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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number: 0-21003
TWINLAB CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 11-3317986
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 Motor Parkway 11788
Hauppauge, New York (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (516) 467-3140
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates based on the closing sale price of the Common Stock on
March 25, 1999, as reported on the Nasdaq National Market, was $166,978,928.
As of March 25, 1999, the registrant had 32,705,049 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
NOTE
Twinlab Corporation's Report on Form 10-K filed with the Securities and Exchange
Commission includes all exhibits required to be filed with the Report. Copies of
this Report on Form 10-K, not including any of the exhibits listed under Item
14(c) of this Report, are available without charge upon written request. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the exhibits
and to request copies of such exhibits:
Corporate Secretary
Twinlab Corporation
150 Motor Parkway
Hauppauge, NY 11788
2
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TWINLAB CORPORATION 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I
Page
Item 1. Business.................................................. 4
Item 2. Properties................................................ 18
Item 3. Legal Proceedings......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 20
Item 6. Selected Financial Data................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 23
Item 8. Financial Statements and Supplementary Data............... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant........ 30
Item 11. Executive Compensation.................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13. Certain Relationships and Related Party Transactions...... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 30
SIGNATURES........................................................ 34
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PART I
Information contained or incorporated by reference in this annual report
may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. See, e.g., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Business Strategy."
Forward-looking statements involve substantial risks and uncertainties and
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. Such forward looking statements by
their nature involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the Company's control, which may cause actual results,
performance or achievements to differ materially from those projected or implied
in such forward-looking statements. As a result, no assurance can be given that
the future results covered by such forward-looking statements will be achieved.
Factors that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things, those discussed in "Factors Affecting Future
Performance" under the caption "Business" in Item 1 of this annual report. Other
factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. For the purpose of this
annual report, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. The Company
accepts no obligation to update any forward-looking statements and does not
intend to do so.
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"), Changes International of Fort Walton Beach, Inc. ("Changes
International"), Bronson Laboratories, Inc. ("Bronson"), Health Factors
International, Inc. ("Health Factors") and PR*Nutrition, Inc. ("PR*Nutrition").
Item 1. BUSINESS
General
The Company is one of the leading manufacturers and marketers of brand
name nutritional supplements sold through domestic health and natural food
stores and various direct sales channels, including network and catalog
marketing and is also engaged in the sale of products through national and
regional drug store chains, supermarkets and mass merchandise retailers. The
Company produces a full line of nutritional supplements and offers one of the
broadest product lines in the industry with more than 1,300 products and 2,400
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), HealthCare
Naturals(R) and Twinlab TruHerbs(R) trademarks; a line of specially formulated
nutritional supplements marketed under the Changes(R) trademark; herb teas
marketed under the Alvita(R) trademark; vitamins, herbs and nutritional
supplements and health and beauty aids marketed under the Bronson(R) trademark;
and nutritionally enhanced food bars marketed under the PR*Bar(R) and Ironman
Triathlon(R) trademarks. 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 premium
product quality, broad product line, strong history of new product introductions
and innovations and superior marketing and advertising programs have established
TWINLAB, Nature's Herbs, Bronson, PR*Nutrition, Changes 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
1994, the Company's net sales and income from operations have grown at compound
annual growth rates of 29.1% and 25.8%, respectively. For the year ended
December 31, 1998, the Company generated net sales, net income and basic and
diluted net income per share of $333.4 million, $29.7 million and $.94,
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:
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o Health and Natural Food Store Channel -- The Company's TWINLAB, Nature's
Herbs, Ironman Triathlon and Alvita brand products are sold primarily
through a network of approximately 80 distributors to nearly 11,000 health
and natural food stores and other selected retail outlets. The health and
natural food store channel of distribution has grown in recent years as
national chains, including those which sell the Company's products, such
as General Nutrition Companies, Inc. ("GNC"), Whole Foods Markets, Inc.
("WFM"), Wild Oats Markets, Inc. ("Wild Oats") and other industry
participants continue to add stores in new and existing markets. The
Company believes that it has a competitive advantage in the health and
natural food store channel due to the high quality of its products, which
is a direct result of its use of premium ingredients, its state of the art
manufacturing facilities and its comprehensive quality control procedures.
Sales to the health and natural food store channel, primarily through
distributors, continue to represent the Company's largest market, totaling
approximately $211.8 million, or approximately 63.5%, of the Company's net
sales in 1998. The Company believes that its products have a presence in
over 95% of the health and natural food stores in the United States, but
that only approximately 20% of such stores carry a comprehensive line of
the Company's products. Management believes that the continued expansion
of health and natural food store retail outlets and the strong demographic
and consumer awareness fundamentals driving the nutritional supplement
industry, combined with health and natural food retailers' success with
the Company's product lines, provide Twinlab with significant
opportunities to increase sales in the health and natural food store
channel. Through its Bronson division, Twinlab markets its MD
Pharmaceutical(R)brand of vitamins, herbs and nutritional supplements
exclusively to United States military commissaries and also manufactures,
through Health Factors, private label vitamins and nutritional supplements
for a number of other companies on a contract manufacturing basis.
o Mass Market Channel -- The Company is actively engaged in efforts to
expand its penetration of the 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, Walgreen, CVS, Kroger, American Stores, Inc. and
Albertson's, Inc., under its TWINLAB, HealthCare Naturals and Alvita brand
names. Approximately $47.0 million or 14.1% of the Company's 1998 net
sales were attributable to mass market retailers compared to $14.1 million
or 6.1% in 1997. Twinlab has recently introduced its nutritionally
enhanced food bars under the Ironman Triathlon brand name in the mass
market channel of distribution. During 1998, the Company introduced the
first line of herbs to be sold under the TWINLAB name to the mass market
under the brand name Twinlab TruHerbs, as well as a line of nutritional
supplements under the Ironman Triathlon trademark.
o Direct Sales Channel -- The Company markets and sells a variety of
products through the direct sales distribution channel, which includes
network marketing, catalog and direct response sales. Through Changes
International, the Company develops, markets and sells vitamins, herbs and
nutritional supplements under the Changes brand name. Changes
International operates through a large sales force of independent
distributors located throughout the United States, Canada and the United
Kingdom who sell directly to consumers. At this time, all of Changes
International's products are specially formulated and packaged for
distribution through a network marketing sales force and are not intended
for sale to retail outlets. The Company more than doubled the size of
Changes International's nutritional supplement line during 1998 and
expects to further expand the Changes line of products in 1999. Changes
International generated net sales of $51.3 million in 1998. Twinlab also
manufactures, markets and distributes a line of over 400 vitamins, herbs
and nutritional supplements and health and beauty aids under the Bronson
brand name which are sold through catalogs and specialty direct mailings
to customers, including healthcare and nutritional professionals. In
August of 1998, the Company acquired PR*Nutrition, a company that markets
and distributes nutritionally enhanced food bars and other nutritional
products. The Company markets products under the PR*Bar brand name
directly to consumers through, direct mailings, and direct response sales.
Approximately $70.5 million or 21.1% of the Company's 1998 net sales were
attributable to the direct sales channel compared to $17.1 million or 5.2%
in 1997.
Operating Divisions
While the Company's products are marketed through the distribution
channels discussed above, the Company's operations are organized around the
following six divisions:
o TWINLAB Division -- The TWINLAB division develops and manufactures
vitamins, minerals, herbs, amino acids and sports nutrition products under
the TWINLAB, TruHerbs, Ironman Triathlon, MaxiLife, "Fuel" and other brand
names for distribution in the health and natural food store and mass
market distribution channels. The TWINLAB division accounted for
approximately $172.7 million, or 51.8%, of the Company's net sales in
1998.
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o Herbal Supplements and Teas Division -- The herbal supplements and teas
division develops and manufactures the Company's products marketed and
sold under the Nature's Herbs, HealthCare Naturals and Alvita brand names
through the health and natural food store and mass market distribution
channels. This division generated approximately $65.8 million, or 19.7%,
of the Company's net sales in 1998.
o Changes International Division -- The Changes International division
develops and markets a line of vitamins, herbs and nutritional supplements
under the Changes brand name for distribution exclusively through a
network marketing sales force of independent distributors. This division
accounted for approximately $51.3 million, or 15.4%, of the Company's net
sales in 1998.
o Bronson Division -- Twinlab's Bronson division manufactures, markets and
distributes products under the Bronson brand name, which are sold through
catalogs and direct mailings to customers, and under the MD Pharmaceutical
brand name exclusively to United States military commissaries. Through
Health Factors, this division also manufactures private label vitamins and
nutritional supplements for a number of other companies on a contract
manufacturing basis. The Bronson division, following its acquisition in
late April 1998, generated net sales of $18.7 million or 5.6% of the
Company net sales in 1998.
o PR*Nutrition Division -- The PR*Nutrition division develops, markets and
sells nutritionally enhanced food bars and other nutritional products
under the PR*Bar and Ironman Triathlon brand names for sale to consumers
through direct and specialty mailings, direct response sales, and the
health and natural food stores and mass market channels. This division
generated net sales of $20.9 million in 1998, or 6.3% of the Company's
1998 net sales.
o Publishing Division - Through Advanced Research Press, the Publishing
division is responsible for the publishing activities of the Company,
including the publication of a monthly fitness magazine, Muscular
Development, a monthly newsletter and select books concerning nutritional
supplements and related subjects. ARP generated net sales of $4.0 million,
or 1.2% of the Company's 1998 net sales.
Twinlab was incorporated under the laws of the State of Delaware in 1996
and maintains its principal executive offices at 150 Motor Parkway, Suite 210,
Hauppauge, New York 11788. Its telephone number is 516-467-3140.
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, sports
nutrition products and other nutritional supplements to the health and natural
food store channel while continuing to increase sales and market share in the
mass market and direct sales distribution channels. 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.
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
proprietary brands, including the TruHerbs, Ironman Triathlon, Bronson,
PR*Nutrition and Changes brands, targeted to the Company's respective channels
of distribution. As in the past, the Company will 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 1998, the
Company spent $26.4 million, an increase of 30% over fiscal 1997, on marketing
and advertising to promote its products. The Company has budgeted for
significantly greater marketing and advertising expenses in fiscal 1999, as
compared to 1998.
Further Develop Multiple Channels of Distribution -- The Company intends
to continue to increase its penetration of the domestic and international health
and natural food store channel and expand its mass market, retail, network
marketing and catalog businesses. 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 and natural food stores.
If appropriate, the Company may seek to acquire selective products or product
lines to distribute through these established channels.
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Continue to Introduce New Products and Product Innovations -- A
cornerstone of the Company's success has been its ability to rapidly utilize
innovative 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 that 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 it to achieve immediate and broad distribution
for new product launches. From 1991 through 1998, the Company introduced over
700 products, with over 140 new products introduced in 1998 alone. Net sales
from new products introduced in 1998 were approximately $15.9 million, or
approximately 4.8% of the Company's net sales. The Company expects to introduce
new products in 1999 in the health and natural food store and mass market retail
channels. Eighteen new products have already been introduced in 1999. Additional
products are likewise expected to be introduced through the catalog and network
marketing channels.
Increase Penetration of Foreign Markets -- Management believes that
there are substantial opportunities for the Company to expand its presence in
foreign markets. The Company's international sales force is supported by a
network of approximately 60 overseas distributor organizations, serving over 70
foreign countries. Approximately 6.0%, or $19.9 million, of the Company's net
sales in 1998 were derived from international sales originating from overseas
distributor organizations. The Company presently has distribution agreements
covering many western European countries, including Great Britain, France,
Italy, Belgium, the Netherlands and the Scandinavian countries; eastern European
countries, including Russia; Latin American countries, including Mexico, Brazil,
Chile and Argentina; Middle Eastern countries, including Israel and Saudi
Arabia; several countries in the Far East, including China and Singapore; and
the Caribbean. As part of its continuing efforts to expand its international
presence, the Company recently opened a branch office in the United Kingdom. The
Company also initiated programs in 1998 to qualify distributors in Japan and
Australia.
Supplement Internal Growth Through Strategic Acquisitions -- The Company
actively pursues acquisition opportunities that will complement or extend its
existing product lines or that 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 ability to generate sales of
its products through successful marketing programs provide it with a strategic
advantage in pursuing and consummating such opportunities.
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. 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. In
1998, the Company leased an approximately 106,000 square foot warehouse and
distribution facility in Bohemia, New York and substantially completed the
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 160,000
square feet and will substantially increase the Company's production capacity.
The total budget for the Utah Facility expansion is approximately $13.3 million.
Approximately 140,000 square feet of construction was complete by the end of
1998, at an approximate cost of $9.1 million in capital expenditures. During
1998, the Company also added significant management and staff to support its
mass market and Changes International operations. Bronson's fulfillment and
telemarketing operations were consolidated in 1998 with the operations of the
herbal supplements and teas division at the Company's expanded Utah Facility
(with the exception of product production which remains with Health Factors in
Tempe, Arizona). The management of Bronson's catalog business is currently
conducted by an independent mail order consulting group.
There can be no assurance that the Company will successfully implement all
or any part of its business strategy.
Industry
Based on estimates in 1998 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 food bars
and diet products; the "VMS Products") has grown at a compounded annual rate of
15.4% from $5.0 billion in 1994 to $8.9 billion in 1998. A large portion of this
growth is attributable to an increase in sales of supplements (primarily herbal
products), which grew from $1.3 billion in 1994 to $3.9 billion in 1998. Growth
in this category has been fueled by the popularity of such herbs as echinacea,
garlic, ginseng, gingko, saw palmetto and St. John's Wort. Packaged Facts
forecasts 13.3% compound annual growth in the market for VMS Products, including
19.8% compound annual growth in the market for supplements, through the year
2003. In addition, according to Packaged Facts, the retail market for sports
nutrition products has grown at a compound annual rate of 15.2% from
approximately $720 million in 1994 to approximately $1.3 billion in 1998.
Management believes that the growth rate in the nutritional supplement
industry has slowed significantly compared to the growth rate experienced in the
first six months of 1998. The Company believes the slow down in growth is in
part due to a decline in sales at the retail level of St. John's Wort and other
herbal products that were in greater demand in the first half
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of 1998 and to a more generalized industry-wide slowing of growth across most
product categories. The Company believes that as a result, inventories at the
retail and distributor level have become excessive and therefore orders to
manufacturers and suppliers have been reduced.
US Retail Sales of VMS Products and Sports Nutrition Products 1994-1998
(in millions of dollars)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Category 1994 1998 CAGR
================================================================================
<S> <C> <C> <C>
Vitamins ............................. $ 3,140 $ 4,160 7.3%
Supplements .......................... 1,250 3,865 32.6
Minerals ............................. 615 855 8.6
------- ------- -------
Total VMS Products ........ 5,005 8,880 15.4
------- ------- -------
Sports Nutrition ..................... 720 1,268 15.2
------- ------- -------
Total ........... $ 5,725 10,148 15.4%
------- ------- -------
- --------------------------------------------------------------------------------
</TABLE>
Source: Packaged Facts
Management believes continued industry 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 60% 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 and natural food stores, mass market retailers (drug store
chains, supermarkets and other mass merchandisers), and direct sales channels
(including network marketing and catalog distribution). In 1998, according to
Packaged Facts, the mass market channel accounted for approximately 49% of sales
of VMS Products, health and natural food stores accounted for 39% of sales and
12% of sales were generated through direct selling, mail order and the internet.
The United States health and natural 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 49% of a typical health and natural food store's sales. The health and
natural 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 and natural 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 18.7% of total retail sales of VMS Products in 1998 compared to 11.5% in
1994. This compares to traditional drug store chains and supermarkets which
accounted for 30.5% and 34.6% of total retail sales of VMS Products in 1998 and
1994, respectively.
Although growing, sales generated via direct selling, mail order and the
internet have not grown as quickly as sales in other channels of distribution.
According to Packaged Facts, sales via direct selling as a percentage of total
retail sales of VMS Products were 9.9% in 1998 compared to 13.1% in 1994. Sales
via mail order and the internet were 2.4% and 4.2% of total retail sales of VMS
Products in 1998 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.
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Share of VMS Products Market -- Sales by Retail Outlets, 1994, 1996 and
1998
<TABLE>
<CAPTION>
Outlet 1994 1996 1998
------ ---- ---- ----
<S> <C> <C> <C>
Health and Natural Food Stores ....... 36.6% 38.2% 38.5%
Mass Market Drug Store Chains ........ 23.1 20.2 18.4
Mass Merchandisers ................... 11.5 14.8 18.7
Supermarkets ......................... 11.5 10.8 12.1
------ ------ ------
Total Mass Market .................... 46.1 45.8 49.2
------ ------ ------
Direct Selling ....................... 13.1 12.6 9.9
Mail Order and Internet
4.2 3.4 2.4
------ ------ ------
TOTAL ...................... 100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
- ----------
Source: Packaged Facts
Products
The Company has a highly diversified array of products and product
categories and manufactures and markets over 1,300 products and over 2,400 SKU's
in several product categories. The Company's product line includes vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products
(including food bars) and special formulas marketed under the TWINLAB trademark,
a full line of herbal supplements, phytonutrients and herb teas marketed under
the Nature's Herbs, HealthCare Naturals, TruHerbs and Alvita trademarks, a line
of nutritional supplements marketed through Changes International under the
Changes trademark, a full line of vitamins, herbal supplements and personal care
items under the Bronson brand name through its catalog division and a line of
food bars under the PR*Bar and Ironman Triathlon trademarks through its
PR*Nutrition division. The Company also sells certain products under private
label arrangements with third parties. Some of these products are manufactured
by Health Factors, which also manufactures the majority of the Bronson catalog
products. The Company also publishes health, fitness and nutrition-related
publications through its Publishing division.
The following table sets forth certain information concerning each of the
Company's product categories:
<TABLE>
<CAPTION>
Five-Year
Number of Percentage of Compound Annual
Product Category SKU's 1998 Gross Sales Gross Sales Growth
---------------- ----- ---------------- ------------------
<S> <C> <C> <C>
TWINLAB Products ..................... 1,165 54.6% 18.0%
Herbal Supplement and Teas Products
742 19.3 36.5
Bronson Products ..................... 421 5.1 N/A
Changes Products ..................... 67 14.0 N/A
PR Nutrition Products ................ 57 5.9 90.8
Publishing ........................... N/A 1.1 8.7
------ ------ ------
TOTAL ...................... 2,452 100.0% 28.2%
====== ====== ======
</TABLE>
Twinlab Division. The TWINLAB division is responsible for the manufacture
and sale of vitamins, minerals, amino acids, sports nutrition formulas and other
nutritional supplement products marketed under the TWINLAB brand name including
multivitamins, such as Daily One Caps and Animal Friends, single-entity
vitamins, such as B-1 Caps and Mega E Softgels, minerals, such as Calcium
Citrate Caps and Magnesium Caps, and amino acids such as L-Glutamine Caps and
Mega L-Carnitine Tabs. These products are generally available in a variety of
delivery forms, including liquid, powder, capsule and tablet to accommodate a
variety of consumer tastes and 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.
The sports nutrition products sold under the Twinlab brand consist of a
wide variety of nutritional supplements designed for
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and targeted to active lifestyle consumers. These products are specially
formulated to help individuals 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's sports nutrition products are
utilized by a variety of health conscious consumers including amateur and
professional athletes in a variety of competitive sports. The Company believes
that its 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.
Twinlab's special formulas consist 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 and natural food stores.
Examples include Beyond Cholesterol, which assists with a healthy cholesterol
level, OcuGuard Plus with Lutein, which is formulated for nutritional support
for the eyes, Coenzyme Q10, which is designed for cardiovascular health,
MaxiLIFE Glucosamine and Chondroitin Sulfate Formula, which nutritionally
supports healthy bone and joint function, and the MaxiLIFE Protector Series, a
premium supplement line for 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 number of nutritional benefits, including favorable
effects on cardiovascular health.
In 1998, the Twinlab division introduced the first line of herbs to be
sold under the Twinlab trademark. Twinlab TruHerbs are a full line of
approximately 45 products of which approximately seven are manufactured
utilizing a "Time Release" technology for a sustained herbal activity level.
In 1998, the Twinlab division also introduced a line of six supplements to
the mass market channel under the Ironman Triathlon trademark which is licensed
to the Company. The Company believes this supplement line compliments the
nutritionally enhanced food bar line marketed by the Twinlab division under the
Ironman Triathlon mark
Herbal Supplements and Teas. 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 medications. The Company manufactures
and markets approximately 575 herbal and botanical supplements which are
produced at the Company's modern FDA registered Utah Facility and sold primarily
under the Nature's Herbs and TruHerbs brand names. Twinlab's herbal 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 health care product
formulations, such as Allerin and Coldrin. The Company supplies herbal
supplements to Wal-Mart for its Spring Valley private label line. Twinlab
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 brand products are packaged
using the innovative FRESH CARE 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.
Through its Alvita product line, the Company offers approximately 144 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 and natural 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 at the Company's Utah facility and 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. Alvita markets its products with
an environmentally conscious theme by packaging bulk tea and tea bags in paper
and recyclable foil pouches and by not utilizing shrink wrap for either its
outer boxes or tea bags. In the fall of 1998, the Company launched a line of
teas under the trademark Herbal Orchard. Initially, six medicinal teas made with
real fruit and decaffeinated green tea were introduced with names such as Lazy
Lemontime and Blackberry Moon.
Direct Sales Products. Through Changes International, a network marketing
company that was acquired in November 1997, the Company develops, markets and
sells vitamins, herbs and nutritional supplements under the Changes brand name.
Changes International operates through a large sales force of independent
distributors located throughout the United States, Canada and the United
Kingdom. Changes International's products include Thermolift, a thermogenic diet
product, Changes Relief, an advanced supplement that nutritionally supports
healthy bone and joint functions, and Perfor-Max, an antioxidant formula. All of
Changes International's products are specially formulated and packaged and are
manufactured by an independent contractor pursuant to the
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Company's specifications solely for the network marketing sales force and are
not intended for sale to retail outlets at this time. During 1999, the Company
intends to solidify its distribution base through the introduction of new and
innovative products.
