Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 1997
|_| 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:
1-14608
WEIDER NUTRITION INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 87-0563574
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2002 SOUTH 5070 WEST
SALT LAKE CITY, UTAH 84104-4726
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code:
(801) 975-5000
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, par value $.01 per share
(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
None
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 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 number of shares outstanding of the Registrant's common stock is
24,699,238 (as of July 25, 1997).
The aggregate market value of the voting stock held by non-affiliates of
the Registrant is approximately $129,300,000 (as of July 25, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on October 29, 1997, which will be filed with the SEC,
are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Weider Nutrition International, Inc. (the "Company") is a manufacturer of
branded and private label nutritional supplements. The Company manufactures a
broad range of capsules and tablets, powdered drink mixes, bottled beverages and
nutrition bars. The Company markets its branded products in four principal
categories: sports nutrition; vitamins, minerals and herbs; diet; and healthy
snacks. The Company manufactures and markets approximately 1,400 products
consisting of approximately 1,800 stock keeping units ("SKUs"). The Company's
principal executive offices are located at 2002 South 5070 West, Salt Lake City,
Utah 84104 and its telephone number is (801) 975-5000. As used herein, the
"Company" means Weider Nutrition International, Inc. and its subsidiaries,
except where indicated otherwise.
INDUSTRY OVERVIEW
According to Packaged Facts, the principal markets in which the Company's
products compete totaled approximately $6.5 billion in 1996 and grew at a
compound annual growth rate of approximately 15% from 1992 through 1996. The
Company believes several factors account for the steady growth of the
nutritional supplement market, including increased public awareness of the
health benefits of nutritional supplements and favorable demographic trends
toward older Americans who are more likely to consume nutritional supplements.
Over the past several years, public awareness of the positive effects of
nutritional supplements on health has been heightened by widely publicized
reports and medical research findings indicating a correlation between the
consumption of nutrients and the reduced incidence of certain diseases. Reports
have indicated that the United States government and universities generally have
increased sponsorship of research relating to nutritional supplements. In
addition, Congress has established the Office of Alternative Medicine within the
National Institutes of Health to foster research into alternative medical
treatment modalities, which may include natural remedies. Congress has also
recently established the Office of Dietary Supplements in the National
Institutes of Health to conduct and coordinate research into the role of dietary
supplements in maintaining health and preventing disease.
The Company believes that the aging of the United States population,
together with a corresponding increased focus on preventative health care
measures, will continue to result in increased demand for certain nutritional
supplement products. According to Congressional findings that accompanied the
Dietary Supplement Health and Education Act ("DSHEA"), national surveys reveal
that almost 43% of Americans regularly consume vitamins, minerals and herbal
supplements and 80% consume these products at some time during their lives. The
35-and-older age group of consumers, which is expected to continue to grow over
the next two decades, represents 78% of the regular users of vitamin and mineral
supplements. Based on data provided by the United States Bureau of the Census,
from 1990 to 2010, the 35-and-older age group of the United States population is
projected to increase by 32%, a significantly greater increase than the 20%
projected increase for the United States population in general.
The Company believes these and other trends have supplied the growth of
the nutritional supplement market. New products introduced over the past several
years include function specific products for weight loss, sports nutrition,
menopause, energy and mental alertness. In addition, the use of a number of
innovative ingredients, such as CitriMax(R), DHEA, chromium picolinate
1
and melatonin, have created opportunities to offer new products.
SALES AND DISTRIBUTION
The Company's products are currently sold in over 38,000 retail outlets in
all 50 states. The Company's customers in the mass volume retail channel
include: mass merchandisers -- Wal-Mart, Target and Kmart; drug stores --
Walgreens, CVS, American Drug and Thrifty/Payless; warehouse clubs -- Price
Costco and Sam's Club; and supermarkets -- Albertson's, Giant and Ralphs. The
Company services the health food market by distributing its products to General
Nutrition Center (GNC) and the leading health food distributors (such as
Tree-of-Life, Stow Mills and Nature's Best). The Company also sells through
other distribution channels, including its network of exclusive distributors to
health clubs and gyms (such as Bally's Health and Fitness and Gold's Gym),
International markets, and private label manufacturing for other nutritional
supplement companies and certain retail customers. The Company pursues a
multi-channel distribution strategy in order to participate in the growth being
experienced in each of these channels, thereby increasing its overall share of
the nutritional supplement market. The Company also distributes its products to
all major markets worldwide.
