Prospectus, which is a part of
this Registration Statement. We also consent to the references to us under the
heading "Selected Historical Financial Data" and "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Twinlab Corporation
listed in Part II at Item 16(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Jericho, New York
April 3, 1998