Bronson was acquired in April 1998. The Bronson catalog is a leading
source for the direct sale of high quality nutritional supplement products.
Since its acquisition in April, the Bronson catalog and mailing lists have been
significantly updated, and a number of new products have been added to the
catalog, such as 7-Keto DHEA and Bronson Tomato Power (an antioxidant product
containing lycopene). Bronson also recently introduced, via a specialty mailing,
ten innovative products under the Bronson Pro-Complex Formula brand name.
PR*Nutrition. In August of 1998, the Company acquired PR*Nutrition, a
distributor of nutritionally enhanced food bars and related drink powders. The
bars sold by the PR*Nutrition division are generally based upon a dietary ratio
of forty percent carbohydrates, thirty percent protein and thirty percent fat.
PR*Nutrition's products are manufactured by a third party pursuant to the
Company's specifications. The formulations necessary to make such products are
owned by the Company. The Ironman Triathlon bar is sold through retail channels.
The PR*Bar and PR*Powder are sold by PR*Nutrition through direct response sales.
Publications. Through ARP, the Company publishes Muscular Development, a
high-quality 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, sports, fitness and diet. This publication serves as a
vehicle to increase public awareness of the Company's products and as an outlet
for a portion of the Company's advertising program. Muscular Development
currently has a monthly paid circulation of approximately 100,000 readers. The
Company also publishes a monthly newsletter and select books concerning
nutritional supplements and related subjects.
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
numerous health and nutrition periodicals, including the New England Journal of
Medicine and the Journal of the American Medical Association, in order to
generate ideas for new product formulations. Management believes that the
Company's introduction of new products has increased market share for both the
Company and its retail customers, and the Company intends to continue developing
new products and programs in the future. The Company was the first major
nutritional supplement manufacturer to introduce such industry-wide innovations
as: an all-capsule vitamin and mineral line that is well tolerated by
allergy-prone individuals; a complete line of amino acids and fish and marine
oils; the most advanced and complete array of antioxidants, including beta
carotene, lutein, lycopene, L-glutathione, N-acetyl cysteine (NAC), lipoic acid
and an entirely new class of antioxidants, including polyphenols, flavonoids and
isoflavones; concentrated Coenzyme Q10; chondroitin sulfate; thermogenic
products; standardized herbal extracts guaranteeing potency (Certified Potency);
the FRESH CARE packaging system, designed to preserve potency and freshness; a
full line of Ayurvedic Indian herbal products; and a complete line of herb teas
in single use bag and bulk form. From 1991 through 1998, the Company introduced
over 700 products, with over 140 new products introduced in 1998, including
Twinlab TruHerbs. In 1999, the Company expects to introduce many new products in
the health and natural food and mass market channels, 18 of which have already
been introduced. Representative products introduced in 1999 include Cell Boost
with IP6 and Diet Fuel/Chitosan Formula. The Company more than doubled the
number of products offered through Changes International's distribution network
during 1998. Bronson introduced its Pro-Complex Formula line in a special 1998
mailing and PR*Nutrition introduced several new products, including its Kona
Krunch and Cookies-n-Cream Ironman Triathlon bars. The Company's research and
development expenses were $1.7 million in 1998, compared to $1.1 million in
1997.
Sales and Distribution
The Company believes that its TWINLAB products have a presence in over 95%
of the health and natural food stores in the United States, but that only
approximately 20% of such stores carry a comprehensive line of the Company's
products. The Company sells its products primarily through a network of
approximately 80 distributors, which service approximately 11,000 health and
natural food stores throughout the country and selected retail outlets. Sales to
domestic distributors represented approximately 54.1% of the Company's net sales
in 1998. The Company's distributor customers include GNC, Tree of Life, Super
Nutrition, United Natural Foods, Inc. ("United Naturals"), Nature's Best, Inc.
and other distributors that supply retailers of vitamins, herbs, food bars and
other nutritional supplements. Management believes that it sells its products to
every major domestic nutritional supplement distributor servicing health and
natural food stores and is generally the largest independent supplier of
nutritional supplements to such distributors.
Several of the Company's distributors, such as GNC, Tree of Life and
United Naturals, are national in scope, but most are
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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 12% and 14%,
respectively, of the Company's net sales in 1998. Net sales to Wal-Mart
accounted for approximately 12% of the Company's 1998 net sales. No other single
customer accounted for more than 10% of the Company's net sales in 1998. The
largest retail organization in the health and natural food store channel 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 customers among mass
market retailers include Wal-Mart, Albertson's, Inc., American Stores, Inc.,
Rite Aid Corporation, Walgreen, CVS, Kroger and Target. Management is continuing
its efforts to expand its presence in mass market retail outlets and in 1998
hired a President of Mass Market Sales to oversee the Company's efforts in this
distribution channel, as well as additional management and staff to focus on
this market.
Changes International currently markets and distributes over 20 products
through a network of over 60,000 independent distributors in the United States,
Canada and the United Kingdom. The distributor network markets Changes
International's products directly to consumers.
Approximately 6.0%, or $19.9 million, of the Company's net sales in 1998
were derived from international sales originating from overseas distributor
organizations. The Company presently has distribution agreements covering many
western European countries including Great Britain, France, Belgium, Italy, the
Netherlands and the Scandinavian countries; eastern European countries including
Russia; Latin American countries including Mexico, Chile, Brazil and Argentina;
Middle Eastern countries including Israel and Saudi Arabia; and several other
countries in the Far East, including China and Singapore, and the Caribbean. In
1998, the Company initiated new programs to qualify distributors in Japan and
Australia and established a representative office in the United Kingdom.
Marketing
The Company's marketing strategy, which centers around an extensive
advertising and promotion program, has been a critical component of the
Company's growth, strong brand name recognition and leading position within the
nutritional supplement industry.
The Company's advertising expenditures were approximately $20.7 million in
1998, $15.9 million in 1997 and $12.4 million in 1996. The Company has
significantly increased its budget for marketing and advertising expenditures in
fiscal 1999, compared to fiscal 1998. 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.
The Company supports its key product categories through its sponsorship of
television and radio programming on network and cable stations such as ABC, CBS,
Fox, VH-1, USA and ESPN. During 1998, the Company sponsored the CBS television
Wellness Report, and its products were advertised on such popular programs as
Melrose Place, Millennium, America's Funniest Home Videos and coverage of Major
League Baseball and the National Basketball Association.
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.
Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as the Boston Marathon,
the San Diego Marathon, the New York Marathon, the Ironman Triathlon World
Championship in Hawaii, and bodybuilding shows, including Team Universe and
Fitness America. 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 has extended its marketing efforts to include various sites on
the World Wide Web, including http://www.twinlab.com, which provides an overview
of the Company in addition to a product catalog. The site also provides a list
of
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retailers carrying the Company's products and is linked to other Company sites,
including those of the Company's herbal supplement and teas division
(http://www.herbalvillage.com); the PR*Nutrition division
(http://www.prbar.com); the Bronson division
(http://www.bronson-nutritional.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 World Wide Web sites shall not be deemed to be a part of or
incorporated by reference into this Annual Report on Form 10-K.
Customer Sales Support
The Company's established customer relationships are based upon the
Company's long-standing commitment to a high level of customer service. The
Company's sales force currently consists of approximately 40 dedicated sales
professionals who work to gain better placement and additional shelf space for
TWINLAB, Nature's Herbs, Alvita and PR*Nutrition products and to stay abreast of
customer needs. These sales representatives are assigned to specific territories
covering the entire continental United States, Hawaii 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, Alvita and PR*Nutrition products. An additional sales
and marketing staff supports Nature's Herbs products and the servicing of
customer needs. During 1998, the Company expanded its administrative and sales
infrastructure to service sales in the mass market channel, particularly its
sales of Twinlab, TruHerbs and Ironman Triathlon supplements. 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 maintains in-house customer service and customer sales support
departments to respond to inquiries concerning product applications, background
data, ingredient compositions and the efficacy of products. The customer service
departments of each division are staffed by full time nutrition experts and
other specially trained employees.
Changes International provides its independent distributors with a broad
range of informational materials, including product brochures, sales tools,
business and information forms, audio materials and initial distributor startup
kits. Changes International maintains a 24-hour toll-free phone line for
receiving distributors' orders and a separate customer service line to answer
product questions.
Manufacturing and Product Quality
Most of the Company's TWINLAB products are manufactured at the Company's
72,000 square foot manufacturing facility located in Ronkonkoma, New York (the
"Ronkonkoma Facility"). Most of the Company's TWINLAB products are packaged at
and distributed from the Company's 106,515 square foot warehousing and packaging
facility located in Bohemia, New York (the "Bohemia Facility"). The Bohemia
Facility was leased by the Company commencing in 1998. Herbal supplements and
phytonutrients, including the TruHerbs line, are manufactured at the Company's
FDA registered Utah Facility and at the Ronkonkoma Facility. The Utah Facility
is currently undergoing construction to expand from 57,000 square feet in 1997
to approximately 160,000 square feet during the first half of 1999, of which
approximately 140,000 square feet was completed by the end of 1998. Herb teas
are currently packaged at the Utah Facility and by an independent contractor and
are warehoused at and shipped from the Utah Facility. The products of Changes
International and PR*Nutrition are currently manufactured and packaged by
independent contractors pursuant to the Company's specifications and warehoused
in Florida, and California, respectively. In connection with the Bronson
acquisition, the Company acquired two adjacent, approximately 15,000 square foot
manufacturing and warehouse facilities in Tempe, Arizona (collectively the
"Tempe Facility") that manufacture and store the Bronson brand products and
manufacture certain other products for third parties. The Company's 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 March
1998, the Company commenced construction of the addition to the Utah Facility
which will provide additional capacity for the production, warehouse and
distribution operations, as well as additional office space for the herbal
supplement and teas division. The cost of the project, including land,
construction and equipment, will total approximately $13.3 million.
Approximately $9.1 million of this amount was financed with working capital in
1998 of which approximately $8 million will be converted to a ten year mortgage.
Management believes that the Company's Ronkonkoma, Bohemia, Utah and Tempe
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
additional facilities. See Item 2 "Properties."
The Company's modern manufacturing operations feature the highest 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
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gallons of liquid preparations per day. The Company has twelve 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
Ronkonkoma, Bohemia, Utah and Tempe 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 Ronkonkoma Facility operates, when necessary, 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 1998.
The Company's quality standards are a significant factor in consumer
purchase decisions, and the Company believes it has established a competitive
advantage based on the premium 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 three 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 full-time quality
assurance professionals regularly conducts a wide variety of visual and
scientific tests on all manufactured products, and samples of raw materials and
finished products are generally retained for quality control purposes.
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 and natural food stores, mass market retailers
(drug store chains, supermarkets and other mass merchandisers), and direct sales
channels (including network marketing, catalog and internet distribution).
The Company's principal competitors in the health and natural food store
market include Nutraceutical International Corporation, Weider Nutrition
International, Inc., Nature's Way Products, Inc., Natrol, Inc. and Nature's Plus
Inc. Solgar Vitamin and Herb Company, one of the Company's competitors, was
acquired by American Home Products, Inc. during 1998. 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 and natural 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 premium products, premium brand names, commitment to
quality, ability to rapidly introduce innovative products, , 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 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. ("NBTY"),
certain of which are larger and have access to greater resources than the
Company. The Company believes it 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 premium quality products.
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Many of the Company's competitors in markets other than the health and
natural food store market, including the major pharmaceutical companies, have
substantially greater financial and other resources than the Company. During
1998, several major pharmaceutical companies, including American Home Products,
Warner-Lambert and Bayer, introduced proprietary lines of herbal supplements
into the mass market channel.
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, including Avon, NuSkin, Rexall Showcase International and others,
whose product lines may or may not compete with the products of Changes
International.
In addition to the aforementioned retail competitors, the Bronson catalog
competes with many other nutritional supplement catalogs, including those
distributed by Amrion, NBTY and individual retail stores and chains. Bronson
also competes with the many internet sites that are devoted to the sale of
nutritional supplements. With respect to both the PR*Bar and the Ironman
Triathlon Bar, PR*Nutrition competes against other manufacturers and
distributors of nutritionally enhanced food bar products, including Powerbar,
Clif Bar and MetRx. With respect to bars that are formulated based on a
nutritional concept of forty percent carbohydrates, thirty percent protein and
thirty percent fat, the primary competitor is Balance Bar, marketed by Balance
Bar, Inc.
Regulatory Matters
Government Regulation
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency ("EPA"). These activities
are also regulated by various agencies of the states, localities and foreign
countries to which the Company's products are distributed and in which the
Company's products are sold. The FDA, in particular, regulates the formulation,
manufacture and labeling of vitamin and other nutritional supplements.
On October 25, 1994, the President signed into law the Dietary Supplement
Health and Education Act of 1994 ("DSHEA"). This law revised 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 statutory class of "dietary supplements." This 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, requires 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
required the Company to revise, by the end of March 1999, most of its product
labels. The Company believes it is in material compliance with these
regulations.
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.
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These distributors are independent contractors over whom the Company has limited
control.
As a result of the Company's efforts to comply with applicable statutes
and regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
The Company's Utah Facility is registered with the FDA as a manufacturer
of OTC drugs and is subject to periodic inspection by the FDA.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company. See "Legal Proceedings."
Ma Huang
Approximately 15 of the Company's products include an herb known as "Ma
Huang," which contains naturally-occurring ephedrine. Certain of such products
also contain caffeine or other central nervous system stimulants. Such products
accounted for approximately 19% of the Company's net sales in 1998. 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.
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 Item 3 "Legal Proceedings."
Employees
At December 31, 1998, the Company employed 974 persons, of which 248 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 approximately 80 persons
from an independent personnel agency. None of the Company's employees are
covered by a collective bargaining agreement, and management considers relations
with its employees to be good.
Trademarks and Patents
The Company owns trademarks registered with the United States Patent and
Trademark Office and/or similar regulatory authorities in many other countries
for its TWINLAB, Nature's Herbs, Alvita, and Fuel family of trademarks, and has
rights to use other marks material to its business. In addition, the Company has
obtained over two hundred trademarks for various of its products and has
trademark registrations with the United States Patent and Trademark Office for
the TWINLAB, Nature's Herbs, PR, Alvita and Changes brands. The Ironman
Triathlon trademark is licensed to the Company. 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. The
16
<PAGE> 17
Company currently has one patent application pending
FACTORS AFFECTING FUTURE PERFORMANCE
Uncertainty Related to Acquisitions
The Company may pursue acquisition opportunities that complement or extend
its existing products 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 that any acquisition will 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 operations. In
addition, such acquisitions could result in substantial equity dilution to
existing stockholders.
FTC Inquiry
The Company received an inquiry from the FTC with respect to the Company's
substantiation for certain advertising claims made for its product "Herbal Phen
Fuel". After the Company submitted scientific substantiation to the FTC, the FTC
forwarded a proposed consent order (the "Consent Order") to the Company. The
proposed Consent Order provides for, among other things, injunctive relief
prohibiting the Company from making weight-loss claims for its products without
adequate scientific substantiation. The proposed Consent Order is the subject of
negotiation between the FTC and the Company. The Company is unable to predict
whether it will be able to reach a negotiated settlement of this matter.
Restrictions Imposed by Terms of the Company's Indebtedness
The Company's borrowing arrangements 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.
Competition
The business of developing, manufacturing and selling vitamins, herbs,
sports nutrition products, nutritional supplements and other nutraceuticals is
highly competitive in all channels of distribution. There are numerous companies
in the vitamin and nutritional supplement industry selling products to mass
merchandisers, drug store chains, independent drug stores, supermarkets, health
and natural food stores, as well as through catalogs, the internet and network
marketing. Certain of the Company's competitors are substantially larger and
have greater financial resources than the Company. See "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. 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 conditions.
17
<PAGE> 18
Furthermore, the Company believes that the recent growth experienced by
the nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain vitamins and other nutritional products. Such
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and there
can be no assurance of future favorable scientific results and media attention
or of the absence of unfavorable or inconsistent findings.
Dependence on Distributors and Customers
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, GNC and Wal-Mart. Tree of Life, GNC
and Wal-Mart accounted for approximately 12%, 14% and 12% respectively, of the
Company's net sales in 1998. The loss of Tree of Life or GNC as a distributor or
Wal-Mart as a customer, or the loss of a significant number of other
distributors, or a significant reduction in purchase volume by Tree of Life,
GNC, Wal-Mart or such other distributors or customers, for any reason, would
have a material adverse effect on the Company's results of operations and
financial condition.
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.
Item 2. PROPERTIES
The Company owns a vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. The 72,000 square foot
Ronkonkoma Facility is in the process of being redesigned to permit additional
and updated manufacturing capacity. The estimated cost of this project is $5
million, which is expected to be financed with working capital. In April 1998,
the Company moved substantially all of its executive and administrative offices
to approximately 21,000 square feet of leased space in a modern office building
in Hauppauge, New York. The Company also leases 26,300 square feet of warehouse
space in Ronkonkoma, 106,515 square feet of packaging, warehousing and shipping
space in Bohemia, New York and 5,000 square feet of office space in Ronkonkoma.
In addition, the Company owns the modern FDA-registered Utah Facility. The Utah
Facility, which was initially constructed as a 57,000 square foot facility in
1993, houses office, manufacturing and warehousing facilities for the operations
of the herbal supplements and teas division. The Company is in the process of
expanding the Utah Facility to approximately 160,000 square feet, of which
approximately 140,000 square feet were completed by the end of 1998. The Company
also leases 21,500 square feet of warehouse and office space in Destin, Florida
for Changes International. The Company owns approximately 30,000 square feet of
total manufacturing and warehouse space in two separate 15,000 square foot
adjacent properties in Tempe, Arizona and leases an additional 2,200 square feet
of warehouse space in Tempe. The Company leases approximately 14,500 square feet
of office and warehouse space for its PR*Nutrition operations in San Diego,
California.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. During 1998, the Company
substantially completed construction of an approximately 85,000 square foot
addition to its Utah Facility that provides additional capacity for production,
warehouse and distribution operations, as well as additional office space for
the herbal supplement and teas division. The cost of the Utah Facility expansion
project, including land, construction and equipment, is expected to total
approximately $13.3 million, of which $9.1 million was expended in 1998 and
financed out of working capital. Approximately $8 million of this cost will be
converted to a ten year mortgage. Management believes that the Company's
Ronkonkoma, Utah and Tempe Facilities, coupled with its leased space in Bohemia,
Hauppauge, Destin and San Diego will be sufficient to enable the Company to meet
manufacturing and 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.
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<PAGE> 19
Item 3. LEGAL PROCEEDINGS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. The Company may be subjected to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. While such claims to date have
not been material to the Company and the Company maintains product liability
insurance, there can be no assurance that product liability claims and the
resulting adverse publicity will not have a material adverse effect on the
Company. The Company carries insurance in the types and amounts that management
considers reasonably adequate to cover the risks associated with its business.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or if available will be adequate to cover liabilities.
The Company has been named as a defendant in five currently pending
lawsuits alleging that its Ma Huang containing products caused injuries and/or
damages, as well as two proceedings seeking class action certification for
alleged deceptive advertising claims related to its Ma Huang products. 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 and State of
California have settled these suits with the manufacturers, including the
Company. 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.
Securities Law Litigation
In December 1998, two shareholder class action lawsuits were filed in the
United States District Court for the Eastern District of New York against the
Company and certain of its officers and directors. The plaintiffs allege that
the Company and the other defendants violated the securities laws by making
material misstatements and failing to state material facts about the Company's
business and financial condition, among other things, in securities act filings
and public statements. Plaintiffs have moved to consolidate these lawsuits and
all subsequent lawsuits relating to the same issues. On February 25, 1999,
proposed plaintiffs' co-lead counsel announced that it would amend the
complaints to enlarge the class of plaintiffs suing the Company to include all
buyers of the Company's stock from March 17, 1998 through February 24, 1999.
On February 11, 1999, William Logue, Sheri Sears and Barry Nussbaum, the
former owners of PR*Nutrition, commenced a lawsuit in the United States District
Court for the Southern District of New York against the Company, Twin and
certain of its officers and directors. The plaintiffs' claims include alleged
violations of the securities laws, breach of contract, fraud and negligent
misrepresentation in connection with the Company's purchase of 100% of the stock
of PR*Nutrition. More specifically, the plaintiffs allege that the Company and
the other defendants made material misstatements or failed to disclose material
facts about the Company's business and financial condition, among other things,
in securities act filings and other statements.
In the first quarter of 1999, a series of separate shareholder class
action lawsuits were filed in the United States District Court for the Eastern
District of New York against the Company, and certain of its officers and
directors. These lawsuits have not yet been served on the Company. The
plaintiffs generally allege that the Company and the other defendants violated
the securities laws by making material misstatements and failing to state
material facts about the Company's business and financial condition, among other
things, in securities act filings and public statements. The class of plaintiffs
suing the Company in these actions is generally all buyers of the Company's
stock from April 28, 1998 through February 24, 1999.
The Company intends to vigorously defend itself against these securities
law litigations. It is premature, however, to determine the effect, if any,
such actions may have on the Company's consolidated financial position, results
of operations or liquidity.
Other Legal Actions
The Company is presently engaged in various other legal actions that 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.
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<PAGE> 20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1998, no matters were submitted
to a vote of security holders of the Company.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq National Market
since the Company's initial public offering (the "IPO") of its common stock, par
value $1.00 per share (the "Common Stock"), in November 1996, in which 8,500,000
shares of Common Stock were issued by the Company. Prior to the IPO, there was
no public market for the Common Stock. On March 25, 1999, the last reported
sales price of the Company's Common Stock as reported on the Nasdaq National
Market was $8.563. As of March 25, 1999, there were 194 holders of record of the
Company's Common Stock. The high and low sale prices for the Common Stock as
reported by the Nasdaq National Market for 1997 and 1998 are summarized below.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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
$33.875 $22.58
Second Quarter.............................. 45.750 35.250
Third Quarter............................... 47.875 24.375
Fourth Quarter.............................. 26.438 11.500
</TABLE>
From 1993 until May 7, 1996, the Company consisted solely of "S"
corporations. While maintaining such status, the Company periodically declared
and paid dividends to its shareholders, including amounts sufficient for its
shareholders to pay their income taxes on the earnings of the Company that were
treated as having been earned by the Company's shareholders. The Company
terminated its "S" corporation status on May 7, 1996.