BRANDS AND PRODUCTS. As part of its multi-brand, multi-channel strategy,
the Company has created a portfolio of recognized brands designed for specific
distribution channels. The positioning of the Company's brand names is supported
by significant advertising and marketing expenditures as well as the Company's
historical association with the Weider name. As a result, the Company believes
that it has many of the leading brands in the nutritional supplement industry.
The following table identifies the Company's 12 leading brands and
illustrates the Company's multi-brand, multi-channel strategy:
BRAND PRIMARY CHANNEL PRIMARY CATEGORY
- ---- --------------- ----------------
GREAT AMERICAN NUTRITION(TM) Mass volume retailers Vitamins and diet
JOE WEIDER SIGNATURE(TM) Mass volume retailers Sports nutrition and diet
PRIME TIME(R) Mass volume retailers Vitamins and diet
TIGER'S MILK(TM) Mass volume retailers Healthy snacks
FI-BAR(R) Mass volume retailers Healthy snacks
SCHIFF(R) Health food stores Vitamins and diet
METAFORM(TM) Health food stores Sports nutrition and diet
VICTORY(TM) Health food stores Sports nutrition
MEGA MASS(R) Health food stores Sports nutrition
AMERICAN BODY BUILDING(TM) Health clubs and gyms Sports nutrition and diet
SCIENCE FOODS(R) Health clubs and gyms Sports nutrition and diet
STEEL BAR(R) Health clubs and gyms Sports nutrition
The Company markets its branded products in four principal categories of
nutritional supplements: sports nutrition; vitamins, minerals and herbs; diet;
and healthy snacks. The Company also manufactures private label products for
other nutritional supplement marketers and certain retail customers. The Company
believes that offering its customers a wide variety of products also provides
the Company a competitive advantage in capturing an increasing share of the
growing nutritional supplement market.
2
SPORTS NUTRITION. The Company's sports nutrition category includes a wide
variety of products designed to enhance athletic performance and support the
results derived from exercise programs. The Company's sports nutrition products
deliver nutritional supplements through a variety of forms, including powdered
drink mixes, tablets, capsules, nutrition bars and beverages. The target
consumers for the Company's sports nutrition products are athletes, bodybuilders
and fitness enthusiasts. While each of the Company's products offers distinct
benefits to the consumer, the Company's sports nutrition products are intended
to generally enhance the consumer's ability to control weight, support muscle
growth, lose fat and increase energy levels and stamina. The following table
summarizes the major brands and representative products of the Company's sports
nutrition category:
MAJOR BRANDS REPRESENTATIVE PRODUCTS
- ------------ -----------------------
American Body Building................. Blue Thunder protein beverages and
Ripped Force energy beverages and
powdered drink mixes
Science Foods.......................... White Lightning protein beverages
and Turbo-Tea energizing beverages
Victory................................ Mass 1000 and Professional powdered
drink mixes
Mega Mass.............................. Giant Mega Mass and Super Mega Mass
powdered drink mixes
Metaform............................... Metaform and Metaform Heat powdered
drink mixes and nutrition bars
Joe Weider Signature................... Dynamic Weight Gain and Dynamic
Muscle Builder powdered drink mixes
Tiger's Milk........................... Tiger Sport nutrition bars
Steel Bar.............................. Steel Bar nutrition bars
The American Body Building brands, which are intended to help the consumer
increase energy levels and stamina, control weight and lose fat, are primarily
distributed to health clubs and gyms through the Company's exclusive
distributors. Science Foods products are distributed through health clubs and
gyms through direct, non-exclusive distributors. The Victory, Mega Mass,
Metaform and Joe Weider Signature brands, which are intended to support
consumers' efforts to control weight, support muscle growth and lose fat, are
primarily distributed through mass volume retailers and health food stores such
as GNC. The Tiger's Milk product line, which has been marketed for over 30
years, includes seven nutrition bars that supply significant amounts of protein,
vitamins and other essential nutrients with less fat than a traditional candy
bar. Both Tiger Sport and Steel Bars are nationally distributed through
supermarkets, convenience stores, warehouse clubs and health food stores.