The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Twinlab conducts its business through
its direct and indirect subsidiaries and has no operations of its own. The
principal assets of Twinlab are the capital stock of its direct and indirect
subsidiaries, Twin, ARP, Changes International, Bronson, Health Factors and
PR*Nutrition. Accordingly, Twinlab has no independent means of generating
revenues. As a holding company, Twinlab's internal sources of funds to meet its
cash needs, including payment of expenses, are dividends and other permitted
payments from its direct and indirect subsidiaries. Financing arrangements under
which Twin is the borrower restrict the payment of dividends and the making of
loans, advances or other distributions to Twinlab, except in certain limited
circumstances. The payment of cash dividends in the future will depend upon,
among other things, the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Company's Board of
Directors.
On May 7, 1996, Twin sold $100,000,000 aggregate principal amount of its
10 1/4% Senior Subordinated Notes due 2006 (the "Old Notes") to Donaldson,
Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(collectively, the "Initial Notes Purchasers") for $100,000,000 in cash (less
the Initial Notes Purchasers' discount of $3,000,000) (the "Note Offering").
Such securities were sold in a transaction that was exempt from registration
under Section 4(2) of the Securities Act. Subsequently, pursuant to a
Registration Statement on Form S-4, on October 28, 1996, the Company consummated
a fully-subscribed registered exchange offer under the Securities Act for the
Old Notes and issued in exchange therefor $100,000,000 aggregate principal
amount of its registered 10 1/4% Senior Subordinated Notes due 2006
(collectively with the Old Notes, the "Notes").
On May 7, 1996, Twinlab sold (i) an aggregate of 30,000 shares of its 14%
Non-Voting Senior Cumulative Preferred Stock (the "Senior Preferred Stock") to
five investors (the "Senior Preferred Stock Purchasers") for $30,000,000 in
cash, (ii) 37,000 shares of its 11 1/4% Non-Voting Junior Cumulative Preferred
Stock (the "Junior Preferred Stock") to Green Equity Investors II, L.P. ("GEI")
for $37,000,000 in cash, (iii) 1,295,000 shares of Common Stock to the Senior
Preferred Stock Purchasers for an aggregate of
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<PAGE> 21
$700,000 in cash, (iv) 8,880,000 shares of Common Stock to GEI for an aggregate
of $4,800,000 in cash, and (v) an aggregate of 8,325,000 shares of Common Stock
valued at $4,500,000 to certain members of its senior management in exchange for
certain of their shares of common stock of Natur-Pharma Inc. Such securities
were sold in transactions that were exempt from registration under Section 4(2)
of the Securities Act. In connection with the consummation of the IPO, in
November 1996, the Company redeemed all of the outstanding shares of Senior
Preferred Stock and Junior Preferred Stock, which together had an aggregate
liquidation preference of $67.0 million, plus accrued and unpaid dividends
thereon.
On November 12, 1997, Twinlab issued an aggregate of 312,500 shares of
Common Stock to the shareholders of Changes International as the stock portion
of the purchase price for all of the outstanding common stock of Changes
International; the cash portion of such purchase price was $7.9 million,
including acquisition costs. Such Common Stock was issued in a transaction that
was exempt from registration under Section 4(2) of the Securities Act.
On August 20, 1998, Twinlab issued an aggregate of 1,150,000 shares of
Common Stock to the shareholders of PR*Nutrition as the purchase price for all
of the outstanding common stock of PR*Nutrition. Such Common Stock was issued in
a transaction that was exempt from registration under Section 4(2) of the
Securities Act.
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<PAGE> 22
Item 6. SELECTED FINANCIAL DATA
The selected historical financial data as of December 31, 1998, 1997, 1996, 1995
and 1994 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, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 is included elsewhere herein. The selected financial data
below also presents pro forma financial data relating to (i) the Company's
conversion of tax status from an "S" corporation to a "C" corporation as a
result of the Transactions (as hereinafter defined), (ii) the Transactions and
the IPO and (iii) PR*Nutrition's conversion of tax status from an "S"
corporation to a "C" corporation as a result of its acquisition by the Company.
The selected historical financial data should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company and the notes thereto and the other financial information included in
Item 14 to this Annual Report.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997(1) 1996(1)(a)(e) 1995(1) 1994(1)
---- ------- ------------- ------- -------
(in thousands, except per share data and percentages)
<S> <C> <C> <C> <C> <C>
Operating Data:
Net sales .............................................. $ 333,375 $ 229,614 $ 182,010 $ 154,805 $ 120,095
Gross profit ........................................... 169,942 104,188 79,792 63,888 49,436
Operating expenses ..................................... 106,755 52,072 37,108 30,607 24,757
Merger expenses ........................................ 1,462 -- -- -- --
Income from operations ................................. 61,725 52,116 42,684 33,281 24,679
Interest expense ....................................... 8,119 12,336 10,012 875 761
Nonrecurring and transaction expenses .................. -- -- 15,700(b) 656 --
Net income ............................................. 29,691 25,876 14,970(b) 31,857 22,302
========= ========= ========= ========= =========
Basic and diluted net income per share(c) .............. $ 0.94 $ 0.92 $0..36(b) $ 1.13 $ 0.79
========= ========= ========= ========= =========
Basic weighted average shares outstanding(d) ........... 31,492 28,192 28,150 28,150 28,150
========= ========= ========= ========= =========
Diluted weighted average shares outstanding (d) ........ 31,607 28,228 28,150 28,150 28,150
========= ========= ========= ========= =========
Pro forma relating to change in tax status:(e)
Historical income before provision for income
Taxes and extraordinary item ........................... $ 54,989 $ 40,022 $ 17,608 $ 32,127 $ 22,547
Pro forma provision for income taxes ................... 21,524 15,429 6,788 12,742 9,337
--------- --------- --------- --------- ---------
Pro forma income before extraordinary item ............. 33,465 24,593 10,820 19,385 12,310
Extraordinary item ..................................... (4,941)(f) -- (1,792)(g) -- --
--------- --------- --------- --------- ---------
Pro forma net income ................................... $ 28,524 $ 24,593 $ 9,028 $ 19,385 $ 12,310
========= ========= ========= ========= =========
Basic income before extraordinary item per share (c) ... $ 1.06 $ 0.87 $ 0.21 $ 0.69
========= ========= ========= =========
Diluted income before extraordinary item per share (c) . $ 1.06 $ 0.87 $ 0.21 $ 0.69
========= ========= ========= =========
Basic net income per share (c) ......................... $ 0.91 $ 0.87 $ 0.15 $ 0.69
========= ========= ========= =========
Diluted net income per share (c) ....................... $ 0.90 $ 0.87 $ 0.15 $ 0.69
========= ========= ========= =========
Pro forma for the Transactions and the IPO:(h)
Net income ............................................. $ 18,631 $ 12,410
--------- ---------
Basic and diluted net income per share ................. $ 0.66 $ 0.44
========= =========
Other Data:
Income from operations margin (i) ...................... 18.5% 22.7% 23.5% 21.5% 20.5%
Capital expenditures ................................... $ 13,407 $ 4,022 $ 2,480 $ 2,740 $ 1,839
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: 1998 1997 1996(a) 1995 1994
---- ---- ------- ---- ----
<S> <C> <C> <C> <C> <C>
Net working capital (excluding cash and cash
equivalents, marketable securities and current debt) $ 96,443 $ 57,604 $ 43,871 $ 39,205 $ 34,878
Property, plant and equipment, net 29,551 14,263 14,424 13,153 12,109
Total assets 290,018 173,010 142,978 75,857 64,882
Total debt (including current debt) 43,531 114,379 120,728 8,792 9,291
Shareholders' equity 205,485 30,881 2,367 55,673 48,616
</TABLE>
(1) Amounts restated to include the acquisition of PR Nutrition which was
accounted for as a pooling of interests.
(a) The Blechman Brothers, their parents, David and Jean Blechman, Stephen L.
Welling, the President of the Nature's Herbs division of the Company
(collectively, the "Stockholders"), GEI and certain other parties entered
into a Stock Purchase and Sale Agreement, dated as of March 5, 1996, as
amended (the "Acquisition Agreement"), pursuant to which, among other
things, on May 7, 1996 (i) GEI acquired 48% of the Common Stock of Twinlab
for aggregate consideration of $4.8 million and shares of Junior Preferred
Stock for aggregate consideration of $37.0 million, (ii) certain other
investors acquired 7% of the Common Stock of Twinlab for aggregate
consideration of $0.7 million and shares of Senior Preferred Stock
(together with
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<PAGE> 23
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 and, (iv) Twinlab purchased all of the
remaining shares of common stock of Twin from the Stockholders for cash,
resulting in Twin becoming a wholly owned subsidiary of Twinlab. The total
cash consideration that the Stockholders received was approximately $212.5
million, the majority of which was paid to David and Jean Blechman. The
transactions described above are hereinafter referred to as the
"Acquisition." Concurrently with the consummation of the Acquisition, the
Company entered into a credit facility (the "Original Credit Facility")
(which provided for a term loan facility in the amount of $53.0 million
and a revolving credit facility in the amount of $15.0 million) and issued
$100.0 million principal amount of its Old Notes in the Note Offering
(collectively with the Acquisition and the Original Credit Facility, the
"Transactions"). The net cash proceeds of the Note Offering were used,
together with borrowings under the Original Credit Facility, the proceeds
from the issuance of the Common Stock and Preferred Stock of Twinlab and
available cash of the Company, to finance the Acquisition, to refinance
approximately $7.0 million aggregate principal amount of debt of the
Company and to pay related fees and expenses. The net proceeds of the IPO
of approximately $93.7 million, together with available cash resources of
the Company and approximately $20.0 million of borrowings under the
Amended and Restated Credit and Guarantee Agreement, dated November 15,
1996 (the "Revolving Credit Facility"), were used to repay all of the
Company's outstanding indebtedness under the Original Credit Facility and
to redeem all of the outstanding shares of Preferred Stock. See Note 1 to
the Consolidated Financial Statements of the Company included under Item
14 of this Annual Report.
(b) Reflects $15.3 million of nonrecurring non-competition agreement expense
and $0.4 million of Transaction expenses.
(c) Basic and diluted income per share has been computed by dividing net
income (and pro forma income before extraordinary item and pro forma net
income for 1995 and 1996), after reduction for Preferred Stock dividends,
by the applicable weighted average shares outstanding.
(d) Diluted weighted average shares outstanding for 1994 through 1996
represents the number of equivalent shares outstanding after giving
retroactive effect to Twinlab's 18.5 for 1 stock split (effected in the
form of a stock dividend) and assumes that the 10,175,000 shares of Common
Stock issued in connection with the Acquisition and the 8,500,000 shares
of Common Stock issued in connection with the Company's IPO were
outstanding. See Notes to the Consolidated Financial Statements of the
Company included under Item 14 of this Annual Report.
(e) Prior to May 1996, the Company consisted of "S" corporations and,
accordingly, federal and state taxes were generally paid at the
shareholder level only. Upon consummation of the Transactions, the Company
eliminated its "S" corporation status and, accordingly, became subject to
federal and state income taxes. In addition, PR*Nutrition was an "S"
corporation prior to its acquisition. Upon consummation of its
acquisition, PR*Nutrition terminated its "S" corporation status.
(f) Represents the write-off of previously deferred finance costs incurred in
connection with the Note offering.
(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 (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.
(i) Income from operations margin equals income from operations as a
percentage of net sales.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report.
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<PAGE> 24
Results of Operations
The Company operates primarily in one business segment, the manufacture
and marketing of brand name nutritional supplements. Within this segment, the
Company operates through six primary business divisions: the TWINLAB division,
the herbal supplements and teas division, the Changes International division,
the Bronson division and the PR*Nutrition division. Products sold by the TWINLAB
division include vitamins, minerals, amino acids, herbs, sports nutrition
products and special formulas primarily under the TWINLAB brand name. The herbal
supplements and teas division produces and markets a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs and HealthCare
Naturals brands and a full line of herb teas marketed under the Alvita brand.
The Company's network marketing activities are conducted through Changes
International, which was acquired by the Company in November 1997. The Bronson
division, acquired effective April 30, 1998, markets vitamins, herbs,
nutritional supplements and health and beauty aids through its Bronson catalog,
and produces and markets a line of vitamins and supplements for sale exclusively
to United States military commissaries and also manufactures, through Health
Factors, private label vitamins and supplements for a number of other companies
on a contract marketing basis. The PR*Nutrition division markets nutritionally
enhanced food bars marketed under the PR*Bar and Ironman Triathlon trademarks.
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,
-----------------------
1996(1) 1997(1) 1998
------- ------- ----
Net Sales: (dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
TWINLAB Division .......................... $136.2 74.8% $156.0 67.9% $172.7 51.8%
Herbal Supplements &
Herbal Teas Division ...................... 28.7 15.7 45.2 19.7 65.8 19.7
Changes International Division ............ NA NA 7.0 3.1 51.3 15.4
Bronson Division .......................... NA NA NA NA 18.7 5.6
PR*Nutrition Division ..................... 11.9 6.6 16.4 7.1 20.9 6.3
Publishing Division ....................... 5.2 2.9 5.0 2.2 4.0 1.2
====== ====== ====== ====== ====== ======
Net Sales ................................. 182.0 100.0 229.6 100.0 333.4 100.0
Gross Profit .............................. 79.8 43.8 104.2 45.4 169.9 51.0
Operating Expenses ........................ 37.1 20.4 52.1 22.7 106.8 32.0
Merger Expenses ........................... NA NA NA NA 1.4 .4
------ ------ ------ ----- ------ ------
Income From Operations .................... $42.7 23.5% $52.1 22.7% $61.7 18.5%
</TABLE>
(1) Amounts restated to include the acquisition of PR*Nutrition which was
accounted for as a pooling-of-interests.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales in 1998 were $333.4 million compared to $229.6
million in 1997, an increase of $103.8 million or 45.2%. Sales at the TWINLAB
division increased from $156.0 million in 1997 to $172.7 million in 1998, an
increase of $16.7 million or 10.7%. This increase was primarily the result of
increased demand in each of the vitamin, mineral and nutritional supplements,
sports nutrition and special formula product lines and reflected, in part,
increased promotion and advertising and in part the successful introduction of
new products, as well as strong consumer interest in existing products. Sales of
herbal supplements and teas increased to $65.8 million in 1998 from $45.2 in
1997, an increase of $20.6 million or 45.6% compared to 1997. The herbal
supplements and teas category benefited from strong consumer demand for St.
John's Wort, Gingko, Kava Kava and Saw Palmetto through a mass market private
label sales program and in the health and natural food store channel.. Changes
International, which operates a network marketing sales force was acquired in
November 1997 and contributed $7.0 million to 1997 sales for the two month
period ended December 31, 1997, and $51.3 million to 1998 net sales.
The Bronson division, which was acquired effective April 30, 1998,
contributed $18.7 million to 1998 net sales. PR*Nutrition sales in 1998 were
$20.9 million, an increase of $4.5 million or 27.4% from the $16.4 million in
sales in 1997. The increase was
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<PAGE> 25
primarily due to the strong consumer demand for nutritionally enhanced food bar
products as well as increased penetration of the health and natural food store
and mass market channels with the Ironman Triathlon food bar. Publishing sales
declined from $5.0 million in 1997 to $4.0 million in 1998.
Gross Profit. Gross profit for the year ended December 31, 1998 was $169.9
million, representing an increase of $65.7 million, or 63.1% as compared to
$104.2 million for the year ended December 31, 1997. Gross profit margin was
51.0% for the year ended December 31, 1998, as compared to 45.4% for the year
ended December 31, 1997. The overall increase in gross profit dollars was
primarily attributable to the Company's higher sales volume for the year ended
December 31, 1998 and to the increase in gross profit margin. The increase in
gross profit margin for the year ended December 31, 1998, as compared to the
year ended December 31, 1997, was primarily due to higher gross profit margins
of the Changes International division compared to the other divisions of the
Company.
Operating Expenses. Operating expenses for the year ended December 31,
1998 were $106.8 million, representing an increase of $54.7 million, or 105.0%,
compared to $52.1 million for the year ended December 31, 1997. As a percent of
net sales, operating expenses increased to 32% for the year ended December 31,
1998 from 22.7% for the year ended December 31, 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 resulting from the Company's increased level of
operations for the year ended December 31, 1998. These expenses were comprised
primarily of increased variable commission expense for the Changes International
division, an increase in the Company's advertising and marketing expenses and
increased general administrative expenses incurred to support the increased
level of business activity.
Merger Expenses. Merger expenses were $1.4 million for the year ended
December 31, 1998 and were incurred, as a result of the acquisition of
PR*Nutrition.
Income from Operations. Income from operations for the year ended December
31, 1998, was $61.7 million, representing an increase of $9.6 million, or 18.4%,
as compared to $52.1 million for the year ended December 31, 1997. Income from
operations margin decreased to 18.5% of net sales for the year ended December
31, 1998 from 22.7% of net sales for the year ended December 31, 1997. The
increase in income from operations as a percent of net sales was primarily due
to the Company's higher sales volume together with higher gross margins. The
decrease in income from operations margin was primarily due to higher operating
expenses as a percent of net sales.
Other Expense. Other expense for the year ended December 31, 1998 was $6.7
million, as compared to $12.1 million for the year ended December 31, 1997. The
net decrease of $5.4 million is primarily due to increased interest income of
$1.2 million and decreased interest expense of $4.2 million, both primarily as a
result of reduced debt levels and increased cash balances which resulted
primarily from the Company's second public offering in April 1998.
Income Taxes. PR*Nutrition was an "S" Corporation prior to it acquisition
on August 21, 1998. Accordingly, federal taxes were generally paid at the
shareholder level only. The PR*Nutrition provision for taxes for the year ended
December 31, 1997 and through August 21, 1998 included state taxes only. The
Consolidated Statements of Income include pro forma information which reflects
adjustments to historical net income as if PR*Nutrition had not elected "S"
Corporation status for income tax purposes.
Fiscal 1997 Compared to Fiscal 1996
Net Sales. Net sales for fiscal 1997 were $229.6 million, an increase of
$47.6 million, or 26.2%, as compared to net sales of $182.0 million for fiscal
1996. The 26.2% increase was attributable to increased sales in each of the
Company's product categories other than publishing. TWINLAB division sales were
$156.0 million, an increase of $19.8 million or 45.5% compared to the $136.2
million in sales in 1997. The increase was due to increased demand for its
sports nutrition and special formula products. The increase in demand was
primarily due to the expansion of established accounts, increased sales of
existing products, new product introductions and product specific advertising.
Sales of the herbal supplements and teas division were $45.2 million, an
increase of $16.5 million or 57.5% from the $28.7 million in sales in 1997. The
net sales increase in herbal supplements and herbal teas was primarily due to
the expansion of established accounts in domestic health and natural food
stores, improved business development, including a new private label
relationship in the mass market channel of distribution, increased sales of
existing products and new product introductions. Changes International
contributed net sales of $7.0 million after its acquisition in November 1997.
PR*Nutrition sales were $16.4 million, an increase of $4.5 million, or 37.8%,
compared to sales of $11.9 million in 1996. The increase was a result of
increased demand for nutritionally enhanced bar products.
Gross Profit. Gross profit for fiscal 1997 was $104.2 million, which
represented an increase of $24.4 million or 30.6%, as compared to $79.8 million
for fiscal 1996. Gross profit margin was 45.4% for 1997, as compared to 43.8%
for fiscal 1996. The
25
<PAGE> 26
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, primarily due to higher margin sports
nutrition, special formulas, and nutritionally enhanced bar 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 $52.1 million for fiscal 1997,
representing an increase of $15.0 million, or 40.4%, as compared to $37.1
million for fiscal 1996. As a percent of net sales, operating expenses increased
from 20.4% for fiscal 1996 to 22.7% 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 variable commission expense relating to Changes
International, and the hiring of additional administrative staff.
Income from Operations. Income from operations was $52.1 million for
fiscal 1997, representing an increase of $9.4 million or 22.1% as compared to
$42.7 million for fiscal 1996. Income from operations margin decreased to 22.7%
of net sales for fiscal 1997, as compared to 23.5% 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 Income (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 as compared to
1996.
Income Taxes. The Company consisted of "S" Corporations 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 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.
PR*Nutrition was an "S" Corporation prior to its acquisition on August 21, 1998
Accordingly, federal taxes were generally paid at the shareholder level only.
The PR*Nutrition provision for taxes for the years ended December 31, 1996, and
1997 and through August 21, 1998 included state taxes only. The consolidated
Statements of Income include pro forma information which reflects adjustments
to historical net income as if the company and PR*Nutrition had not elected "S"
Corporation status for income tax purpose.
Liquidity and Capital Resources
For fiscal 1998, cash provided by operating activities was $13.9 million,
as compared to $14.9 million for fiscal 1997 and $28.2 million for fiscal 1996.
The decrease in fiscal 1998 compared to fiscal 1997 was primarily due to a net
increase in operating assets, principally inventory, partially offset by higher
net income and by an increase in accounts payable and accrued liabilities. The
increase in inventory is due to higher sales volume and to a reduction in
inventory turnover. 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.
Cash provided from financing activities in 1998 was $68.1 million, which
came from the Company's public offering in April 1998. Approximately $74.9
million of the net proceeds of such offering were used to redeem senior
subordinated notes and repay debt, as discussed in the succeeding two
paragraphs. Cash used in financing activities was $9.6 million for fiscal 1997,
and represented repayment of certain outstanding indebtedness. Cash used in
financing activities for fiscal 1996 was $30.7 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.
In April 1998, the Company completed a public offering of 9.2 million
shares of its common stock priced at $36.50 per share. Of the total shares
offered, 4.2 million shares were sold by the Company. The net proceeds to the
Company from the offering, after expenses, were approximately $147.5 million. Of
the net proceeds to the Company, approximately $56.1 million was used to pay the
purchase price for the Bronson acquisition (discussed in Note 3 of the Notes to
the Consolidated Financial Statements), including related fees and expenses;
approximately $40.1 million was used to redeem $35.0 million of the Company's
senior subordinated notes at a redemption price of 109 1/2 percent, plus accrued
and unpaid interest; approximately $9.9 million was
26
<PAGE> 27
used to reduce outstanding borrowings under the Company's revolving credit
facility, including accrued and unpaid interest; and approximately $41.4 million
was available for working capital and other general corporate purposes.
In July 1998, the Company purchased $18.1 million aggregate principal
amount of senior subordinated notes in the open market at a price of 112 1/2
percent or an aggregate of $20.8 million, including accrued interest of $.4
million. In September 1998, the Company purchased an additional $3.6 million
aggregate principal amount of senior subordinated notes in the open market at a
price of 108 1/2 percent or an aggregate of $4.1 million, including accrued
interest of $.1 million. The Company may from time to time purchase additional
senior subordinated notes in the open market.
Capital expenditures were $13.4 million in 1998. Capital expenditures in
1998 included approximately $9.0 million for an 85,000 square foot expansion of
the Utah Facility expected to be completed in the first half of 1999. The
balance of the 1998 capital expenditures was used primarily for production
equipment and computer hardware and software. In addition, $4.2 million of the
increase in other assets in 1998 represented deposits made on fixed assets to be
completed in 1999. Capital expenditures in 1997 were $4.0 million ($3.1 million
of which was for equipment that was subsequently sold and leased back) and $2.5
million for fiscal 1996. Historical capital expenditures were primarily used to
purchase production equipment, expand capacity and improve manufacturing
efficiency. Capital expenditures are expected to be approximately $10.0 million
during fiscal 1999, of which approximately $3.0 million will be used to complete
the Company's $13.3 million Utah Facility expansion (approximately $8.0 million
of which will be financed by a ten year mortgage). The remainder of which will
be used primarily to purchase manufacturing equipment and computer hardware and
software and additional acreage adjacent to the Utah Facility ($1.3 million) The
Company estimates that its historical level of maintenance capital expenditures
has been approximately $1.0 million per fiscal year.
On November 12, 1997, the Company acquired Changes International for a
purchase price (including fees and expenses) of approximately $13.7 million,
consisting of $7.9 million in cash and 312,500 shares of Twinlab Common Stock.
The cash portion of the purchase price was financed through borrowings under the
Company's Revolving Credit Facility. Changes International markets and
distributes a line of nutritional supplements through a network of independent
distributors located primarily throughout the United States and Canada. The
acquisition was recorded using the purchase method of accounting.
On April 30, 1998 the Company acquired substantially all of the assets and
assumed certain liabilities of the Bronson Division of Jones Medical Industries,
Inc. The purchase price was approximately $56.1 million, including related fees
and expenses. Bronson manufactures, markets and distributes a line of over 400
vitamins, herbs and nutritional supplements and health and beauty aids, which
are sold under the Bronson brand name through catalogs and direct mailings to
customers, including healthcare and nutritional professionals. Bronson markets
the MD Pharmaceutical brand of vitamins, herbs and nutritional supplements to
United States military commissaries and also manufactures, through Health
Factors, private label vitamins and nutritional supplements on a contract
manufacturing basis. This acquisition was recorded using the purchase method of
accounting.
On August 21, 1998, the Company acquired PR*Nutrition for 1,150,000 shares
of Twinlab common Stock having a market value at the date of the merger of
approximately $39.7 million. The Company incurred approximately $1.4 million in
merger related expense in connection with this transaction which is included in
a separate item in operating expenses in the Company's Statement of Income.
PR*Nutrition markets and distributes nutritionally enhanced food bars and other
nutritional products that are marketed to active lifestyle consumers. The
transaction has been accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements have been retroactively restated to
include the accounts of PR*Nutrition for all periods presented.
Twinlab Corporation has no operations of its own and accordingly has no
independent means of generating revenue. As a holding company, Twinlab
Corporation'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. In addition, the
Revolving Credit Agreement requires the Company to be Year 2000 compliant by
September 30, 1999.
On February 25, 1999, the Company announced that its Board of Directors
had approved a share repurchase program authorizing the Company to buy up to 5
million shares of its Common Stock. The Company has obtained the required
waivers under its $50 million Revolving Credit Agreement to engage in purchases
and intends to use funds available under the agreement and internally generated
cash to purchase such shares. The Company will purchase Common Stock from time
to time in the open market and in individually negotiated transactions. The
amount and timing of any purchase will be dependent upon a number of factors,
including the price and availability of the Company's shares and general market
conditions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all
27
<PAGE> 28
required capital expenditures, purchase its shares under the share repurchase
program 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 existing $50 million
Revolving Credit Facility and a planned expansion of the facility currently
under discussion with its banks. As of December 31, 1998, $50.0 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 pursue acquisition
opportunities that complement or extend its existing products or product lines,
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 $35.0 million of which was available as
of December 31, 1998). 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.
Recent Developments (Trends)
The company believes that the growth rate in the nutritional supplement
industry has slowed significantly compared to the growth rate experienced in the
first six months of 1998. The Company believes the slow down in growth is in
part due to a decline in sales at the retail level of St. John's Wort and other
herbal products that were in greater demand in the first half of 1998 and to a
more generalized industry-wide slowing of growth across most product categories.
The Company believes that as a result, inventories at the retail and distributor
level have become excessive and therefore orders to manufacturers and suppliers
have been reduced. The Company's incoming orders showed a significant decline
from the third to the fourth quarters of 1998, which is expected to continue
into the first quarter of 1999. For these reasons, the Company announced on
February 24, 1999, that with respect to the first quarter of 1999, sales are
expected to somewhat trail the first quarter for 1998 and that net income will
be significantly below the first quarter of 1998. The Company indicated that the
industry and the Company had been impacted by a backlog of inventory that was
produced to sustain the significantly higher growth rates that had been
experienced in early 1998 as compared to current rates. In an effort to reduce
retail inventories, the Company has determined that a modest increase in sales
and marketing expense in the first quarter of 1999 compared to fourth quarter of
1998 levels is warranted, which will represent a significant increase over such
expenses in 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
During 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities and measure those instruments at fair value. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. SFAS No. 133 is not expected to have a material effect on the
Company's financial statements.
Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define a specific year. Absent corrective
actions, a computer program that has date sensitive software may recognize a
date using "00" as the year 1900 instead of the year 2000. This could result in
system failures or miscalculations causing disruptions to various activities and
operations.
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 has surveyed, and continues to communicate with,
customers, suppliers, financial institutions and other vendors with which it
does business to coordinate Year 2000 conversion efforts. Based on the results
of this ongoing information exchange, the Company believes it has identified any
existing risks to be addressed. At this time, the Company believes that any
risks are minimal and it believes that its systems are substantially Year 2000
compliant. Management has initiated a Company-wide program to prepare the
Company's internal computer systems for Year 2000 compliance by August 1, 1999.
The Company expects to incur internal staff costs as well as other expenses
necessary during the course of such compliance efforts and the Company expects
to both replace some systems and upgrade others. The total cost of this effort
is estimated to be
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<PAGE> 29
in the range of $150,000 - $250,000. The Company 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 internal Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of such third parties to
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
General
The following discussion and the estimated amounts generated from the
sensitivity analyses referred to below include forward-looking statements of
market risk which assume for analytical purposes that certain adverse market
conditions may occur. Actual future market conditions may differ materially from
such assumptions because the amounts noted below are the result of analyses used
for the purpose of assessing possible risks and the mitigation thereof.
Accordingly, the forward-looking statements should not be considered projections
by the Company of future events or losses.
The Company's cash flows and earnings are subject to fluctuations
resulting from changes in interest rates. The Company currently is not party to
any derivative instruments and its current policy does not allow speculation in
derivative instruments for profit or execution of derivative instrument
contracts for which there are no underlying exposures. The Company does not use
financial instruments for trading purposes.
The Company measures its market risk, related to its holdings of financial
instruments, based on changes in interest rates utilizing a sensitivity
analysis. The sensitivity analysis measures the potential loss in fair values,
cash flows and earnings based on a hypothetical 10% change in interest rates.
The Company used current market rates on its market risk sensitive assets and
liabilities to perform the sensitivity analysis.
Interest Rate Risk
The Company is exposed to changes in interest rates on its floating rate
revolving credit facility and fixed rate Senior Subordinated Notes. At December
31, 1998, based on a hypothetical 10% decrease in interest rates related to the
Company's fixed rate Senior Subordinated Notes, the Company estimates that the
fair value of its fixed rate debt would have increased by $2.0 million. The
Company had no amounts outstanding under its revolving agreement at December 31,
1998.
Additional information regarding the Company's debt is contained in Note 8
to the consolidated financial statements.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto are presented
under Item 14 of this Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 30
PART III
Information required under PART III (Items 10, 11, 12, and 13) is incorporated
herein by reference to the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days after the year covered by
this Form 10-K with respect to its Annual Meeting of Stockholders to be held on
June 17, 1999.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2). Financial Statements and Financial Statement Schedules:
Page
TWINLAB CORPORATION AND SUBSIDIARIES
Independent Auditors' Report............................................F-1
(1) Financial Statements
Consolidated Balance Sheets as of December 31, 1998 and 1997.......F-2
Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996............................................F-3
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996.............................F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996...................................F-5
Notes to Consolidated Financial Statements.........................F-6
(2) Financial Statement Schedules
For the Three Years Ended December 31, 1998........................S-1
Schedule I - Condensed Financial Information of Registrant*................S-1
Schedule II - Valuation and Qualifying Accounts............................S-4
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last quarter
of the period covered by this Report.
(c) Exhibits:
Exhibit
Number Description of Exhibit
2.1 -- Stock Purchase and Sale Agreement, dated as of March 5, 1996,
among David Blechman, Jean Blechman, Brian Blechman, Neil Blechman,
Ross Blechman, Steve Blechman, Dean Blechman, Stephen Welling, the
Registrant, Natur-Pharma Inc. and GEI (the "Stock Purchase and Sale
Agreement") (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, dated June 4, 1996, as amended,
filed by the Registrant, Registration No. 333-05191; "Twinlab S-1").
2.1.1 -- Amendment to the Stock Purchase and Sale Agreement, dated May 6,
1996 (incorporated by reference to Exhibit 2.1.1 to Twinlab S-1).
3.1 -- Second Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.4 to the
Registration Statement on Form S-4, dated June 25, 1996, as amended,
filed by Twin, Registration No. 333-06781; "Twin S-4").
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.5 to Twin S-4).
30
<PAGE> 31
4.1 -- Indenture, dated May 7, 1996, among Twin, and ARP and the
Registrant (together, the "Guarantors"), and Fleet National Bank as
Trustee, Registrar, Paying Agent and Securities Agent, regarding
Twin's 10 1/4% Senior Subordinated Notes due 2006 and the 10 1/4%
Senior Subordinated Notes due 2006 issued in exchange therefor
(incorporated by reference to Exhibit 4.2 to Twin S-1).
4.2 -- First Supplemental Indenture, dated as of December 1, 1997, to
the Indenture dated as of May 7, 1996, among Twin and ARP, Changes
International and the Registrant, as Guarantors and State Street
Bank and Trust Company (as successor to Fleet National Bank), as
Trustee regarding Twin's 101/4% Senior Subordinated Notes due 2006
(incorporated by reference to Exhibit 4.2 to the Registration
Statement on Form S-3, dated March 17, 1998, Registration No.
333-48091).
4.3 -- Second Supplemental Indenture, dated as of May 14, 1998, to the
Indenture dated as of May 7, 1996, among Twin and ARP, Changes
International, Bronson, Health Factors and the Registrant, as
Guarantors and State Street Bank and Trust Company (as successor to
Fleet National Bank), as Trustee regarding Twin's 10 1/4% Senior
subordinated Notes due 2006.*
4.4 -- Third Supplemental Indenture, dated as of September 15, 1998, to the
Indenture dated as of May 7, 1996, among Twin and ARP, Changes
International, Bronson, Health Factors, PR* Nutrition and the
Registrant, as Guarantors and State Street Bank and Trust Company
(as successor to Fleet National Bank), as Trustee regarding Twin's
10 1/4% Senior Subordinated Notes due 2006.*
10.1 -- Credit and Guarantee Agreement, dated May 7, 1996, among Twin,
the Registrant, the financial institutions named therein, Chemical
Bank as Administrative Agent and The Bank of New York as
Documentation Agent (incorporated by reference to Exhibit 4.3 to
Twinlab S-1).
10.2 -- Amended and Restated Credit and Guarantee Agreement, dated
November 15, 1996, among Twin, the Registrant, the financial
institutions named therein, The Chase Manhattan Bank as
Administrative Agent and The Bank of New York as Documentation Agent
(incorporated by reference to Exhibit 10.2 to the Registrant's 1996
Annual Report on Form 10-K; the "1996 Annual Report").
10.3 -- Guarantee and Collateral Agreement, dated May 7, 1996, among the
Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.1 to
Twinlab S-1).
10.4 -- Form of Revolving Credit Note (incorporated by reference to
Exhibit 10.4 to the 1996 Annual Report).
10.5 -- Form of Swing Line Note (incorporated by reference to Exhibit
10.5 to the 1996 Annual Report).
10.6 -- Deed of Trust, dated May 7, 1996 (the "Deed of Trust"), from Twin
to First American Title Company of Utah, Trustee for the use and
benefit of Chemical Bank, as Administrative Agent, Beneficiary
(incorporated by reference to Exhibit 10.6 to Twinlab S-1).
10.7 -- Amendment to Deed of Trust, dated November 20, 1996, among Twin
and The Chase Manhattan Bank (incorporated by reference to Exhibit
10.7 to the 1996 Annual Report).
10.8 -- Stockholders Agreement, dated May 7, 1996, among Brian Blechman,
Neil Blechman, Ross Blechman, Steve Blechman, Dean Blechman and
Stephen Welling, the Registrant and GEI (incorporated by reference
to Exhibit 10.8 to Twinlab S-1).
10.9 -- Secondary Stockholders Agreement among Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman and Stephen
Welling, the Registrant, GEI,
31
<PAGE> 32
DLJ Investment Funding, Inc., DLJ Investment Partners, L.P., Chase
Equity Associates, L.P., PMI Mezzanine Fund, L.P. and State
Treasurer of the State of Michigan, Custodian of the Michigan Public
School Employees' Retirement System, State Employees' Retirement
System, Michigan State Police Retirement System, and Michigan Judges
Retirement System (incorporated by reference to Exhibit 10.9 to
Twinlab S-1).
10.10 -- Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.10 to Twinlab
S-1).
10.11 -- Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.11 to Twinlab
S-1).
10.12 -- Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.12 to Twinlab
S-1).
10.13 -- Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.13 to Twinlab
S-1).
10.14 -- Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.14 to Twinlab
S-1).
10.15 -- Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling (incorporated by reference to Exhibit 10.15 to Twinlab S-1).
10.16 -- Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.16 to Twinlab
S-1).
10.17 -- Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.17 to Twinlab
S-1).
10.18 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
David Blechman (incorporated by reference to Exhibit 10.18 to
Twinlab S-1).
10.19 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Jean Blechman (incorporated by reference to Exhibit 10.19 to Twinlab
S-1).
10.20 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Brian Blechman (incorporated by reference to Exhibit 10.20 to
Twinlab S-1).
10.21 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Neil Blechman (incorporated by reference to Exhibit 10.21 to Twinlab
S-1).
10.22 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Ross Blechman (incorporated by reference to Exhibit 10.22 to Twinlab
S-1).
10.23 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Steve Blechman (incorporated by reference to Exhibit 10.23 to
Twinlab S-1).
10.24 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Dean Blechman (incorporated by reference to Exhibit 10.24 to Twinlab
S-1).
10.25 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Stephen Welling (incorporated by reference to Exhibit 10.25 to
Twinlab S-1).
10.26 -- Management Services Agreement, dated May 7, 1996, between Twin
and Leonard Green & Partners, L.P. (incorporated by reference to
Exhibit 10.26 to Twinlab S-1).
10.27 -- Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin and
32
<PAGE> 33
Showa Denko America, Inc. (incorporated by reference to Exhibit
10.28 to Twinlab S-1).
10.28 -- Form of SDR Guaranty Agreement, dated August 1992, between Twin
and Showa Denko K.K. (incorporated by reference to Exhibit 10.29 to
Twinlab S-1).
10.29 -- Twinlab Corporation 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.30 to Twinlab S-1).
10.30 -- Stock Option Agreement, dated November 5, 1997, between the
Registrant and John McCusker. (incorporated by reference to Exhibit
10.30 to the Registrant's 1997 Annual Report on Form 10-K, as
amended; the 1997 Annual Report)
10.31 -- Letter, dated October 7, 1997, between the Registrant and John
McCusker. (incorporated by reference to Exhibit 10.31 to the 1997
Annual Report)
10.32 -- Construction Contract, dated February 27, 1998, between Twin and
Interwest Construction Company, Inc. (incorporated by reference to
Exhibit 10.32 to the 1997 Annual Report)
10.33 -- Lease, dated January 16, 1998, between Twin and Reckson Operating
Partnership, L.P. (incorporated by reference to Exhibit 10.33 to the
1997 Annual Report)
10.34 -- Asset Purchase Agreement, dated as of March 17, 1998, among Jones
Medical Industries, Inc., JMI-Phoenix Laboratories, Inc., Twin and
Bronson Laboratories, Inc. (incorporated by reference to Exhibit
10.34 to the 1997 Annual Report)
10.35 -- Stock Purchase Agreement, dated as of August 19, 1998, by and
among Twinlab, Twin, William Logue, Sheri Sears and Barry Nussbaum
(incorporation by reference to Exhibit 2.1 to the Registrant's
Current Report on Form 8-K dated, August 21, 1998).
10.36 -- Twinlab Corporation 1998 Stock Incentive Plan*
21.1 -- List of Registrant's Subsidiaries.*
23.1 -- Consent of Deloitte & Touche LLP.*
27 -- Financial Data Schedule.*
- ----------
* Filed herewith.