VITAMINS, MINERAL AND HERBS. The Company markets a complete line of
vitamins and minerals, including multivitamins, multiminerals, antioxidants and
digestive enzymes. These products are offered in various forms (including
liquids, tablets, capsules, softgels and powdered drink mixes). In addition,
herbs and phytonutrients constitute a small but growing percentage of the net
sales of the Company. Herbs and phytonutrients, which are a growing category in
the nutritional supplement industry, are alternatives or complements to
over-the-counter pharmaceutical products for consumers who seek a more natural
and preventative approach to their health care. The following table summarizes
the major brands and representative products of the Company's vitamins, minerals
and herbs category:
3
MAJOR BRANDS REPRESENTATIVE PRODUCTS
- ------------ -----------------------
Schiff vitamins........................ Multivitamins, multiminerals,
antioxidants and digestive enzymes
Schiff herbs........................... Ginseng, garlic, ginkgo biloba and
echinacea
Great American Nutrition............... Cold-Free zinc lozenges
Excel.................................. Ultra High Performance and High
Performance capsules
Prime Time............................. Prime Time capsules and tablets
The Company's Schiff brand vitamin products are designed to provide
consumers with essential vitamins and minerals as supplements to their diet.
Schiff vitamins and minerals include multivitamins such as Single Day(TM),
multiminerals such as Guided(TM) Multiminerals Complex, individual vitamins and
minerals such as Vitamins C, E, and Calcium, specialty formulae such as PMS,
Menopause and DHEA, beta carotene and other antioxidants and B-complex. In
addition, the Company introduced Schiff's Melatonin in December 1995, which is a
natural hormone reported in the popular media to combat insomnia and jet lag.
Schiff vitamins are marketed primarily through health food stores but are also
sold through supermarkets and drug stores within the mass volume retail channel.
The Company markets various herbs (including ginseng, garlic, ginkgo
biloba and echinacea) under the Schiff brand primarily in health food stores.
Through its phytocharged supplement line distributed primarily through health
food stores, Schiff is a leader in the development and introduction of
phytonutrients, which are naturally-occurring compounds in plants that are
believed to promote health and prevent disease. These phytonutrients include
lycopene (the beta carotene relative that has been recently linked in the
popular media to lowering prostate cancer risk) and beta glucan (an extract from
oats that is the soluble fiber believed to be responsible for lowering blood
cholesterol levels).
The Company markets certain of its vitamins, minerals and herbal
supplements as energy enhancers under the Excel brand. Excel's energy products
include Ultra High Performance and High Performance with Ginseng. All Excel
products were originally formulated with Ma Huang, an herb that naturally
contains the stimulant ephedrine; however, in fiscal 1997, the Company decided
to discontinue the manufacturing and marketing of products containing ephedrine
in capsule and tablet form due to potential for misuse but will continue to
manufacture and market beverages and powders containing ephedrine. The Company
now offers Ma Huang-free alternatives (consisting of a unique proprietary blend
of herbs) to all of its Excel products. While Excel targets health food stores
for herbal energy products, Great American Nutrition distributes such products
through mass volume retailers.
DIET. The Company is one of the leading suppliers to mass volume retailers
of natural products that utilize vitamins, herbs and other nutritional
supplements designed to promote weight control. The Company's diet products are
intended to support consumers' efforts in a number of weight control functions,
including metabolizing fat, suppressing the appetite, replacing meals and
providing low calorie, low fat snacks. The products are specifically formulated,
packaged and priced to appeal to a wide variety of consumers with different
demographic characteristics and physiological needs.