33
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
TWINLAB CORPORATION
By: /s/ Ross Blechman
Ross Blechman Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title(s) Date
/s/ Ross Blechman Chairman of the Board, Chief March 31, 1999
- ----------------- Executive Officer, President
Ross Blechman and Director (Principal
Executive Officer)
/s/ Neil Blechman Executive Vice President, Secretary March 31, 1999
- ----------------- and Director
Neil Blechman
/s/ Brian Blechman Executive Vice President, Treasurer March 31, 1999
- ------------------ and Director
Brian Blechman
/s/ Steve Blechman Executive Vice President and March 31, 1999
- ------------------ Director
Steve Blechman
/s/ Dean Blechman Executive Vice President and March 31, 1999
- ----------------- Director
Dean Blechman
/s/ John McCusker Chief Financial Officer (Principal March 31, 1999
- ----------------- Financial and Accounting Officer)
John McCusker
/s/ Stephen L. Welling Director March 31, 1999
- ----------------------
Stephen L. Welling
/s/ Jonathan D. Sokoloff Director March 31, 1999
- ------------------------
Jonathan D. Sokoloff
/s/ John G. Danhakl Director March 31, 1999
- -------------------
John G. Danhakl
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Twinlab Corporation and subsidiaries
Hauppauge, New York
We have audited the accompanying consolidated balance sheets of Twinlab
Corporation and subsidiaries as of December 31, 1998 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, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also in our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Jericho, New York
March 16, 1999
F-1
<PAGE> 36
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
RESTATED
(NOTE 3)
<S> <C> <C>
ASSETS (Note 8)
CURRENT ASSETS:
Cash and cash equivalents $ 12,489 $ 4,212
Accounts receivable, net of allowance for bad debts of
$502 and $467, respectively (Note 13) 60,254 44,890
Inventories (Note 4) 72,355 37,525
Deferred tax assets (Note 10) 1,629 1,615
Prepaid expenses and other current assets 3,207 1,324
--------- ---------
Total current assets 149,934 89,566
PROPERTY, PLANT AND EQUIPMENT, Net (Note 5) 29,551 14,263
DEFERRED TAX ASSETS (Note 10) 45,347 48,777
OTHER ASSETS (Note 6) 65,186 20,404
--------- ---------
TOTAL $ 290,018 $ 173,010
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 8) $ 80 $ 14,112
Accounts payable 30,959 17,172
Accrued expenses and other current liabilities (Note 7) 10,043 10,578
--------- ---------
Total current liabilities 41,082 41,862
LONG-TERM DEBT, less current portion (Note 8) 43,451 100,267
--------- ---------
Total liabilities 84,533 142,129
--------- ---------
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;
32,705,049 shares outstanding as of December 31, 1998
and 28,470,100 as of December 31, 1997 32,705 28,470
Additional paid-in capital 289,327 145,917
Accumulated deficit (116,547) (143,506)
--------- ---------
Total shareholders' equity 205,485 30,881
--------- ---------
TOTAL $ 290,018 $ 173,010
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 37
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
RESTATED RESTATED
(NOTE 3) (NOTE 3)
<S> <C> <C> <C>
NET SALES (Note 13) $ 333,375 $ 229,614 $ 182,010
COST OF SALES 163,433 125,426 102,218
--------- --------- ---------
GROSS PROFIT 169,942 104,188 79,792
OPERATING EXPENSES 106,755 52,072 37,108
MERGER EXPENSES (Note 3) 1,462 -- --
--------- --------- ---------
INCOME FROM OPERATIONS 61,725 52,116 42,684
--------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income 1,421 215 603
Interest expense (8,119) (12,336) (10,012)
Transaction expenses (Note 1) -- -- (400)
Nonrecurring non-competition agreement expense (Note 1) -- -- (15,300)
Other (38) 27 33
--------- --------- ---------
(6,736) (12,094) (25,076)
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 54,989 40,022 17,608
PROVISION FOR INCOME TAXES (Note 10) 20,357 14,146 846
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 34,632 25,876 16,762
EXTRAORDINARY ITEM, net of income tax benefit of
$3,133 in 1998 and $1,134 in 1996(Notes 1 and 8) (4,941) -- (1,792)
--------- --------- ---------
NET INCOME 29,691 25,876 14,970
Preferred Stock Dividends -- -- 4,862
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON STOCK $ 29,691 $ 25,876 $ 10,108
========= ========= =========
Basic AND DILUTED income per share (Note 9):
Income before extraordinary item $ 1.10 $ 0.92 $ 0.42
Extraordinary item (0.16) -- (0.06)
--------- --------- ---------
Net income $ 0.94 $ 0.92 $ 0.36
========= ========= =========
Basic weighted average shares outstanding 31,492 28,192 28,150
========= ========= =========
Diluted weighted average shares outstanding 31,607 28,228 28,150
========= ========= =========
PRO FORMA RELATING TO CHANGE IN TAX STATUS (Note 10):
Historical income before provision for income taxes and
extraordinary item $ 54,989 $ 40,022 $ 17,608
Pro forma provision for income taxes 21,524 15,429 6,788
--------- --------- ---------
Pro forma income relating to change in tax status before
extraordinary item 33,465 24,593 10,820
Extraordinary item (4,941) -- (1,792)
--------- --------- ---------
Pro forma net income relating to change in tax status 28,524 24,593 9,028
Preferred Stock dividends -- -- 4,862
--------- --------- ---------
Pro forma net income relating to change in tax status
applicable to common stock $ 28,524 $ 24,593 $ 4,166
========= ========= =========
PRO FORMA BASIC income per share:
Income before extraordinary item $ 1.06 $ 0.87 $ 0.21
Extraordinary item (0.15) -- (0.06)
--------- --------- ---------
Net income $ 0.91 $ 0.87 $ 0.15
========= ========= =========
Basic weighted average shares outstanding 31,492 28,192 28,150
========= ========= =========
PRO FORMA DILUTED income per share:
Income before extraordinary item $ 1.06 $ 0.87 $ 0.21
Extraordinary item (0.16) -- (0.06)
--------- --------- ---------
Net income $ 0.90 $ 0.87 $ 0.15
========= ========= =========
Diluted weighted average shares outstanding 31,607 28,192 28,150
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 38
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
---------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 (as previously
reported) 450,000 $ 450 $ 68 $ 54,887 $ 55,405
Changes resulting from acquisition accounted
for as pooling of interests 62,162 62 2 205 269
---------- ------- --------- --------- ---------
Balance at January 1, 1996 (Restated) 512,162 512 70 55,092 55,674
Net income and comprehensive income -- -- -- 14,970 14,970
Distributions to shareholders -- -- -- (11,693) (11,693)
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) 18,587,838 18,588 (18,588) -- --
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 (Restated) 28,150,000 28,150 140,252 (166,035) 2,367
Net income and comprehensive income -- -- -- 25,876 25,876
Distributions to shareholders -- -- -- (3,347) (3,347)
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 (Restated) 28,470,100 28,470 145,917 (143,506) 30,881
Net income and comprehensive income -- -- -- 29,691 29,691
Second public offering of common stock 4,228,749 4,229 143,277 -- 147,506
Shares issues in connection with the exercise of
stock options and related tax benefit 6,200 6 133 -- 139
Distributions to shareholders -- -- -- (2,732) (2,732)
---------- ------- --------- --------- ---------
Balance at December 31, 1998 32,705,049 $32,705 $ 289,327 $(116,547) $ 205,485
========== ======= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 39
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
RESTATED RESTATED
(NOTE 3) (NOTE 3)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,691 $ 25,876 $ 14,970
Adjustment to reconcile net income to net cash provided
by operating activities:
Extraordinary item 4,941 -- 1,792
Depreciation and amortization 5,004 2,099 1,965
Gain on sale of equipment -- (3) --
Bad debt expense 35 211 146
Deferred income taxes 3,416 3,684 (3,484)
Nonrecurring non-competition agreement expense -- -- 15,300
Changes in operating assets and liabilities (net of effect of business
acquired):
Accounts receivable (13,496) (13,530) (7,319)
Inventories (27,818) (7,178) (4,341)
Prepaid expenses and other current assets (1,641) (12) (425)
Accounts payable 12,828 5,800 3,665
Accrued expenses and other current liabilities 946 (2,033) 5,959
--------- -------- ---------
Net cash provided by operating activities 13,906 14,938 28,228
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (56,104) (3,726) --
Maturities of marketable securities -- -- 201
Proceeds from sales of property, plant and equipment -- 3,099 10
Acquisition of property, plant and equipment (13,407) (4,022) (2,480)
(Increase) decrease in other assets (4,223) (462) 452
--------- -------- ---------
Net cash used in investing activities (73,734) (5,111) (1,817)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of senior subordinated notes (62,687) -- --
Proceeds from issuance of debt 700 400 173,097
Proceeds from issuance of Preferred Stock -- -- 67,000
Dividends on Preferred Stock -- -- (4,862)
Distributions to shareholders (2,732) (3,347) (11,693)
Payments of debt (14,606) (6,603) (61,025)
Redemption of Preferred Stock -- -- (67,000)
Issuance of common stock 82 126 5,500
Repurchase of shareholders' common stock and recapitalization -- -- (216,780)
Net proceeds from public offering of common stock 147,506 -- 93,666
Payment of financing costs -- -- (8,450)
Principal payments of capital lease obligations (158) (146) (136)
--------- -------- ---------
Net cash provided by (used in) financing activities 68,105 (9,570) (30,683)
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents 8,277 257 (4,272)
Cash and cash equivalents at beginning of year 4,212 3,955 8,227
--------- -------- ---------
Cash and cash equivalents at end of year $ 12,489 $ 4,212 $ 3,955
========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,048 $ 12,272 $ 8,026
========= ======== =========
Income taxes $ 15,676 $ 9,807 $ 3,084
========= ======== =========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE> 40
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
1. DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND PUBLIC OFFERINGS
The Company is one of the leading manufacturers and marketers of brand
name nutritional supplements sold through domestic health and natural
food stores and various direct sales channels, including network and
catalog marketing and is also engaged in the sale of its products through
national and regional drug store chains, supermarkets, and mass market
retailers.
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
F-6
<PAGE> 41
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 $400 of professional fees for the year ended
December 31, 1996.
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 following unaudited pro forma results of operations assume the
Transactions occurred on January 1, 1996 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, 1996.
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net sales $182,010
Interest expense 402
Income before extraordinary item 18,116
Diluted income before extraordinary item per share 0.64
Weighted average shares outstanding
(in thousands) 28,150
</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
F-7
<PAGE> 42
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, in 1996, 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).
In April 1998, the Company completed a second public offering of the
Company's common stock (the "Offering"). A total of 9,200,000 shares of
common stock was offered to the public, of which 4,971,251 was sold by
certain of the Company's stockholders. The net proceeds to the Company
from the Offering were approximately $147,506. Of the net proceeds to the
Company, approximately $56,104 was used to pay the purchase price for the
Bronson acquisition (as described in Note 3), including related fees and
expenses; approximately $40,119 was 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 was used to reduce outstanding borrowings under the Revolving
Credit Facility, including accrued and unpaid interest. The remaining net
proceeds to the Company was used for working capital and other general
corporate purposes.
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 and Bronson are being amortized on the straight-line
method over periods ranging from five years to thirty years.
F-8
<PAGE> 43
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 $1,655, $1,095 and $1,119 for the years
ended December 31, 1998, 1997 and 1996, respectively.
i. EARNINGS PER SHARE - The Company retroactively adopted SFAS No. 128,
"Earnings Per Share" during 1997. SFAS No. 128 changed the
computation, presentation and disclosure requirements for earnings
per share. SFAS No. 128 requires presentation of "basic" and
"diluted" earnings per share. The adoption of SFAS No. 128 did not
have a material impact on the Company's income per share.
j. COMPREHENSIVE INCOME - In 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income". This statement establishes rules
for the reporting of comprehensive income and its components.
Comprehensive income, as presented in the Consolidated Statement of
Shareholders' Equity, is equivalent to net income as the Company has
no other items of comprehensive income. The adoption of SFAS No. 130
had no impact on total shareholders' equity.
k. 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.
l. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
F-9
<PAGE> 44
m. RECLASSIFICATIONS - Certain prior year balances have been
reclassified to conform with current year classifications.
3. ACQUISITIONS
a. PR NUTRITION - On August 21, 1998, the Company acquired all of the
outstanding capital stock of PR Nutrition, Inc. ("PR Nutrition") for
1,150,000 shares of the Company's common stock, having a market value
at the date of acquisition of approximately $39,675. PR Nutrition
develops, markets and sells nutritionally enhanced food bars and
other nutritional products. This acquisition has been accounted for
as a pooling of interests and accordingly the consolidated financial
statements have been restated to include PR Nutrition's amounts for
all periods presented. Included in the operating results of the
Company for the year ended December 31, 1998 are approximately
$13,404 of net sales and approximately $3,007 of net income of PR
Nutrition prior to the date of acquisition. Expenses of approximately
$1,462 have been incurred related to this acquisition.
The following is a reconciliation of certain restated amounts with
amounts previously reported:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales:
As previously reported $213,229 $170,075
Effect of PR Nutrition pooling of interests 16,385 11,935
-------- --------
As restated $229,614 $182,010
======== ========
Net income:
As previously reported $ 22,671 $ 11,796
Effect of PR Nutrition pooling of interests 3,205 3,174
-------- --------
As restated $ 25,876 $ 14,970
======== ========
Basic and diluted net income per share:
As previously reported $ 0.84 $ 0.26
Effect of PR Nutrition pooling of interests 0.08 0.10
-------- --------
As restated $ 0.92 $ 0.36
======== ========
</TABLE>
b. BRONSON - On April 30, 1998, the Company acquired substantially all
of the assets and assumed certain liabilities of the Bronson division
("Bronson") of Jones Medical Industries, Inc. Bronson, through
Bronson Laboratories, Inc., manufactures, markets and distributes a
line of over 400 vitamins, herbs, and nutritional supplements and
health and beauty aids, through catalogs and specialty direct
mailings, markets its MD Pharmaceutical brand of vitamins, herbs and
nutritional supplements exclusively to United States military
commissaries and also manufactures through Health Factors
International, private label vitamins and nutritional supplements for
a number of other companies on a contract manufacturing basis. The
Company paid $56,104 in cash, including acquisition costs, which was
financed through proceeds from the Offering. This acquisition has
been accounted for as a purchase and, accordingly, the results of
Bronson 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 to net assets
acquired based upon their fair values. Goodwill relating to the
acquisition of $14,480 is being amortized over 30 years.
c. CHANGES INTERNATIONAL - In November 1997, the Company acquired all of
the outstanding shares of Changes International of Fort Walton Beach,
Inc. ("Changes
F-10
<PAGE> 45
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 to net assets acquired based upon their
fair values. Goodwill relating to the acquisition of $10,714 is being
amortized over 20 years.
The following unaudited pro forma information assumes that the
acquisition of Bronson and Changes International had occurred as of
January 1, 1997, 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 acquisitions, in fact, occurred
on January 1, 1997.
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net sales $343,392 $296,126
Income before extraordinary item 35,879 31,704
Basic and diluted income before extraordinary
item per share 1.12 1.05
Diluted weighted average shares outstanding
(in thousands) 32,041 30,159
4 INVENTORIES
Inventories consist of the following:
1998 1997
-------- --------
Raw materials $ 36,257 $ 16,340
Work in process 11,337 7,393
Finished goods 24,761 13,792
-------- --------
Total $ 72,355 $ 37,525
======== ========
5 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
1998 1997
-------- --------
Land, building and leasehold improvements $ 22,769 $ 12,363
Plant equipment 10,730 7,461
Office equipment 6,672 3,157
Automobiles 65 56
-------- --------
40,236 23,037
Less: accumulated depreciation and amortization 10,685 8,774
-------- --------
Property, plant and equipment - net $ 29,551 $ 14,263
======== ========
Depreciation and amortization expense $ 1,940 $ 1,120
======== ========
</TABLE>
F-11
<PAGE> 46
6. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Goodwill, net of accumulated amortization of $1,113
and $166, respectively $ 24,784 $ 11,251
Acquired tradenames, net of accumulated amortization
of $474 20,861 --
Acquired customer lists and distribution networks,
net of accumulated amortization of $1,162 and $54,
respectively 9,686 1,946
Deferred finance costs, net of accumulated amortization
of $741 and $872, respectively 1,712 4,337
Other 8,143 2,870
-------- --------
Total $ 65,186 $ 20,404
======== ========
7 ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
1998 1997
-------- --------
Accrued salaries, employee benefits and payroll taxes $ 3,816 $ 2,645
Accrued commissions 2,219 1,795
Other 4,008 6,138
-------- --------
Total $ 10,043 $ 10,578
======== ========
8 LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
-------- --------
Revolving Credit Facility (a) $ -- $ 13,750
Senior subordinated notes (b) 43,215 100,000
Note payable to a power authority, payable in monthly installments
of $2, including interest at 6.38 percent, maturing February 2011 251 266
Obligations under capital lease -- 158
Other 65 205
-------- --------
43,531 114,379
Less: current portion 80 14,112
-------- --------
Total $ 43,451 $100,267
======== ========
</TABLE>
(a) The Revolving Credit Facility, as amended on March 22, 1999, 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. 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. 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, Changes International, Bronson and PR
Nutrition. The Revolving Credit Facility contains certain restrictive
covenants including,
F-12
<PAGE> 47
among other things, the maintenance of certain debt coverage ratios,
as well as restrictions on additional indebtedness, dividends and
certain other significant transactions. In addition, the Revolving
Credit Facility requires the Company to be Year 2000 compliant by
September 30, 1999.
(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, Changes International, Bronson and PR Nutrition 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. Upon a change of control, as
defined, Twin is required to offer to redeem the senior subordinated
notes at 101 percent of the principal amount plus accrued and unpaid
interest. Restrictive covenants contained in the indenture governing
the senior subordinated notes (the "Note Indenture") include, among
other things, limitations on additional indebtedness, investments,
dividends and certain other significant transactions.
In May 1998, Twin redeemed 35 percent ($35,000) of the senior
subordinated notes at a redemption price of 109 -1/2 percent with a
portion of the proceeds of the Offering. In addition, in July 1998
and September 1998, Twin repurchased an additional $18,136 and
$3,649, respectively, of senior subordinated notes at prices of
112-1/2 percent and 108-1/2 percent, respectively. In connection,
with the redemptions and repurchases of the senior subordinated
notes, the Company recorded an extraordinary charge, representing the
premium paid and the write-off of previously deferred finance costs,
of approximately $4,941 (net of tax benefit of $3,133).
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> <C>
1999 $ 80
2000 15
2001 16
2002 17
2003 18
Thereafter 43,385
-------
Total $43,531
=======
</TABLE>
The carrying amount of the borrowing under the Revolving Credit
Facility approximated fair value as of December 31, 1998 and 1997
based on borrowing rates available to the Company at such dates for
loans with similar terms. The fair value of the senior subordinated
notes approximated $49,770 and $100,000 at December 31, 1998 and
1997, respectively, based on borrowing rates available to the Company
at such dates.
F-13
<PAGE> 48
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. 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. On January 27, 1998, the Board
adopted, subject to stockholder approval which was received on June
17, 1998, the Twinlab Corporation 1998 Stock Incentive Plan (the
"1998 Plan"). The 1998 Plan provides initially for the issuance of a
total of up to 1,000,000 authorized and unissued shares of common
stock, treasury shares and/or shares acquired by the Company for
purposes of the 1998 Plan, and may be increased annually commencing
January 1, 1999, at the discretion of the Board, by an amount up to 1
percent of the shares of common stock then outstanding. Awards under
the 1998 Plan may be made in the form of (i) incentive stock options;
(ii) non-qualified stock options; (iii) stock appreciation rights;
(iv) restricted stock; (v) restricted stock units; (vi) dividend
equivalent rights; and (vii) other stock based-awards. 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.
The following table sets forth summarized information concerning
stock option activity relating to the Company's 1996 Plan and 1998
Plan (collectively, the "Plans"):
<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, January 1, 1997 120,000 $12.00 $12.00
Granted 56,000 $18.13 - $19.38 $19.24
Canceled (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
Granted 264,000 $25.00 - $29.38 $28.55
Canceled (11,400) $12.00 - $29.38 $25.72
Exercised (6,200) $12.00 - $18.13 $13.19
---------- --------------- ------
Balance, December 31, 1998 408,800 $12.00 - $29.38 $23.28
========== =============== ======
Shares exercisable at December 31, 1998 50,560 $13.57
========== ======
Shares reserved for issuance at December 31, 1998 1,386,200
==========
</TABLE>
F-14
<PAGE> 49
Significant option groups outstanding at December 31, 1998 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> <C>
$12.00 99,000 8.0 $12.00 39,600 $12.00
$18.13 - $19.38 54,800 8.8 $19.27 10,960 $19.27
$25.00 50,000 9.4 $25.00 -- $ --
$29.38 205,000 9.8 $29.38 -- $ --
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting For Stock Issued To Employees", and selected
interpretations in accounting for the Plans. 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 Plans 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 $642, $188 and $14 in 1998, 1997 and 1996,
respectively. The Company's pro forma net income and diluted earnings
per share would have been $29,000 and $0.92 per share for 1998;
$25,700 and $0.91 per share for 1997; and $15,000 and $0.53 per share
for 1996. The weighted average fair value of the options granted
during 1998, 1997 and 1996 is estimated at $19.50, $10.89 and $6.81,
respectively, on the date of grant (using Black-Scholes option
pricing model) with the following weighted average assumptions for
1998, 1997 and 1996, respectively: volatility of 65 percent, 46
percent and 45 percent, risk-free interest rate of 5.71 percent, 5.75
percent and 6.09 percent, and an expected life of seven years.
(c) NET INCOME PER SHARE - In 1997, the Company adopted SFAS No. 128,
"Earnings Per Share". Basic income per share is determined by using
the weighted average number of shares of common stock outstanding
during each period. Diluted income per share further assumes the
issuance of common shares for all dilutive outstanding common stock
options. The calculation for income before extraordinary item per
share for each of the three years ended December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ----------------------------- -------------------------------
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 $34,632 $25,876 $16,762
Less: Preferred
dividends -- -- (4,862)
-------- -------- -------
BASIC INCOME PER
SHARE
Income before
extraordinary item 34,632 31,492 $1.10 25,876 28,192 $ 0.92 11,900 28,150(a) $ 0.42
===== ======= =======
EFFECT OF DILUTIVE
SECURITIES:
Options -- 115 -- 36 -- --
------- ------ ------- ------ ------- -------
DILUTED INCOME PER
SHARE
Income before
extraordinary item $34,632 31,607 $1.10 $25,876 28,228 $ 0.92 $11,900 28,150 $ 0.42
======= ======= ===== ======= ====== ======= ======= ====== =======
</TABLE>
F-15
<PAGE> 50
(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).
(d) STOCK REPURCHASE PROGRAM - On February 25, 1999, the Company
announced that its Board of Directors had approved a share repurchase
program authorizing the Company to buy up to 5 million shares of its
common stock. The Company has obtained the required waivers under its
Revolving Credit Facility to engage in purchases of its common stock
and intends to use funds available under the Revolving Credit
Facility and internally generated cash to purchase such shares. The
Company will purchase common stock from time to time in the open
market and in individually negotiated transactions. The amount and
timing of any purchase will be dependent upon a number of factors,
including the price and availability of the Company's shares and
general market conditions.
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 from
January 1, 1996 through the consummation of the Acquisition on May 7,
1996, represents state taxes for those states that impose a tax on "S"
corporations. In addition, prior to being acquired by the Company, PR
Nutrition was an "S" corporation and as such, Federal and state taxes
were generally paid at the shareholder level only. The pro forma
provisions for income taxes for the years ended December 31, 1998, 1997,
and 1996 in the accompanying Consolidated Statements of Income assume the
Companies and PR Nutrition were "C" corporations for the entire fiscal
years.
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 as a recapitalization for
financial accounting purposes. For Federal and state income tax purposes,
the purchase price was allocated among the various corporations and their
respective assets and liabilities based on the respective fair values as
of the closing of the Acquisition. This resulted in different book and
tax asset bases for the assets of these companies, which resulted in
deferred tax assets of approximately $55,571.
The provision for (benefit from) income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- -------- -------
<S> <C> <C> <C>
Current:
Federal $14,267 $ 8,916 $ 3,662
State and local 2,674 1,546 668
------- -------- -------
16,941 10,462 4,330
------- -------- -------
Deferred:
Federal 2,923 3,515 (3,108)
State and local 493 169 (376)
------- -------- -------
3,416 3,684 (3,484)
------- -------- -------
$20,357 $ 14,146 $ 846
======= ======== =======
</TABLE>
F-16
<PAGE> 51
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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Statutory Federal income tax rate 35.0% 35.0% 34.0%
State and local income taxes (net of
Federal tax benefit) 3.7 2.8 1.1
Exempt income due to "S" Corporation
status (2.0) (2.8) (28.0)
Other 0.3 0.3 (2.3)
------ ------ ------
Effective tax rate 37.0% 35.3% 4.8%
====== ====== ======
</TABLE>
At December 31, 1998 and 1997, the deferred tax assets, which required no
valuation allowance, consisted of:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Accounts receivable $ 327 $ 1,099
Inventories 1,064 380
Property, plant and equipment (249) 34
Intangible and other assets 45,596 48,743
Other 238 136
-------- -------
$ 46,976 $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 $518, $367 and $164 for the years
ended December 31, 1998, 1997 and 1996, respectively.
12. COMMITMENTS AND CONTINGENCIES
a. LEASES - The Company leases certain warehouse space and equipment
under operating leases. Generally, the leases carry renewal
provisions and require the payment of maintenance costs. Rental
payments may be adjusted for increases in taxes and other costs above
specific amounts. Rental expense charged to operations for the years
ended December 31, 1998, 1997 and 1996 was approximately $3,476,
$2,006, and $1,664, respectively.
F-17
<PAGE> 52
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> <C>
1999 $ 4,929
2000 4,585
2001 4,198
2002 4,030
2003 2,802
Thereafter 1,290
----------
Total $ 21,834
==========
</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 has been named as a defendant in five
currently pending lawsuits alleging that its Ma Huang-containing
products caused injuries and/or damages, as well as two proceedings
seeking class action certification for alleged deceptive advertising
claims related to its Ma Huang products. 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 consolidated financial statements.
In December 1998, two shareholder class action lawsuits were filed in
the United States District Court for the Eastern District of New York
against the Company and certain of its officers and directors. The
plaintiffs allege that the Company and the other defendants violated
the securities laws by making material misstatements and failing to
state material facts about the Company's business and financial
condition, among other things, in securities act filings and public
statements. Plaintiffs have moved to consolidate these lawsuits and
all subsequent lawsuits relating to the same issues. On February 25,
1999, proposed plaintiffs' co-lead counsel announced that it would
amend the complaints to enlarge the class of plaintiffs suing the
Company to include all buyers of the Company's stock from March 17,
1998 through February 24, 1999. The Company intends to vigorously
defend against these actions; however, it is premature to determine
the effect, if any, of such litigation on the consolidated financial
statements.
On February 11, 1999, the former shareholders of PR Nutrition
commenced a lawsuit in the United States District Court for the
Southern District of New York against the Company and certain of its
officers and directors. The plaintiffs' claims include alleged
violations of the securities laws, breach of contract, fraud and
negligent misrepresentation in connection with the Company's purchase
of 100 percent of the stock of PR Nutrition. More specifically, the
plaintiffs allege that the Company and the other defendants made
material misstatements or failed to disclose material facts about the
Company's business and financial condition, among other things, in
securities act filings and other statements. The Company intends to
vigorously defend against these actions; however, it is premature to
determine the effect, if any, of such litigation on the consolidated
financial statements.
F-18
<PAGE> 53
In the first quarter of 1999, a series of separate shareholder class
action lawsuits were filed in the United States District Court for
the Eastern District of New York against the Company and certain of
its officers and directors. These lawsuits have not yet been served
on the Company. The plaintiffs generally allege that the Company and
the other defendants violated the securities laws by making material
misstatements and failing to state material facts about the Company's
business and financial condition, among other things, in securities
act filings and public statements. The class of plaintiffs suing the
Company is all buyers of the Company's stock from April 28, 1998
through February 24, 1999. The Company intends to vigorously defend
against these actions; however, it is premature to determine the
effect, if any, of such litigation on the consolidated financial
statements.
The Company received an inquiry from the Federal Trade Commission
("FTC") with respect to the Company's substantiation for certain
advertising claims made for its product "Herbal Phen Fuel". After the
Company submitted scientific substantiation to the FTC, the FTC
forwarded a proposed consent order (the "Consent Order") to the
Company. The proposed Consent Order provides for, among other things,
injunctive relief prohibiting the Company from making weightloss
claims for its products without adequate scientific substantiation.
The proposed Consent Order is the subject of negotiating between the
FTC and the Company. The Company is unable to predict whether it will
be able to reach a negotiated settlement of this matter.
The Company is also engaged in various other litigation in the
ordinary course of business. Management is of the opinion that the
amounts which may be awarded or assessed, 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
During the years ended December 31, 1998, 1997, and 1996, the Company
recognized net sales to significant customers as set forth below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Major customers:
Customer A 14% 22% 19%
Customer B 12 18 23
Customer C 12 4 --
</TABLE>
The Company's customers are primarily large independent distributors of
health food products. At December 31, 1998 and 1997, approximately 47 and
62 percent, respectively, of accounts receivable related to two
customers.
14. SUMMARIZED FINANCIAL INFORMATION
Twin is a direct wholly-owned subsidiary of Twinlab. ARP, Changes
International, Bronson Laboratories, Inc., Health Factors International,
Inc. and PR Nutrition are indirect wholly-owned subsidiaries of Twinlab.
Twinlab, ARP, Changes International, Bronson Laboratories, Inc., Health
Factors International, Inc. and PR Nutrition have provided joint and
several full and unconditional senior subordinated guarantees of the
senior subordinated notes of Twin (see Note 8b).
F-19
<PAGE> 54
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, Changes International,
Bronson Laboratories Inc., Health Factors International, Inc. and PR
Nutrition. Twin has no other stockholder than Twinlab. Accordingly, the
Company has determined that separate financial statements of Twin, ARP,
Changes International, Bronson Laboratories Inc., Health Factors Inc. and
PR Nutrition would not be material to investors and, therefore, are not
included herein.
Summarized financial information for the year ended December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
TWIN ARP INTERNATIONAL INC. INC. NUTRITION
-------- ------ ------------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets $149,611 $1,571 $ 9,008 $ 7,279 $ 4,295 $ 3,373
Noncurrent assets 140,084 186 12,520 39,566 7,491 417
Current liabilities 44,152 470 3,575 1,417 356 1,916
Noncurrent liabilities 43,451 -- -- -- -- --
Shareholder's equity 202,092 1,287 17,953 45,428 11,430 1,874
Net sales 333,375 4,670 51,313 11,495 7,192 20,878
Gross profit 169,942 997 42,714 6,601 1,218 14,418
Net income 29,199 263 3,662 719 35 4,070
</TABLE>
Summarized financial information for the year ended December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
CHANGES PR
TWIN ARP INTERNATIONAL NUTRITION
-------- ------ ------------- ---------
<S> <C> <C> <C> <C>
Current assets $ 89,397 $1,399 $ 4,005 $ 1,321
Noncurrent assets 83,444 193 13,026 365
Current liabilities 45,952 568 2,685 1,127
Noncurrent liabilities 100,267 -- -- 22
Shareholder's equity 26,622 1,024 14,346 537
Net sales 229,614 5,661 7,037 16,385
Gross profit 104,188 1,329 5,854 11,906
Net income 26,061 465 598 3,205
</TABLE>
Summarized financial information for the year ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
PR
TWIN ARP NUTRITION
-------- ------ ---------
<S> <C> <C> <C>
Current assets $ 69,251 $1,577 $ 1,151
Noncurrent assets 75,268 182 289
Current liabilities 40,134 1,200 708
Noncurrent liabilities 100,478 -- 55
Shareholder's equity 3,909 559 679
Net sales 182,010 5,862 11,935
Gross profit 79,792 886 9,544
Net income 14,916 392 3,174
</TABLE>
15. OPERATING SEGMENTS
In 1998, the Company adopted SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information", which changes the way the Company
reports information about its operating segments.
F-20
<PAGE> 55
The Company has four reportable segments: Twinlab Division; Herbal
Supplements and Teas Division; Changes International Division; and
Bronson Division. The Company manufactures and markets nutritional
products, including a complete line of vitamins, herbs, and
nutraceuticals, antioxidants, fish and marine oils, and sports nutrition
supplements through its Twinlab Division; a full line of herbs,
phytonutrients, and teas through its Herbal Supplements and Teas
Division; a line of specially formulated nutritional supplements through
a sales force of independent distributors through its , Changes
International Division; and a line of vitamins, herbs, nutritional
supplements and health and beauty aids through its Bronson Division.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. The Company evaluates
the financial performance of its business units based on operating income
of the respective business units.
Segment information for the years ended December 31, 1998, 1997, and 1996
was as follows:
<TABLE>
<CAPTION>
HERBAL
SUPPLEMENTS CHANGES INTER-
TWINLAB AND TEAS INTERNATIONAL BRONSON COMPANY
DIVISION(1) DIVISION DIVISION DIVISION OTHER(2) ELIMINATION TOTAL
----------- ---------- ------------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
1998
Net sales from external
customers $172,665 $65,824 $51,313 $18,687 $24,886 $ -- $333,375
Intersegment net sales 3,971 300 -- -- 662 (4,933) --
Operating income 30,545 18,873 5,829 1,231 5,247 61,725
Interest expense 8,075 24 -- -- 20 -- 8,119
Interest income 249 -- 157 -- 1,015 -- 1,421
Long-lived assets 10,994 15,287 12,490 47,047 586 -- 86,404
Capital expenditures 2,691 9,391 703 368 254 -- 13,407
Depreciation and
amortization 1,501 511 1,019 1,805 168 -- 5,004
1997
Net sales from external
customers $155,982 $45,206 $ 7,037 $ -- $21,389 $ -- $229,614
Intersegment net sales 150 82 -- -- 658 (890) --
Operating income 35,486 11,805 832 -- 3,993 -- 52,116
Interest expense 12,294 21 -- -- 21 -- 12,336
Interest income 156 -- 17 -- 41 -- 214
Long-lived assets 9,252 6,294 12,820 -- 538 -- 28,904
Capital expenditures 2,570 1,258 13 -- 181 -- 4,022
Depreciation and
amortization 1,374 433 136 -- 156 -- 2,099
1996
Net sales from external
customers $136,140 $28,713 $ -- $ -- $17,157 $ -- $182,010
Intersegment net sales 209 18 -- -- 639 (866) --
Operating income 32,523 6,497 -- -- 3,664 -- 42,684
Interest expense 9,843 241 -- -- 17 (89) 10,012
Interest income 610 -- -- -- 8,270 (89) 603
Long-lived assets 9,520 6,428 -- -- 205 -- 16,153
Capital expenditures 842 1,411 -- -- 227 -- 2,480
Depreciation and
amortization 1,534 341 -- -- 90 -- 1,965
</TABLE>
[1] Interest expense relating primarily to borrowings under the Revolving
Credit Agreement and the senior subordinated notes of $8,075 in 1998,
$12,294 in 1997 and $9,843 in 1996 has been recorded in the Twinlab
Division and not allocated to the other operating segments.
[2] The "other" column includes corporate-related items and the results of two
divisions, PR Nutrition and ARP, whose segment information is below the
reportable quantitative thresholds. The Company markets nutritionally
enhanced food bars and other nutritional products through PR Nutrition and
publishes a sports fitness magazine and health and fitness-related books,
audios and newsletters through ARP.
F-21
<PAGE> 56
The Company primarily distributes its products through three distribution
channels: the health and natural food store channel; the mass market
channel, which consists of drug store chains, supermarkets and mass
market retailers; and the direct sales channel, which includes network
marketing, catalog and direct response. Net sales by distribution channel
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Health and natural food stores $211,837 $193,464 $164,444
Mass market 47,039 14,057 2,780
Direct sales 70,492 17,087 9,563
Other 4,007 5,006 5,223
-------- -------- --------
$333,375 $229,614 $182,010
======== ======== ========
</TABLE>
F-22
<PAGE> 57
SCHEDULE I
TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
RESTATED)
<S> <C> <C>
ASSETS
Cash $ 323 $ 169
Investment in subsidiaries 205,162 30,712
--------- ---------
Total $ 205,485 $ 30,881
========= =========
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; 32,705,049 shares outstanding
as of December 31, 1998 and 28,470,100 as of
December 31, 1997 32,705 28,470
Additional paid-in capital 289,327 145,917
Accumulated deficit (116,547) (143,506)
--------- ---------
Total $ 205,485 $ 30,881
========= =========
</TABLE>
- ---------------------
Note: Investment in subsidiaries is accounted for under the equity method of
accounting.
See notes to consolidated financial statements included elsewhere herein.
S-1
<PAGE> 58
SCHEDULE I
TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Equity interest in net income of subsidiaries $28,221 $25,677 $14,916
Interest income 981 7 54
------- ------- -------
Income before provision for income taxes 29,202 25,684 14,970
Provision for income taxes 489 192 --
------- ------- -------
Net income $29,691 $25,876 $14,970
======= ======= =======
</TABLE>
See notes to consolidated financial statements included elsewhere herein.
S-2
<PAGE> 59
SCHEDULE I
TWINLAB CORPORATION AND SUBSIDIARIES
(PARENT COMPANY ONLY)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,691 $ 25,876 $ 14,970
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity investment in subsidiaries 118,289 (18,922) 119,361
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of business, net of cash acquired (56,104) (3,726) --
Proceeds from issuance of Preferred Stock -- -- 67,000
Dividends on Preferred Stock -- -- (4,862)
Distributions to shareholders (2,732) (3,347) (11,693)
Redemption of Preferred Stock -- -- (67,000)
Issuance of common stock 82 126 5,500
Repurchase of shareholders' common stock and recapitalization -- -- (216,780)
Proceeds from public offering of common stock 147,506 -- 93,666
--------- -------- ---------
Net cash provided by (used in) financing activities 88,752 (6,947) (134,169)
--------- -------- ---------
Net increase in cash 154 7 162
Cash at beginning of year 169 162 --
--------- ----------- -----------
Cash at end of year $ 323 $ 169 $ 162
========= =========== ===========
</TABLE>
See notes to consolidated financial statements included elsewhere herein.
S-3
<PAGE> 60
SCHEDULE II
TWINLAB CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTIONS OF PERIOD EXPENSES - DESCRIBE - DESCRIBE PERIOD
------------ --------- -------- ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998:
Allowance for bad debts $ 467 $ 35 $-- $ [1] $ 502
======= ====== === ===== =======
Reserve for excess and
slow moving inventory $ 1,000 $1,801 $-- $ -- $ 2,801
======= ====== === ===== =======
YEAR ENDED DECEMBER 31, 1997:
Allowance for bad debts $ 220 $ 249 $-- $ 2[1] $ 467
======= ====== === ===== =======
Reserve for excess and
slow moving inventory $ 625 $ 375 $-- $ -- $ 1,000
======= ====== === ===== =======
YEAR ENDED DECEMBER 31, 1996:
Allowance for bad debts $ 177 $ 137 $-- $ 94[1] $ 220
======= ====== === ===== =======
Reserve for excess and
slow moving inventory $ 515 $ 625 $-- $ 515[1] $ 625
======= ====== === ===== =======
</TABLE>
(1) Amounts written off.
S-4
<PAGE> 1
TWIN LABORATORIES INC., as Issuer,
and
THE GUARANTORS NAMED HEREIN
and
STATE STREET BANK AND TRUST COMPANY, as Trustee
SECOND SUPPLEMENTAL INDENTURE
Dated as of May 14, 1998
to
INDENTURE
Dated As of May 7, 1996
as supplemented as of December 1, 1997
10-1/4% Senior Subordinated Notes due 2006
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of May 14, 1998 by and among
TWIN LABORATORIES INC., a Utah corporation (the "Company"), ADVANCED RESEARCH
PRESS, INC., a New York corporation ("Advanced"), TWINLAB CORPORATION, a
Delaware corporation formerly named TLG Laboratories Holding Corp. ("Holding
Company"), CHANGES INTERNATIONAL OF FORT WALTON BEACH, INC., a Florida
corporation ("Changes"), Bronson Laboratories Inc., a Delaware Corporation
("Bronson"), and Health Factors International, Inc., a Delaware corporation
("Health Factors"), as Guarantors, and State Street Bank and Trust Company, a
Massachusetts bank and trust company (successor to Fleet National Bank), as
Trustee (the "Trustee").
WHEREAS, the Company, Advanced, Holding Company and Fleet National
Bank, as Trustee executed an Indenture, dated as of May 7, 1996 (the
"Indenture"), in respect of $100,000,000 aggregate principal amount of the
Company's 10-1/4% Senior Subordinated Notes due 2006 (the "Securities");
WHEREAS, State Street Bank and Trust Company is the successor to
Fleet National Bank, as Trustee under the Indenture;
WHEREAS, on December 1, 1997 the Company, Advanced, Holding Company,
Changes and Trustee executed the First Supplemental Indenture dated as of
December 1, 1997 (the "First Supplemental Indenture");
WHEREAS, the term Indenture as hereinafter used in this Second
Supplemental Indenture shall mean the Indenture as amended by the First
Supplemental Indenture;
WHEREAS, Section 11.3 of the Indenture requires, under circumstances
specified in Section 11.3, that certain Subsidiaries of the Company execute and
deliver to the Trustee a supplemental indenture pursuant to which such
Subsidiaries of the Company shall be named as additional Subsidiary Guarantors;
and
WHEREAS, all conditions and requirements necessary to make this
Second Supplemental Indenture a valid, binding and legal instrument in
accordance with its terms have been performed and fulfilled and the execution
and delivery hereof have been in all respects duly authorized.
NOW, THEREFORE, in consideration of the above premises, each party
agrees, for the benefit of each other party and for the equal and ratable
benefit of the Holders of the Securities, as follows:
<PAGE> 3
ARTICLE I
AMENDMENTS
Section 1. The Company, Advanced, Holding Company, Changes, Bronson,
Health Factors and the Trustee hereby amend the Indenture and agree that Bronson
and Health Factors shall each be a Subsidiary Guarantor, a Guarantor and a
Future Subsidiary Guarantor for all purposes under the Indenture and each of the
terms "Subsidiary Guarantor", "Guarantor" and "Future Subsidiary Guarantor"
shall for all purposes under the Indenture specifically include Bronson and
Health Factors.
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1. Terms Defined. For all purposes of this Second
Supplemental Indenture, except as otherwise defined or unless the context
otherwise requires, terms used in capitalized form in this Second Supplemental
Indenture and defined in the Indenture have the meanings specified in the
Indenture.
Section 2.2. Indenture. Except as amended hereby, the Indenture and
the Securities are in all respects ratified and confirmed and all their terms
shall remain in full force and effect.
Section 2.3. Governing Law. THIS SECOND SUPPLEMENTAL INDENTURE SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
Section 2.4. Successors and Assigns. All agreements of the Company,
Advanced, Holding Company, Changes, Bronson and Health Factors in this Second
Supplemental Indenture and the Securities shall bind their respective successors
and assigns.
Section 2.5. Multiple Counterparts. This Second Supplemental
Indenture may be executed in any number of counterparts, each of which shall be
an original; but such counterparts shall together constitute but one and the
same instrument.
Section 2.6. Effectiveness. The provisions of this Second
Supplemental Indenture shall become effective immediately upon its execution and
delivery by the Trustee in accordance with the provisions of Article IX of the
Indenture.
-2-
<PAGE> 4
Section 2.7. Trustee Disclaimer. The Trustee accepts the amendment
of the Indenture effected by this Second Supplemental Indenture and agrees to
execute the trust created by the Indenture as hereby amended, but only upon the
terms and conditions set forth in the Indenture, including the terms and
provisions defining and limiting the liabilities and responsibilities of the
Trustee, which terms and provisions shall in like manner define and limit its
liabilities and responsibilities in the performance of the trust created by the
Indenture as hereby amended, and, without limiting the generality of the
foregoing, the Trustee shall not be responsible in any manner whatsoever for or
with respect to any of the recitals (other than the second recital) or
statements contained herein, all of which recitals or statements are made solely
by the Company, Advanced, Holding Company, Changes, Bronson and Health Factors
or for or with respect to (i) the validity, efficacy or sufficiency of this
Second Supplemental Indenture or any of the terms or provisions hereof, (ii) the
proper authorization hereof by the Company, Advanced, Holding Company, Changes,
Bronson and Health Factors by corporate action or otherwise, (iii) the due
execution hereof by the Company, Advanced, Holding Company, Changes, Bronson and
Health Factors, or (iv) the consequences (direct or indirect and whether
deliberate or inadvertent) of any amendment herein provided for, and the Trustee
makes no representation with respect to any such matters.
Section 2.8 Headings. The headings of the Articles and Sections of
this Second Supplemental Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
-3-
<PAGE> 5
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed, all as of the date first written
above.
TWIN LABORATORIES INC., TWINLAB CORPORATION,
as Issuer
By: /s/ Ross Blechman By: /s/ Ross Blechman
_________________________ ___________________________
Name: Ross Blechman Name: Ross Blechman
Title: Chairman, CEO Title: Chairman, CEO
& President & President
ADVANCED RESEARCH PRESS, CHANGES INTERNATIONAL OF
INC. FORT WALTON BEACH, INC.
By: /s/ Ross Blechman By: /s/ Ross Blechman
_________________________ ___________________________
Name: Ross Blechman Name: Ross Blechman
Title: Executive Vice Title: Chairman
President
BRONSON LABORATORIES, INC. HEALTH FACTORS INTERNATIONAL,
INC.
By: /s/ Ross Blechman By: /s/ Ross Blechman
_________________________ ___________________________
Name: Ross Blechman Name: Ross Blechman
Title: Chairman, CEO Title: Chairman, CEO
& President & President
-4-
<PAGE> 6
STATE STREET BANK AND TRUST
COMPANY, AS TRUSTEE
By: /s/ Elizabeth Hammer
___________________________
Name: Elizabeth Hammer
Title: Vice President
-5-
<PAGE> 1
TWIN LABORATORIES INC., as Issuer,
and
THE GUARANTORS NAMED HEREIN
and
STATE STREET BANK AND TRUST COMPANY, as Trustee
THIRD SUPPLEMENTAL INDENTURE
Dated as of September 15, 1998
to
INDENTURE
Dated As of May 7, 1996 as supplemented as of
December 1, 1997 and as of May 14, 1998
10-1/4% Senior Subordinated Notes due 2006
<PAGE> 2
THIRD SUPPLEMENTAL INDENTURE, dated as of September 15, 1998 by and
among TWIN LABORATORIES INC., a Utah corporation (the "Company"), ADVANCED
RESEARCH PRESS, INC., a New York corporation ("Advanced"), TWINLAB CORPORATION,
a Delaware corporation formerly named TLG Laboratories Holding Corp. ("Holding
Company"), CHANGES INTERNATIONAL OF FORT WALTON BEACH, INC., a Florida
corporation ("Changes"), BRONSON LABORATORIES INC., a Delaware Corporation
("Bronson"), HEALTH FACTORS INTERNATIONAL, INC., a Delaware corporation ("Health
Factors"), and PR NUTRITION, INC., a California corporation ("PR Nutrition"), as
Guarantors, and State Street Bank and Trust Company, a Massachusetts bank and
trust company (successor to Fleet National Bank), as Trustee (the "Trustee").