4
The following table summarizes the major brands and representative products of
the Company's diet category:
MAJOR BRANDS REPRESENTATIVE PRODUCTS
- ------------ -----------------------
Great American Nutrition.............. Fat Burner drinks and supplements
Schiff................................ Ultra Lean capsules and tablets
American Body Building................ Ripped Force and Cutting Force
energy beverages
Science Foods......................... Razor Ripped and Cut-Up energy
beverages
Joe Weider Signature.................. Fat Burner supplements
Metaform.............................. Metaform Heat powdered drink mixes
Excel................................. Super Diet and Fat Burner capsules
and tablets
Prime Time............................ Prime Time capsules and tablets
The Great American Nutrition brands, which are intended to support
consumers' efforts to reduce fat, are primarily distributed through mass volume
retailers. The Schiff brands, which are intended to aid in suppressing the
appetite, are primarily distributed through health food stores. The American
Body Building brands, which are intended to support consumers' efforts to reduce
fat and provide a low calorie source of energy, are primarily distributed
through the Company's exclusive distributors to health clubs and gyms. The Joe
Weider Signature and Metaform brands, which are intended to enhance the
consumers' efforts to control weight, support muscle growth and lose fat, are
primarily distributed through mass volume retailers and health food stores, such
as GNC. The Excel line, which is intended to aid in suppressing the appetite and
support consumers' efforts to reduce fat, is distributed primarily though health
food stores. Prime Time, a comprehensive health program designed specifically
for men over age 40, is distributed primarily through mass volume retailers.
HEALTHY SNACKS. The Company's healthy snacks category includes its Fi-Bar
and Tiger's Milk product lines. The Fi-Bar product line is comprised of Fat Free
Granola bars and fruit and nut bars coated with yogurt, chocolate or carob made
without hydrogenated fats. The Tiger's Milk product line, which as been marketed
for over 30 years, includes seven nutrition bars that supply significant amounts
of protein, vitamins and other essential nutrients with less fat than a
traditional candy bar. The following table summarizes the major brands and
representative products of the Company's healthy snacks category:
MAJOR BRANDS REPRESENTATIVE PRODUCTS
- ------------ -----------------------
Tiger's Milk.......................... Tiger's Milk nutrition bars
Fi-Bar................................ Fat Free Fi-Bar nutrition bars
The Tiger's Milk and Fi-Bar brands, which are intended to provide
consumers with a healthy alternative to traditional snack foods and candy bars,
are primarily distributed through mass volume retailers.
PRIVATE LABEL. The Company manufactures capsules, tablets, beverages,
nutrition bars and powdered drink mixes for more than 30 other marketers of
nutritional supplements and certain retail customers. These independent
marketers, or private label customers, market the Company's products under their
own brand name. The Company believes private label manufacturing provides
opportunities to enhance profitable growth through increased efficiencies from
greater use of operating capacities. In addition, the Company believes private
label manufacturing allows it to participate,
5
indirectly, in the growth of direct marketing.
INTERNATIONAL MARKETS. The Company believes significant opportunities
exist for nutritional supplement products in international markets. The Company
has positioned itself to take advantage of such opportunities through
acquisitions (in fiscal years 1996 and 1997) of businesses in Western Europe and
Canada. The Company has the capability to manufacture nutritional supplements in
Spain and market nutritional supplements throughout continental Europe,
including Italy, Germany, France, Belgium, the Netherlands, Luxembourg, Portugal
and Spain. The Company markets nutritional supplements to South America, Russia
and the Pacific Rim. These acquisitions provide the Company with the rights to
manufacture and market nutritional supplements worldwide, excluding Australia,
New Zealand, Japan and South Africa. In addition, the Company has manufacturing
capabilities in the United Kingdom as a result of an agreement with an indirect
subsidiary of Archer Daniels Midland.
GROWTH STRATEGY. The Company intends to broaden its leadership position in
the nutritional supplement industry by combining internal growth with strategic
acquisitions. Specifically, the Company's strategy is to:(i) leverage its
portfolio of established brands to increase its share of the nutritional
supplement market; (ii) develop new brands and product line extensions through
its commitment to research and development; (iii) continue the growth of its
balanced distribution network; (iv) further penetrate international markets; and
(v) supplement internal growth through strategic acquisitions of related
businesses and product lines. The Company believes that its multiple
distribution channels, broad portfolio of leading brands and state-of-the-art
manufacturing and distribution capabilities position it to be a long-term
competitive leader in the nutritional supplement industry.