WHEREAS, the Company, Advanced, Holding Company and Fleet National
Bank, as Trustee executed an Indenture, dated as of May 7, 1996 (the
"Indenture"), in respect of $100,000,000 aggregate principal amount of the
Company's 10-1/4% Senior Subordinated Notes due 2006 (the "Securities");
WHEREAS, State Street Bank and Trust Company is the successor to
Fleet National Bank, as Trustee under the Indenture;
WHEREAS, on December 1, 1997 the Company, Advanced, Holding Company,
Changes and Trustee executed the First Supplemental Indenture dated as of
December 1, 1997 (the "First Supplemental Indenture");
WHEREAS, on May 14, 1998, the Company, Advanced, Holding Company,
Changes, Bronson, Health Factors and Trustee executed the Second Supplemental
Indenture dated as of May 14, 1998 (the "Second Supplemental Indenture");
WHEREAS, the term Indenture as hereinafter used in this Third
Supplemental Indenture shall mean the Indenture as amended by the First
Supplemental Indenture and the Second Supplemental Indenture;
WHEREAS, Section 11.3 of the Indenture requires, under circumstances
specified in Section 11.3, that certain Subsidiaries of the Company execute and
deliver to the Trustee a supplemental indenture pursuant to which such
Subsidiaries of the Company shall be named as additional Subsidiary Guarantors;
and
WHEREAS, all conditions and requirements necessary to make this
Third Supplemental Indenture a valid, binding and legal instrument in accordance
with its terms have been performed and fulfilled and the execution and delivery
hereof have been in all respects duly authorized.
<PAGE> 3
NOW, THEREFORE, in consideration of the above premises, each party
agrees, for the benefit of each other party and for the equal and ratable
benefit of the Holders of the Securities, as follows:
ARTICLE I
AMENDMENTS
Section 1. The Company, Advanced, Holding Company, Changes, Bronson,
Health Factors and PR Nutrition and the Trustee hereby amend the Indenture and
agree that PR Nutrition shall be a Subsidiary Guarantor, a Guarantor and a
Future Subsidiary Guarantor for all purposes under the Indenture and each of the
terms "Subsidiary Guarantor", "Guarantor" and "Future Subsidiary Guarantor"
shall for all purposes under the Indenture specifically include PR Nutrition.
ARTICLE II
MISCELLANEOUS PROVISIONS
Section 2.1. Terms Defined. For all purposes of this Third
Supplemental Indenture, except as otherwise defined or unless the context
otherwise requires, terms used in capitalized form in this Third Supplemental
Indenture and defined in the Indenture have the meanings specified in the
Indenture.
Section 2.2. Indenture. Except as amended hereby, the Indenture and
the Securities are in all respects ratified and confirmed and all their terms
shall remain in full force and effect.
Section 2.3. Governing Law. THIS THIRD SUPPLEMENTAL INDENTURE SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK,
WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.
Section 2.4. Successors and Assigns. All agreements of the Company,
Advanced, Holding Company, Changes, Bronson, Health Factors and PR Nutrition in
this Third Supplemental Indenture and the Securities shall bind their respective
successors and assigns.
Section 2.5. Multiple Counterparts. This Third Supplemental
Indenture may be executed in any number of counterparts, each of which shall be
an original; but such counterparts shall together constitute but one and the
same instrument.
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<PAGE> 4
Section 2.6. Effectiveness. The provisions of this Third
Supplemental Indenture shall become effective immediately upon its execution and
delivery by the Trustee in accordance with the provisions of Article IX of the
Indenture.
Section 2.7. Trustee Disclaimer. The Trustee accepts the amendment
of the Indenture effected by this Third Supplemental Indenture and agrees to
execute the trust created by the Indenture as hereby amended, but only upon the
terms and conditions set forth in the Indenture, including the terms and
provisions defining and limiting the liabilities and responsibilities of the
Trustee, which terms and provisions shall in like manner define and limit its
liabilities and responsibilities in the performance of the trust created by the
Indenture as hereby amended, and, without limiting the generality of the
foregoing, the Trustee shall not be responsible in any manner whatsoever for or
with respect to any of the recitals (other than the second recital) or
statements contained herein, all of which recitals or statements are made solely
by the Company, Advanced, Holding Company, Changes, Bronson, Health Factors and
PR Nutrition or for or with respect to (i) the validity, efficacy or sufficiency
of this Third Supplemental Indenture or any of the terms or provisions hereof,
(ii) the proper authorization hereof by the Company, Advanced, Holding Company,
Changes, Bronson, Health Factors and PR Nutrition by corporate action or
otherwise, (iii) the due execution hereof by the Company, Advanced, Holding
Company, Changes, Bronson, Health Factors and PR Nutrition, or (iv) the
consequences (direct or indirect and whether deliberate or inadvertent) of any
amendment herein provided for, and the Trustee makes no representation with
respect to any such matters.
Section 2.8 Headings. The headings of the Articles and Sections of
this Third Supplemental Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
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<PAGE> 5
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed, all as of the date first written
above.
TWIN LABORATORIES INC., TWINLAB CORPORATION,
as Issuer
By:/s/Ross Blechman By:/s/Ross Blechman
_________________________ ___________________________
Name:Ross Blechman Name:Ross Blechman
Title:Chairman, CEO & President Title:Chairman, CEO & President
ADVANCED RESEARCH PRESS, CHANGES INTERNATIONAL OF
INC. FORT WALTON BEACH, INC.
By:/s/Ross Blechman By:/s/Ross Blechman
___________________________ ___________________________
Name:Ross Blechman Name:Ross Blechman
Title:Executive Vice President Title:Chairman
BRONSON LABORATORIES, INC. HEALTH FACTORS INTERNATIONAL,
INC.
By:/s/Ross Blechman By:/s/Ross Blechman
___________________________ ___________________________
Name:Ross Blechman Name:Ross Blechman
Title:Chairman, CEO & President Title:Chairman, CEO & President
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<PAGE> 6
STATE STREET BANK AND TRUST PR NUTRITION, INC.
COMPANY, AS TRUSTEE
By:/s/Elizabeth Hammer By:/s/Ross Blechman
___________________________ ______________________
Name:Elizabeth Hammer Name:Ross Blechman
Title:Vice President Title:Chairman & CEO
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<PAGE> 1
APPENDIX A
TWINLAB CORPORATION
1998 STOCK INCENTIVE PLAN
June, 1998
<PAGE> 2
Table of Contents
Page
----
ARTICLE I
GENERAL
1.1 Purpose..................................................... 1
1.2 Administration.............................................. 1
1.3 Persons Eligible for Awards................................. 3
1.4 Types of Awards Under Plan.................................. 3
1.5 Shares Available for Awards................................. 3
1.6 Adjustments Upon Changes in Capitalization or Merger ....... 5
1.7 Definitions of Certain Terms................................ 6
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards................................ 9
2.2 No Rights as a Shareholder.................................. 9
2.3 Grant of Stock Options, Stock Appreciation
Rights and Reload Options................................. 10
2.4 Exercise of Options and Stock Appreciation
Rights.................................................... 13
2.5 Termination of Employment; Death............................ 14
2.6 Grant of Restricted Stock................................... 16
2.7 Grant of Restricted Stock Units............................. 17
2.8 Grant of Performance Shares................................. 18
2.9 Other Stock-Based Awards.................................... 19
2.10 Grant of Dividend Equivalent Rights......................... 19
2.11 Right of Recapture.......................................... 20
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification
of Awards................................................. 21
3.2 Tax Withholding............................................. 22
3.3 Restrictions................................................ 23
3.4 Nonassignability............................................ 23
3.5 Requirement of Notification of Election
Under Section 83(b) of the Code........................... 23
3.6 Requirement of Notification Upon
Disqualifying Disposition Under
Section 421(b) of the Code................................ 23
3.7 Right of Discharge Reserved................................. 24
3.8 Nature of Payments.......................................... 24
3.9 Non-Uniform Determinations.................................. 24
3.10 Other Payments or Awards.................................... 25
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3.11 Section Headings............................................ 25
3.12 Effective Date and Term of Plan............................. 25
3.13 Governing Law............................................... 26
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<PAGE> 4
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Twinlab Corporation 1998 Stock Incentive Plan
(the "Plan") is to provide for officers, other employees and directors of, and
consultants to, Twinlab Corporation (the "Company") and its subsidiaries an
incentive (a) to enter into and remain in the service of the Company, (b) to
enhance the long-term performance of the Company, and (c) to acquire a
proprietary interest in the success of the Company. 1.2 Administration
1.2.1 Subject to Section 1.2.6, the Plan shall be administered by a
committee (the "Committee") of the board of directors of the Company (the
"Board"), which shall consist of not less than two directors. The members of the
Committee shall be appointed by, and serve at the pleasure of, the Board. To the
extent required for transactions under the Plan to qualify for the exemptions
available under Rule 16b-3 ("Rule 16b-3") promulgated under the Securities
Exchange Act of 1934 (the "1934 Act"), all actions relating to awards to persons
subject to Section 16 of the 1934 Act shall be taken by the Board unless each
person who serves on the Committee is a "non-employee director" within the
meaning of Rule 16b-3 or such actions are taken by a sub-committee of the
Committee (or the Board) comprised solely of "non-employee directors." To the
extent required for compensation realized from awards under the Plan to be
deductible by the Company pursuant to section 162(m) of the Internal Revenue
Code of 1986 (the "Code"), the members of the Committee shall be "outside
directors" within the meaning of section 162(m).
1.2.2 The Committee shall have the authority (a) to exercise all of
the powers granted to it under the Plan, (b) to construe, interpret and
implement the Plan and any plan agree-
<PAGE> 5
ments executed pursuant to Section 2.1, (c) to prescribe, amend and rescind
rules and regulations relating to the Plan, including rules governing its own
operations, (d) to make all determinations necessary or advisable in
administering the Plan, (e) to correct any defect, supply any omission and
reconcile any inconsistency in the Plan, (f) to amend the Plan to reflect
changes in applicable law, (g) to determine whether, to what extent and under
what circumstances awards may be settled or exercised in cash, Shares of Common
Stock, other securities, other awards or other property, or canceled, forfeited
or suspended and the method or methods by which awards may be settled, canceled,
forfeited or suspended, and (h) to determine whether, to what extent and under
what circumstances cash, shares of Common Stock, other securities, other awards
or other property and other amounts payable with respect to an award shall be
deferred either automatically or at the election of the holder thereof or of the
Committee.
1.2.3 Actions of the Committee shall be taken by the vote of a
majority of its members. Any action may be taken by a written instrument signed
by a majority of the Committee members, and action so taken shall be fully as
effective as if it had been taken by a vote at a meeting.
1.2.4 The determination of the Committee on all matters relating to
the Plan or any plan agreement shall be final, binding and conclusive.
1.2.5 No member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any award
thereunder.
1.2.6 Notwithstanding anything to the contrary contained herein: (a)
until the Board shall appoint the members of the Committee, the Plan shall be
administered by the Board and (b) the Board may, in its sole discretion, at any
time and from time to time, grant awards or resolve to administer the Plan. In
either of the foregoing events, the Board shall have all of the authority
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and responsibility granted to the Committee herein.
1.3 Persons Eligible for Awards
Awards under the Plan may be made to such officers and other
employees of the Company and its subsidiaries (including employees who are also
directors and prospective employees conditioned on their becoming employees),
and to such consultants to the Company and its subsidiaries (collectively, "key
persons") as the Committee shall select in its discretion.
1.4 Types of Awards Under Plan
Awards may be made under the Plan in the form of (a) incentive stock
options (within the meaning of section 422 of the Code), (b) nonqualified stock
options, (c) stock appreciation rights, (d) dividend equivalent rights, (e)
restricted stock, (f) restricted stock units (g) performance shares and (h)
other stock-based awards, all as more fully set forth in Article II. The term
"award" means any of the foregoing. No incentive stock option (other than an
incentive stock option that may be assumed or issued by the Company in
connection with a transaction to which section 424(a) of the Code applies) may
be granted to a person who is not an employee of the Company on the date of
grant. 1.5 Shares Available for Awards
1.5.1 Total shares available. The total number of shares of common
stock of the Company, par value $1.00 per share ("Common Stock"), which may be
transferred in satisfaction of awards granted under the Plan shall not exceed
1,000,000 shares plus additional shares determined as follows. As of January 1,
1999 and each January 1 thereafter, the Board in its discretion may increase the
number of shares authorized under this Section 1.5.1 by an amount not in excess
of one percent (1%) of the total number of shares of Common Stock then
outstanding.
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The increments authorized pursuant to the preceding sentence shall be
cumulative, so that any amount of permitted increase in shares not implemented
in one year may in the Board's discretion be implemented in a subsequent year.
Notwithstanding the foregoing, no more than 1,000,000 shares of Common Stock
shall be available for issuance upon the exercise of incentive stock options.
Shares issued pursusnt to the Plan may be authorized but unissued Common Stock
or authorized and issued Common Stock held in the Company's treasury or acquired
by the Company for the purposes of the Plan. The Committee may direct that any
stock certificate evidencing shares issued pursuant to the Plan shall bear a
legend setting forth such restrictions on transferability as may apply to such
shares pursuant to the Plan. If, after the effective date of the Plan, any award
is forfeited or any award otherwise terminates or is cancelled without the
delivery of shares of Common Stock, then the shares covered by such award or to
which such award relates shall again become available for transfer pursuant to
awards granted or to be granted under this Plan. Any shares of Common Stock
delivered by the Company, any shares of Common Stock with respect to which
awards are made by the Company and any shares of Common Stock with respect to
which the Company becomes obligated to make awards, through the assumption of,
or in substitution for, outstanding awards previously granted by an acquired
entity, shall not be counted against the shares available for awards under this
Plan.
1.5.2 Individual Limit. The total number of shares of Common Stock
with respect to which stock options and stock appreciation rights may be granted
to any one employee of the Company or a subsidiary during any one -year period
shall not exceed 250,000.
1.5.3 Except as provided in this Section 1.5 and in Section 2.3.8,
there shall be no limit on the number or the value of the shares of Common Stock
that may be subject to awards to any individual under the Plan.
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<PAGE> 8
1.6 Adjustments Upon Changes in Capitalization or Merger
1.6.1 Subject to any required action by the shareholders of the
Company, the number of shares of Common Stock covered by each outstanding award,
the number of shares available for awards, the number of shares that may be
subject to awards to any one employee, and the price per share of Common Stock
covered by each such outstanding award shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Committee, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an award.
After any adjustment made pursuant to this Section 1.6.1, the number of shares
subject to each outstanding award shall be rounded to the nearest whole number.
1.6.2 In the event of the proposed dissolution or liquidation of the
Company, all outstanding awards will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Committee. The Committee may, in the exercise of its sole discretion in such
instances, accelerate the date on which any award becomes exercisable or fully
vested and/or declare that any award shall terminate as of a specified date.
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<PAGE> 9
1.6.3 In the event of a merger or consolidation ("merger") of the
Company with or into any other corporation or entity ("successor corporation"),
outstanding awards shall be assumed or an equivalent option or right shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Committee determines, in the exercise of its
sole discretion, to accelerate the date on which an award becomes exercisable or
fully vested. In the absence of an assumption or substitution of awards, awards
shall, to the extent not exercised, terminate as of the date of the closing of
the merger. For the purposes of this Section 3.7.4, an award shall be considered
assumed if, for every share of Common Stock subject thereto immediately prior to
the merger, the grantee has the right, following the merger, to acquire the
consideration received in the merger transaction by holders of shares of Common
Stock (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding shares);
provided, however, that if such consideration received in the merger was not
solely common stock of the successor corporation or its parent, the Committee
may, with the consent of the successor corporation and the participant, provide
for the consideration to be acquired pursuant to the award, for each share of
Common Stock subject thereto, to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger. For purposes
hereof, the term "merger" shall include any transaction in which another
corporation acquires all of the issued and outstanding Common Stock of the
Company.
1.7 Definitions of Certain Terms
1.7.1 The "Fair Market Value" of a share of Common Stock on any day
shall be determined as follows.
(a) If the principal market for the Common Stock (the
"Market") is a
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<PAGE> 10
national securities exchange or the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") National Market, the last sale price or,
if no reported sales take place on the applicable date, the average of the high
bid and low asked price of Common Stock as reported for such Market on such date
or, if no such quotation is made on such date, on the next preceding day on
which there were quotations, provided that such quotations shall have been made
within the ten (10) business days preceding the applicable date;
(b) If the Market is the NASDAQ National List, the NASDAQ
Supplemental List or another market, the average of the high bid and low asked
price for Common Stock on the applicable date, or, if no such quotations shall
have been made on such date, on the next preceding day on which there were
quotations, provided that such quotations shall have been made within the ten
(10) business days preceding the applicable date; or,
(c) In the event that neither paragraph (a) nor (b) shall
apply, the Fair Market Value of a share of Common Stock on any day shall be
determined in good faith by the Committee.
1.7.2 The term "incentive stock option" means an option that is
intended to qualify for special federal income tax treatment pursuant to
sections 421 and 422 of the Code, as now constituted or subsequently amended, or
pursuant to a successor provision of the Code, and which is so designated in the
applicable plan agreement. Any option that is not specifically designated as an
incentive stock option shall under no circumstances be considered an incentive
stock option. Any option that is not an incentive stock option is referred to
herein as a "nonqualified stock option."
1.7.3 The term "employment" means, in the case of a grantee of an
award under the Plan who is not an employee of the Company, the grantee's
association with the Company or a subsidiary as a consultant or otherwise.
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1.7.4 A grantee shall be deemed to have a "termination of
employment" upon ceasing to be employed by the Company and all of its
subsidiaries or by a corporation assuming awards in a transaction to which
section 424(a) of the Code applies. The Committee may in its discretion
determine (a) whether any leave of absence constitutes a termination of
employment for purposes of the Plan, (b) the impact, if any, of any such leave
of absence on awards theretofore made under the Plan, and (c) when a change in a
non-employee's association with the Company constitutes a termination of
employment for purposes of the Plan. The Committee shall have the right to
determine whether a grantee's termination of employment is a dismissal for cause
and the date of termination in such case, which date the Committee may
retroactively deem to be the date of the action that is cause for dismissal.
Such determinations of the Committee shall be final, binding and conclusive.
1.7.5 The term "cause," when used in connection with termination of
a grantee's employment, shall have the meaning set forth in any then-effective
employment agreement between the grantee and the Company or a subsidiary
thereof. In the absence of such an employment agreement provision, "cause"
means: (a) conviction of any crime (whether or not involving the Company)
constituting a felony in the jurisdiction involved; (b) conduct related to the
grantee's employment for which either criminal or civil penalties against the
grantee or the Company may be sought; (c) material violation of the Company's
policies, including, without limitation, those relating to sexual harassment,
the disclosure or misuse of confidential information, or those set forth in
Company manuals or statements of policy; (d) serious neglect or misconduct in
the performance of the grantee's duties for the Company or willful or repeated
failure or refusal to perform such duties; in each case as determined by the
Committee, which determination shall be final, binding and conclusive.
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ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each award granted under the Plan (except an award of unrestricted
stock) shall be evidenced by a written agreement ("plan agreement") which shall
contain such provisions as the Committee in its discretion deems necessary or
desirable. Such provisions may include, without limitation, a requirement that
the grantee become a party to a shareholders' agreement with respect to any
shares of Common Stock acquired pursuant to the award, a requirement that the
grantee acknowledge that such shares are acquired for investment purposes only,
and a right of first refusal exercisable by the Company in the event that the
grantee wishes to transfer any such shares. The Committee may grant awards in
tandem with or in substitution for any other award or awards granted under this
Plan or any award granted under any other plan of the Company or any subsidiary.
Payments or transfers to be made by the Company or any subsidiary upon the
grant, exercise or payment of an award may be made in such form as the Committee
shall determine, including cash, shares of Common Stock, other securities, other
awards or other property and may be made in a single payment or transfer, in
installments or on a deferred basis, in each case in accordance with rules
established by the Committee. By accepting an award pursuant to the Plan, a
grantee thereby agrees that the award shall be subject to all of the terms and
provisions of the Plan and the applicable plan agreement.
2.2 No Rights as a Shareholder
No grantee of an option or stock appreciation right (or other person
having the right to exercise such award) shall have any of the rights of a
shareholder of the Company with respect to shares subject to such award until
the issuance of a stock certificate to such person for such
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shares. Except as otherwise provided in Section 1.5.3, no adjustment shall be
made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which the
record date is prior to the date such stock certificate is issued.
2.3 Grant of Stock Options, Stock Appreciation Rights and Reload Options
2.3.1 The Committee may grant incentive stock options and
nonqualified stock options (collectively, "options") to purchase shares of
Common Stock from the Company, to such key persons, in such amounts and subject
to such terms and conditions, as the Committee shall determine in its
discretion, subject to the provisions of the Plan.
2.3.2 The Committee may grant stock appreciation rights to such key
persons, in such amounts and subject to such terms and conditions, as the
Committee shall determine in its discretion, subject to the provisions of the
Plan. Stock appreciation rights may be granted in connection with all or any
part of, or independently of, any option granted under the Plan. A stock
appreciation right granted in connection with a nonqualified stock option may be
granted at or after the time of grant of such option. A stock appreciation right
granted in connection with an incentive stock option may be granted only at the
time of grant of such option.
2.3.3 The grantee of a stock appreciation right shall have the
right, subject to the terms of the Plan and the applicable plan agreement, to
receive from the Company an amount equal to (a) the excess of the Fair Market
Value of a share of Common Stock on the date of exercise of the stock
appreciation right over (b) the exercise price of such right as set forth in the
plan agreement (or over the option exercise price if the stock appreciation
right is granted in connection with an option), multiplied by (c) the number of
shares with respect to which the stock appreciation right is exercised. Payment
upon exercise of a stock appreciation right shall be in cash or in shares
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<PAGE> 14
of Common Stock (valued at their Fair Market Value on the date of exercise of
the stock appreciation right) or both, all as the Committee shall determine in
its discretion. Upon the exercise of a stock appreciation right granted in
connection with an option, the number of shares subject to the option shall be
correspondingly reduced by the number of shares with respect to which the stock
appreciation right is exercised. Upon the exercise of an option in connection
with which a stock appreciation right has been granted, the number of shares
subject to the stock appreciation right shall be correspondingly reduced by the
number of shares with respect to which the option is exercised.