MARKETING AND CUSTOMER SALES SUPPORT
A comprehensive promotional program and extensive advertising, in
combination with a large, well-trained sales force and superior customer service
standards, have been integral to the Company's growth. These factors have
enhanced brand name recognition of the Company's products and positioned it as a
leader in the nutritional supplement industry. A key part of the Company's
strategy is to help educate consumers about innovative, safe and beneficial
nutritional supplement products. The Company's marketing and advertising
expenditures were approximately $12.5 million in fiscal 1997, $11.3 million in
fiscal 1996, and $6.7 million in fiscal 1995.
The Company promotes its products in more than 37 consumer magazines, such
as NEWSWEEK, PEOPLE, COSMOPOLITAN, SELF, PARADE, MARTHA STEWART LIVING, WOMAN'S
DAY, FAMILY CIRCLE and MADEMOISELLE and trade magazines, such as WHOLE FOODS,
VITAMIN RETAILER, MASS MARKET RETAILER AND CHAIN DRUG REVIEW. In addition to
these publications, the Company advertises in several magazines published by
Weider Publications Inc. ("Weider Publications"), an affiliate of the Company,
including: MUSCLE AND FITNESS, FLEX, SHAPE, MEN'S FITNESS, and SENIOR GOLFER.
The Company also maintains several Internet sites.
The Company participates in consumer education by sponsoring and attending
various sporting events, including leading professional body building
competitions such as The Mr. Olympia, The Arnold Schwarzenegger Classic and 45
local National Physique Committee bodybuilding competitions. In addition, the
Company plays an active role in supporting industry and consumer advocate
organizations for nutritional products. The Company also promotes its products
at numerous trade and consumer shows representing all current distribution
channels.
6
The Company is committed to providing superior service both to retailers
and consumers. The Company's sales and marketing team consists of approximately
120 professionals organized by distribution channel, brand and product type.
This enables the Company to quickly service the needs of both retailers and
consumers. The Company believes that up-to-date reporting and hands-on
management allow its sales team to be responsive to consumer needs for new
products, creating promotions and producing extensive marketing support
materials.
PRODUCT RESEARCH AND DEVELOPMENT
The Company strives to be a leader in nutritional supplement product
development and intends to continue its commitment to research and development
to create new brands and product line extensions. The nutritional supplement
industry is influenced by products that become popular due to changing consumer
tastes and media attention. The Company believes it is important to develop new
products in the nutritional supplement industry in order to capitalize on new
market opportunities, to strengthen relationships with customers by meeting
demand and to increase market share. In addition, the Company believes that
continually introducing new products is important to preserving and enhancing
gross margins due to the relatively short life cycle of some products.
As a result of the Company's product development history, the Company
believes that it has built a reputation in the nutritional supplement industry
for innovation in both branded and private label products. The Company has
pioneered a number of innovations in the nutritional supplement industry,
including: (i) the development of the first domestic source of melatonin with
consistent quality, supply and cost; (ii) the introduction of garcinia cambogia,
a popular weight loss ingredient; (iii) the production of the first
high-protein, low carbohydrate beverage; and (iv) the retail introduction of the
first carotenoid complex product. The Company is in various stages of
development with respect to new product concepts that will augment its existing
product lines.
In order to support its commitment to research and development, the
Company, as considered appropriate, hires requisite technical personnel and
invests in formulation, testing and other research and development related
capital additions.
MANUFACTURING AND PRODUCT QUALITY
The Company has invested in manufacturing to meet the growing demand for
nutritional supplement products, to ensure continued operating efficiencies and
to maintain high product quality standards. The Company manufactures over 80% of
its branded products. Consistent with its commitment to capturing an increasing
share of the growing nutritional supplement market, the Company recently
completed construction of a state-of-the-art facility that more than doubles
previous capacity. In April 1997, the Company began consolidating many of its
operations in its main distribution center and headquarters in Salt Lake City,
Utah. The Company also currently manufactures its products in four other
facilities in Salt Lake City, Utah; Irwindale, California; Walterboro, South
Carolina; and Las Vegas, Nevada.