2.3.4 Each plan agreement with respect to an option shall set forth
the amount (the "option exercise price") payable by the grantee to the Company
upon exercise of the option evidenced thereby. The option exercise price per
share shall be determined by the Committee in its discretion; provided, however,
that the option exercise price of an incentive stock option shall be at least
100% of the Fair Market Value of a share of Common Stock on the date the option
is granted (except as permitted in connection with the assumption or issuance of
options in a transaction to which section 424(a) of the Code applies), and
provided further that in no event shall the option exercise price be less than
the par value of a share of Common Stock.
2.3.5 Each plan agreement with respect to an option or stock
appreciation right shall set forth the periods during which the award evidenced
thereby shall be exercisable, whether in whole or in part. Such periods shall be
determined by the Committee in its discretion; provided, however, that no
incentive stock option (or a stock appreciation right granted in connection with
an incentive stock option) shall be exercisable more than 10 years after the
date of grant.
2.3.6 The Committee may in its discretion include in any plan
agreement with respect to an option (the "original option") a provision that an
additional option (the "additional option") shall be granted to any grantee who,
pursuant to Section 2.4.3(b), delivers shares of
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<PAGE> 15
Common Stock in partial or full payment of the exercise price of the original
option. The additional option shall be for a number of shares of Common Stock
equal to the number thus delivered, shall have an exercise price equal to the
Fair Market Value of a share of Common Stock on the date of exercise of the
original option, and shall have an expiration date no later than the expiration
date of the original option. In the event that a plan agreement provides for the
grant of an additional option, such Agreement shall also provide that the
exercise price of the original option be no less than the Fair Market Value of a
share of Common Stock on its date of grant, and that any shares that are
delivered pursuant to Section 2.4.3(b) in payment of such exercise price shall
have been held for at least six months.
2.3.7 To the extent that the aggregate Fair Market Value (determined
as of the time the option is granted) of the stock with respect to which
incentive stock options granted under this Plan and all other plans of the
Company and any subsidiary are first exercisable by any employee during any
calendar year shall exceed the maximum limit (currently, $100,000), if any,
imposed from time to time under section 422 of the Code, such options shall be
treated as nonqualified stock options.
2.3.8 Notwithstanding the provisions of Sections 2.3.4 and 2.3.5, to
the extent required under section 422 of the Code, an incentive stock option may
not be granted under the Plan to an individual who, at the time the option is
granted, owns stock possessing more than 10% of the total combined voting power
of all classes of stock of his employer corporation or of its parent or
subsidiary corporations (as such ownership may be determined for purposes of
section 422(b)(6) of the Code) unless (a) at the time such incentive stock
option is granted the option exercise price is at least 110% of the Fair Market
Value of the shares subject thereto and (b) the incentive stock option by its
terms is not exercisable after the expiration of five (5) years from the date it
is granted.
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<PAGE> 16
2.4 Exercise of Options and Stock Appreciation Rights
Subject to the provisions of this Article II, each option or stock
appreciation right granted under the Plan shall be exercisable as follows:
2.4.1 Unless the applicable plan agreement otherwise provides, an
option or stock appreciation right shall become exercisable in five
substantially equal installments, on each of the first, second, third, fourth
and fifth anniversaries of the date of grant, and each installment, once it
becomes exercisable, shall remain exercisable until expiration, cancellation or
termination of the award.
2.4.2 Unless the applicable plan agreement otherwise provides, an
option or stock appreciation right may be exercised from time to time as to all
or part of the shares as to which such award is then exercisable (but, in any
event, only for whole shares). A stock appreciation right granted in connection
with an option may be exercised at any time when, and to the same extent that,
the related option may be exercised. An option or stock appreciation right shall
be exercised by the filing of a written notice with the Company, on such form
and in such manner as the Committee shall prescribe.
2.4.3 Any written notice of exercise of an option shall be
accompanied by payment for the shares being purchased. Such payment shall be
made: (a) by certified or official bank check (or the equivalent thereof
acceptable to the Company) for the full option exercise price; or (b) unless the
applicable plan agreement provides otherwise, by delivery of shares of Common
Stock (which, if acquired pursuant to exercise of a stock option, were acquired
at least six months prior to the option exercise date) and having a Fair Market
Value (determined as of the exercise date) equal to all or part of the option
exercise price and a certified or official bank check (or the
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<PAGE> 17
equivalent thereof acceptable to the Company) for any remaining portion of the
full option exercise price; or (c) at the discretion of the Committee and to the
extent permitted by law, by such other method as the Committee may from time to
time prescribe.
2.4.4 Promptly after receiving payment of the full option exercise
price, or after receiving notice of the exercise of a stock appreciation right
for which payment will be made partly or entirely in shares, the Company shall,
subject to the provisions of Section 3.3 (relating to certain restrictions),
deliver to the grantee or to such other person as may then have the right to
exercise the award, a certificate or certificates for the shares of Common Stock
for which the award has been exercised. If the method of payment employed upon
option exercise so requires, and if applicable law permits, an optionee may
direct the Company to deliver the certificate(s) to the optionee's stockbroker.
2.5 Termination of Employment; Death
2.5.1 Except to the extent otherwise provided in Section 2.5.2,
2.5.3, 2.5.3 or in the applicable plan agreement, all options and stock
appreciation rights not theretofore exercised shall terminate upon termination
of the grantee's employment for any reason (including death).
2.5.2 If a grantee's employment terminates by reason of the
grantee's disability or retirement, then except as otherwise provided in the
applicable Plan Agreement, the grantee may exercise any outstanding option or
stock appreciation right on the following terms and conditions: (a) exercise may
be made only to the extent that the grantee was entitled to exercise the award
on the date of employment termination; and (b) exercise must occur within one
year after employment terminates, but in no event after the expiration date of
the award as set forth in the Plan Agreement. The term "disability" for purposes
of the preceding sentence has the meaning given to it by
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<PAGE> 18
section 422(c)(6) of the Code, and the term "retirement" means retirement from
the Company at or after attaining age 62 with at least ten (10) years of service
with the Company, as determined by the Committee.
2.5.3 If a grantee dies while employed by the Company or any
subsidiary, or after employment termination but during the period in which the
grantee's awards are exercisable pursuant to Section 2.5.2, then except as
otherwise provided in the applicable Plan Agreement, any outstanding option or
stock appreciation right shall be exercisable on the following terms and
conditions: (a) exercise may be made only to the extent that the grantee was
entitled to exercise the award on the date of death; and (b) exercise must occur
by the earlier of the first anniversary of the grantee's death or the expiration
date of the award. Any such exercise of an award following a grantee's death
shall be made only by the grantee's executor or administrator, unless the
grantee's will specifically disposes of such award, in which case such exercise
shall be made only by the recipient of such specific disposition. If a grantee's
personal representative or the recipient of a specific disposition under the
grantee's will shall be entitled to exercise any award pursuant to the preceding
sentence, such representative or recipient shall be bound by all the terms and
conditions of the Plan and the applicable Plan Agreement which would have
applied to the grantee including, without limitation, the provisions of Sections
3.3 and 3.9 hereof.
2.5.4 If a grantee's employment is involuntarily terminated by the
Company other than for Cause, then except as otherwise provided in the
applicable Plan Agreement, the grantee may exercise any outstanding option or
stock appreciation right on the following terms and conditions: (a) exercise may
be made only to the extent that the grantee was entitled to exercise the award
on the date of employment termination; and (b) exercise must occur within ninety
(90) days after employment terminates, but in no event after the expiration date
of the award as set forth in the Plan Agreement.
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<PAGE> 19
2.5.5 If at any time within one year after the exercise of all or
any portion of an option or stock appreciation right the grantee either (a) is
terminated for Cause or (b) engages in any activity determined in the sole
discretion of the Committee to be in competition with any activity of the
Company, or otherwise inimical, contrary or harmful to the interests of the
Company (including, but not limited to accepting employment with or serving as a
consultant, adviser or in any other capacity to an entity that is in competition
with or acting against the interests of the Company), then any option gain
realized by the grantee from exercising such option or stock appreciation right
shall be paid by the grantee to the Company upon notice from the Company. For
purposes of this Section, "option gain" means the excess of the Fair Market
Value of a share of Common Stock on the date of exercise of the option or stock
appreciation right over the option exercise price (or the Fair Market Value of a
share of Common Stock on the date of grant of the stock appreciation right),
multiplied by the number of shares with respect to which the option or stock
appreciation right was exercised, without regard to any subsequent decrease or
increase in the Fair Market Value of such shares. The Company shall have the
right to offset such option gain against any amounts otherwise owed to the
grantee by the Company (whether as wages, vacation pay, or pursuant to any
benefit plan or other compensatory arrangement).
2.6 Grant of Restricted Stock
2.6.1 The Committee may grant restricted shares of Common Stock to
such key persons, in such amounts, and subject to such terms and conditions as
the Committee shall determine in its discretion, subject to the provisions of
the Plan. Restricted stock awards may be made independently of or in connection
with any other award under the Plan. A grantee of a restricted stock award shall
have no rights with respect to such award unless such grantee accepts the award
within such period as the Committee shall specify by executing a plan agreement
in such form as the Committee shall determine and, if the Committee shall so
require, makes payment to
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<PAGE> 20
the Company by certified or official bank check (or the equivalent thereof
acceptable to the Company) in such amount as the Committee may determine.
2.6.2 Promptly after a grantee accepts a restricted stock award, the
Company shall issue in the grantee's name a certificate or certificates for the
shares of Common Stock covered by the award. Upon the issuance of such
certificate(s), the grantee shall have the rights of a shareholder with respect
to the restricted stock, subject to the nontransferability restrictions and
Company repurchase rights described in Sections 2.6.4 and 2.6.5 and to such
other restrictions and conditions as the Committee in its discretion may include
in the applicable plan agreement.
2.6.3 Unless the Committee shall otherwise determine, any
certificate issued evidencing shares of restricted stock shall remain in the
possession of the Company until such shares are free of any restrictions
specified in the applicable plan agreement.
2.6.4 Shares of restricted stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided in this Plan or the applicable plan agreement. The
Committee at the time of grant shall specify the date or dates (which may depend
upon or be related to the attainment of performance goals and other conditions)
on which the nontransferability of the restricted stock shall lapse. Unless the
applicable plan agreement provides otherwise, additional shares of Common Stock
or other property distributed to the grantee in respect of shares of restricted
stock, as dividends or otherwise, shall be subject to the same restrictions
applicable to such restricted stock.
2.6.5 During the 120 days following termination of the grantee's
employment for any reason, the Company shall have the right to require the
return of any shares to which restrictions on transferability apply, in exchange
for which the Company shall repay to the grantee (or the grantee's estate) any
amount paid by the grantee for such shares.
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<PAGE> 21
2.7 Grant of Restricted Stock Units
2.7.1 The Committee may grant awards of restricted stock units to
such key persons, in such amounts, and subject to such terms and conditions as
the Committee shall determine in its discretion, subject to the provisions of
the Plan. Restricted stock units may be awarded independently of or in
connection with any other award under the Plan.
2.7.2 At the time of grant, the Committee shall specify the date or
dates on which the restricted stock units shall become fully vested and
nonforfeitable, and may specify such conditions to vesting as it deems
appropriate. In the event of the termination of the grantee's employment by the
Company and its subsidiaries for any reason, restricted stock units that have
not become nonforfeitable shall be forfeited and cancelled.
2.7.3 At the time of grant, the Committee shall specify the maturity
date applicable to each grant of restricted stock units, which may be determined
at the election of the grantee. Such date may be later than the vesting date or
dates of the award. On the maturity date, the Company shall transfer to the
grantee one unrestricted, fully transferable share of Common Stock for each
restricted stock unit scheduled to be paid out on such date and not previously
forfeited. The Committee shall specify the purchase price, if any, to be paid by
the grantee to the Company for such shares of Common Stock.
2.8 Grant of Performance Shares
2.8.1 The Committee may grant performance share awards to such key
persons, and in such amounts and subject to such terms and conditions, as the
Committee shall in its sole discretion determine, subject to the provisions of
the Plan. Such an award shall entitle the grantee
-18-
<PAGE> 22
to acquire shares of Common Stock, or to be paid the value thereof in cash, as
the Committee shall determine, if specified performance goals are met.
Performance shares may be awarded independently of or in connection with any
other award under the Plan. A grantee shall have no rights with respect to a
performance share award unless such grantee accepts the award by executing a
Plan Agreement at such time and in such form as the Committee shall determine.
2.8.2 The grantee of a performance share award will have the rights
of a shareholder only as to shares for which a certificate has been issued
pursuant to the award and not with respect to any other shares subject to the
award.
2.8.3 Except as may otherwise be provided by the Committee at any
time prior to termination of employment, the rights of a grantee of a
performance share award shall automatically terminate upon the grantee's
termination of employment for any reason.
2.9 Other Stock-Based Awards
The Committee may grant other types of stock-based awards (including
the grant of unrestricted shares) to such key persons, in such amounts and
subject to such terms and conditions, as the Committee shall in its discretion
determine, subject to the provisions of the Plan. Such awards may entail the
transfer of actual shares of Common Stock to Plan participants, or payment in
cash or otherwise of amounts based on the value of shares of Common Stock.
-19-
<PAGE> 23
2.10 Grant of Dividend Equivalent Rights
The Committee may in its discretion include in the plan agreement
with respect to any award a dividend equivalent right entitling the grantee to
receive amounts equal to the ordinary dividends that would be paid, during the
time such award is outstanding and unexercised, on the shares of Common Stock
covered by such award if such shares were then outstanding. In the event such a
provision is included in a plan agreement, the Committee shall determine whether
such payments shall be made in cash, in shares of Common Stock or in another
form, whether they shall be conditioned upon the exercise of the award to which
they relate, the time or times at which they shall be made, and such other terms
and conditions as the Committee shall deem appropriate.
2.11 Right of Recapture
If at any time within one year after the date on which a participant
exercises an option or stock appreciation right, or on which restricted stock
vests, or which is the maturity date of restricted stock units, or on which
income is realized by a participant in connection with any other stock-based
award (each of which events is a "realization event"), the participant (a) is
terminated for cause or (b) engages in any activity determined in the discretion
of the Committee to be in competition with any activity of the Company, or
otherwise inimical, contrary or harmful to the interests of the Company
(including, but not limited to, accepting employment with or serving as a
consultant, adviser or in any other capacity to an entity that is in competition
with or acting against the interests of the Company), then any gain realized by
the participant from the realization event shall be paid by the participant to
the Company upon notice from the Company. Such gain shall be determined as of
the date of the realization event, without regard to any subsequent change in
the Fair Market Value of a share of Common Stock. The Company shall have the
right to offset such
-20-
<PAGE> 24
gain against any amounts otherwise owed to the participant by the Company
(whether as wages, vacation pay, or pursuant to any benefit plan or other
compensatory arrangement).
-21-
<PAGE> 25
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan; Modification of Awards
3.1.1 The Board may from time to time suspend, discontinue, revise
or amend the Plan in any respect whatsoever, except that no such amendment shall
materially impair any rights or materially increase any obligations under any
award theretofore made under the Plan without the consent of the grantee (or,
after the grantee's death, the person having the right to exercise the award).
For purposes of this Section 3.1, any action of the Board or the Committee that
alters or affects the tax treatment of any award shall not be considered to
materially impair any rights of any grantee.
3.1.2 Shareholder approval of any amendment shall be obtained to the
extent necessary to comply with section 422 of the Code (relating to incentive
stock options) or other applicable law or regulation.
3.1.3 The Committee may amend any outstanding plan agreement,
including, without limitation, by amendment which would accelerate the time or
times at which the award becomes unrestricted or may be exercised, waive or
amend any goals, restrictions or conditions set forth in the Agreement, or
extend the scheduled expiration date of the award. However, any such amendment
(other than an amendment pursuant to Section 3.7.2, relating to change in
control) that materially impairs the rights or materially increases the
obligations of a grantee under an outstanding award shall be made only with the
consent of the grantee (or, upon the grantee's death, the person having the
right to exercise the award).
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<PAGE> 26
3.2 Tax Withholding
3.2.1 As a condition to the receipt of any shares of Common Stock
pursuant to any award or the lifting of restrictions on any award, or in
connection with any other event that gives rise to a federal or other
governmental tax withholding obligation on the part of the Company relating to
an award (including, without limitation, FICA tax), the Company shall be
entitled to require that the grantee remit to the Company an amount sufficient
in the opinion of the Company to satisfy such withholding obligation.
3.2.2 If the event giving rise to the withholding obligation is a
transfer of shares of Common Stock, then, unless otherwise specified in the
applicable plan agreement, the grantee may satisfy the withholding obligation
imposed under Section 3.2.1 by electing to have the Company withhold shares of
Common Stock having a Fair Market Value equal to the amount of tax to be
withheld. For this purpose, Fair Market Value shall be determined as of the date
on which the amount of tax to be withheld is determined (and any fractional
share amount shall be settled in cash).
3.3 Restrictions
3.3.1 If the Committee shall at any time determine that any consent
(as hereinafter defined) is necessary or desirable as a condition of, or in
connection with, the granting of any award under the Plan, the issuance or
purchase of shares or other rights thereunder, or the taking of any other action
thereunder (each such action a "plan action"), then such plan action shall not
be taken, in whole or in part, unless and until such consent shall have been
effected or obtained to the full satisfaction of the Committee.
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<PAGE> 27
3.3.2 The term "consent" as used herein with respect to any plan
action means (a) any and all listings, registrations or qualifications in
respect thereof upon any securities exchange or under any federal, state or
local law, rule or regulation, (b) any and all written agreements and
representations by the grantee with respect to the disposition of shares, or
with respect to any other matter, which the Committee shall deem necessary or
desirable to comply with the terms of any such listing, registration or
qualification or to obtain an exemption from the requirement that any such
listing, qualification or registration be made and (c) any and all consents,
clearances and approvals in respect of a plan action by any governmental or
other regulatory bodies. 3.4 Nonassignability
Except to the extent otherwise provided in the applicable plan
agreement, no award or right granted to any person under the Plan shall be
assignable or transferable other than by will or by the laws of descent and
distribution, and all such awards and rights shall be exercisable during the
life of the grantee only by the grantee or the grantee's legal representative.
3.5 Requirement of Notification of Election Under Section 83(b) of the Code
If any grantee shall, in connection with the acquisition of shares
of Common Stock under the Plan, make the election permitted under section 83(b)
of the Code (that is, an election to include in gross income in the year of
transfer the amounts specified in section 83(b)), such grantee shall notify the
Company of such election within ten (10) days of filing notice of the election
with the Internal Revenue Service, in addition to any filing and notification
required pursuant to regulations issued under the authority of Code section
83(b).
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<PAGE> 28
3.6 Requirement of Notification Upon Disqualifying Disposition Under Section
421(b) of the Code
If any grantee shall make any disposition of shares of Common Stock
issued pursuant to the exercise of an incentive stock option under the
circumstances described in section 421(b) of the Code (relating to certain
disqualifying dispositions), such grantee shall notify the Company of such
disposition within 10 days thereof.
3.7 Right of Discharge Reserved
Nothing in the Plan or in any plan agreement shall confer upon any
grantee the right to continue in the employ of the Company or any subsidiary or
affect any right which the Company or any subsidiary may have to terminate such
employment.
3.8 Nature of Payments
3.8.1 Any and all grants of awards and issuances of shares of Common
Stock under the Plan shall be in consideration of services performed for the
Company by the grantee.
3.8.2 All such grants and issuances shall constitute a special
incentive payment to the grantee and shall not be taken into account in
computing the amount of salary or compensation of the grantee for the purpose of
determining any benefits under any pension, retirement, profit-sharing, bonus,
life insurance or other benefit plan of the Company or of any subsidiary or
under any agreement with the grantee, unless such plan or agreement specifically
provides otherwise.
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<PAGE> 29
3.9 Non-Uniform Determinations
The Committee's determinations under the Plan need not be uniform
and may be made by it selectively among persons who receive, or are eligible to
receive, awards under the Plan (whether or not such persons are similarly
situated). Without limiting the generality of the foregoing, the Committee shall
be entitled, among other things, to make non-uniform and selective
determinations, and to enter into non-uniform and selective Plan agreements, as
to (a) the persons to receive awards under the Plan, (b) the terms and
provisions of awards under the Plan and (c) the treatment of leaves of absence
pursuant to Section 1.6.4.
3.10 Other Payments or Awards
Nothing contained in the Plan shall be deemed in any way to limit or
restrict the Company from making any award or payment to any person under any
other plan, arrangement or understanding, whether now existing or hereafter in
effect.
3.11 Section Headings
The section headings contained herein are for the purpose of
convenience only and are not intended to define or limit the contents of the
sections.
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<PAGE> 30
3.12 Effective Date and Term of Plan
3.12.1 The Plan was adopted by the Board on January 27, 1998,
subject to approval by the Company's shareholders. All awards under the Plan
prior to such shareholder approval are subject in their entirety to such
approval. If such approval is not obtained prior to the first anniversary of the
date of adoption of the Plan, the Plan and all awards thereunder shall terminate
on that date.
3.12.2 Unless sooner terminated by the Board, the provisions of the
Plan respecting the grant of incentive stock options shall terminate on the day
before the tenth anniversary of the adoption of the Plan by the Board, and no
incentive stock option awards shall thereafter be made under the Plan. All
awards made under the Plan prior to its termination shall remain in effect until
such awards have been satisfied or terminated in accordance with the terms and
provisions of the Plan and the applicable plan agreements.
3.13 Governing Law
All rights and obligations under the Plan shall be construed and
interpreted in accordance with the laws of the State of New York, without giving
effect to principles of conflict of laws.
-27-
<PAGE> 1
Exhibit 21.1
Subsidiaries
Twin Laboratories Inc.
Advanced Research Press, Inc.
Changes International of Fort Walton Beach, Inc.
Health Factors International, Inc.
Bronson Laboratories, Inc.
PR*Nutrition, Inc.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-18047 and 333-65933 of Twinlab Corporation on Form S-8 of our report dated
March 16, 1999, appearing in this Annual Report on Form 10-K of Twinlab
Corporation for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
- -------------------------------
Jericho, New York
March 31, 1999
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