QUALITY STANDARDS. The Company's manufacturing facilities are in the
initial evaluation and implementation phases of ISO 9000 certification. As part
of this process, all testing and inspection procedures performed by more than 35
quality control professionals are standardized and periodically evaluated for
compliance. Each of the Company's manufacturing sites is equipped with
microbiology and quality control laboratories. Samples are
7
evaluated using visual and flavor profiles as well as analytical testing using
high pressure liquid chromatography, atomic absorption, a UV fluorometer, thin
layer chromatography and infrared spectrophotometric equipment. The Company's
products are also subject to extensive shelf life stability testing through
which the Company determines the effects of aging on its products. The Company's
product retention program allows the Company to maintain samples from each
product batch shipped and to analyze such samples to insure product quality.
Certified outside laboratories are used routinely to evaluate the Company's
laboratory performance and to supplement its testing capabilities.
PURCHASING. The Company focuses on purchasing raw materials from the
highest quality-cost effective vendors and sources its raw materials and
purchases goods from over 275 different qualified vendors. The Company orders
and purchases a majority of its raw materials from its Salt Lake City
headquarters, allowing the Company to benefit from volume purchasing discounts.
COMPETITION
The market for the sale of nutritional supplements is highly competitive.
Competition is based principally upon price, quality of products, customer
service and marketing support. The nutritional supplement industry consists of
six principal types of suppliers: independent health food suppliers, who focus
primarily on vitamins and nutritional supplements; mass volume retail suppliers,
who sell nutritional products that have mass appeal; gym and health club product
companies; direct sale and mail order marketers; private label manufacturers;
and major pharmaceutical companies. The majority of competitors in the
nutritional supplement industry are privately held and the Company is unable to
precisely assess the size of such competitors. However, the Company believes
that no competitor controls more than 10% of this market.
The Company believes that by reacting quickly to market changes,
scientific discoveries and competitive challenges, the Company will continue to
compete, effectively in the nutritional supplement industry. As the nutritional
supplement industry grows and evolves, the Company believes retailers will rely
heavily on suppliers, such as the Company, that can respond quickly to new
opportunities, support them with production capacity and flexibility, and
provide innovative and high margin products. In addition, retailers have begun
to align themselves with suppliers, such as the Company, who are financially
stable, aggressively market a broad portfolio of products and offer superior
customer service. The Company believes that it competes favorably with other
nutritional supplement companies and major pharmaceutical companies because of
its competitive pricing, marketing strategies, sales support and the quality and
breadth of its product line.
GOVERNMENT REGULATION
The manufacturing, packaging, labeling, advertising, distribution and sale
of the Company's products are subject to regulation by one or more governmental
agencies, the most active of which is the Food and Drug Administration ("FDA"),
which regulates the Company's products under the Federal Food, Drug, and
Cosmetic Act ("FDCA") and regulations promulgated thereunder. The Company's
products are also subject to regulation by the Federal Trade Commission ("FTC"),
the Consumer Product Safety Commission ("CPSC"), the United States Department of
Agriculture ("USDA") and the Environmental Protection Agency ("EPA"). The
Company's activities are also regulated by various agencies of the states,
localities and foreign countries to which the Company distributes its products
and in which the Company's products are sold. The FDCA has been amended several
times with respect to
8
dietary supplements, most recently by the Nutrition Labeling and Education Act
of 1990 (the "NLEA") and the DSHEA.
The Company's advertising of its dietary supplement products is subject to
regulation by the FTC under the Federal Trade Commission Act, which prohibits
unfair or deceptive trade practices, including false or misleading advertising.
The FTC in recent years has brought a number of actions challenging claims by
companies (other than the Company) for weight loss dietary supplement products
and plans. Most recently, on March 25, 1997, the FTC announced proposed consent
orders in seven cases involving weight loss claims, as well as a general,
coordinated long-term consumer education and law enforcement program titled
"Operation Waistline." On November 7, 1996, the FTC entered into proposed
consent orders (which have since been finally entered) that would prohibit three
companies from claiming that chromium picolinate causes weight loss, increases
muscle mass or regulates blood sugar levels unless the companies had adequate
substantiation for the claims. Although the Company is not a party to the
consent order, chromium picolinate is used in many of the Company's weight loss
and body building products.
The Company is a party to a Consent Order (the "Order") with the FTC,
which was signed by Weider Health and Fitness ("WHF") in 1985. Pursuant to the
Order, the Company is prohibited from making certain advertising claims relating
to the muscle building capabilities of Anabolic Mega Paks and Dynamic Life
Essence and any other product of substantially similar composition. In
connection with the Company's other food products, the Company is similarly
prohibited from making these claims unless the Company is able to substantiate
such claims. In September 1991, the FTC informed the Company that the FTC has
reviewed the several compliance reports which had been filed from March 1986
through and including June 20, 1991 and no action was planned at such time.
Although the Company has received occasional inquiries from the FTC regarding
compliance matters since September 1991, the FTC has not taken any formal action
regarding the Company's compliance.
The Company manufactures certain products pursuant to contracts with
customers who distribute the products under their own or other trademarks. Such
customers are subject to governmental regulations in connection with their
purchase, marketing, distribution and sale of such products, and the Company is
subject to such regulations in connection with manufacture of such products and
its delivery of services to such customers. However, the Company's contract
manufacturing customers are independent companies, and their labeling, marketing
and distribution of such products is beyond the Company's control. The failure
of these customers to comply with applicable laws or regulations could have a
material adverse effect on the Company.
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 controlled by the Company's distributors for those countries. These
distributors are independent contractors over whom the Company has limited
control.
The Company has a number of individuals dedicated to regulatory
compliance, including a Vice President of Quality Control, a Director of
Regulatory Affairs and a Vice President of Research, in addition to a number of
outside legal consultants. The Vice President of Quality Control is responsible
for conforming each of the Company's manufacturing facilities to applicable GMPs
and federal and state regulations. The Director of Regulatory Affairs'
responsibilities include ensuring that all product packaging and advertising
comply with FDA and FTC requirements and serving as the primary liaison between
the Company and the Company's outside patent consultants. The
9
Vice President of Research is responsible for submitting structure/function
claims to the FDA and validating any technical claims made in any of the
Company's advertising or packaging.
The Company may be subject to additional laws or regulations administered
by the FDA or other federal, state or foreign regulatory authorities, the repeal
or amendment of laws or regulations which the Company considers favorable, such
as the DSHEA, or more stringent interpretations of current laws or regulations,
from time to time in the future. The Company is unable to predict the nature of
such future laws, regulations, interpretations or applications, nor can it
predict what effect additional governmental regulations or administrative
orders, when and if promulgated, would have on its business in the future. They
could, however, require reformulation of certain products to meet new standards,
recall or discontinuance of certain products not able to be reformulated,
imposition of additional recordkeeping requirements, expanded documentation of
the properties of certain products, expanded or different labeling and
scientific substantiation. Any or all such requirements could have a material
adverse effect on the Company's results of operations and financial condition.
PRODUCT LIABILITY INSURANCE
Because the Company manufactures products designed to be ingested, it
faces the risk that materials used for the final products may be contaminated
with substances that may cause sickness or other injury to persons who have used
the products. Although the Company maintains production and operating standards
designed to prevent such events, certain portions of the process of product
development, including the production, harvesting, storage and transportation of
raw materials, along with the handling, transportation and storage of finished
products delivered to consumers, are not within the control of the Company.
Furthermore, sickness or injury to persons may occur if products manufactured by
the Company are ingested in dosages which exceed the dosage recommended on the
product label. The Company cannot control misuse of its products by consumers or
the marketing, distribution and resale of its products by its customers. With
respect to product liability claims in the United States, the Company has $1.0
million per occurrence and $1.0 million in aggregate liability insurance subject
to self-insurance retention of $25,000. In addition, if claims should exceed
$1.0 million, the Company has excess umbrella liability insurance of up to $90.0
million. However, there can be no assurance that such insurance will continue to
be available, or if available, will be adequate to cover potential liabilities.
The Company generally does not obtain contractual indemnification from parties
supplying raw materials or marketing its products and, in any event, any such
indemnification is limited by its terms and, as a practical matter, to the
creditworthiness of the indemnification party.
TRADEMARKS AND PATENTS
At August 1, 1997 the Company had approximately 200 trademarks registered
and/or applications pending with the United States Patent and Trademark Office.
The Company's policy is to pursue registrations for all of the trademarks
associated with its key products. The Company protects its legal rights
concerning its trademarks and is currently enforcing several trademarks against
infringement by litigation, both in the United States and in foreign countries.
The Company relies on common law trademark rights to protect its
unregistered trademarks. Common law trademark rights do not provide the Company
with the same level of protection as afforded by a United States federal
registration of a trademark. In addition, common law trademark rights are
limited to the geographic area in which the trademark is actually used,
10
while a United States federal registration of a trademark enables the registrant
to stop the unauthorized use of the trademark by any third party anywhere in the
United States even if the registrants never used the trademark in the geographic
area wherein the unauthorized use is being made (PROVIDED, HOWEVER, that an
unauthorized third party user has not, prior to the registration date, perfected
its common law rights in the trademark in that geographical area). The Company
intends to register its trademarks in certain foreign jurisdictions where the
Company's products are sold. However, the protection available in such
jurisdictions may not be as extensive as the protection available to the Company
in the United States.
EMPLOYEES
At August 1, 1997, the Company employed approximately 560 persons, of whom
approximately 350 were in management, sales, purchasing, logistics and
administration and approximately 210 were in manufacturing. Additionally, the
Company utilizes temporary employees in some of its manufacturing processes. The
Company is not party to any collective bargaining arrangements. The Company
believes that its relationship with its employees is good.
ITEM 2. PROPERTIES
At May 31, 1997, the Company owned or leased the following facilities:
APPROXIMATE EXPIRATION
LOCATION FUNCTION SQUARE FEET LEASE/OWN DATE OF LEASE
- -------- -------- ----------- --------- -------------
Salt Lake City, UT Company Headquarters,
Manufacturing & Pro-
duction, Warehouse &
Distribution 418,000 Lease March 2013
Salt Lake City, UT Manufacturing & Pro-
duction, Warehouse 152,000 Own N/A
Salt Lake City, UT Warehouse 67,000 Lease May 1998
Irwindale, CA Manufacturing & Pro-
duction 129,000 Lease (1)
Walterboro, S.C. Manufacturing & Pro-
duction 55,000 Own N/A
Las Vegas, NV Manufacturing & Pro-
duction 27,500 Lease November 1999
Montreal, Quebec Administrative Offices
& Warehouse 24,600 Lease September 1998
Madrid, Spain Administrative Offices,
Manufacturing & Pro-
duction 20,000 Lease September 2006
(1) This location consists of three separate facilities. The lease for
30,000 square feet expires in April 1999; the lease for 61,600 square feet
expires in April 2000; and the lease for 37,400 square feet expires in May 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiary, Schiff Products, Inc. ("Schiff Products"),
together with other distributors, manufacturers and retailers of L-Tryptophan,
are defendants in actions in federal and state courts seeking compensatory and,
in some cases, punitive damages for alleged personal injuries resulting from the
ingestion of products containing allegedly contaminated L-Tryptophan. The
Company acquired Schiff Products pursuant to an asset acquisition transaction in
1989. Schiff Products was a distributor of L-Tryptophan, but neither the Company
nor Schiff Products ever distributed products that are the subject of the
lawsuits. In each lawsuit, the LTryptophan products were shipped by the entity
from whom the Company purchased the trademark Schiff and other assets in 1989.
The Company and Schiff Products have entered into an indemnification agreement
(the "Indemnification
11
Agreement") with Showa Denko America ("SDA"), a U.S. subsidiary of a Japanese
Corporation, Showa Denko, K.K. ("SDK"). Under the Indemnification Agreement, SDA
agreed to assume the defense of all claims arising out of the ingestion of
L-Tryptophan products, pay all legal fees and indemnify the Company and its
affiliates against liability in any action if it is determined that a proximate
cause of the injury sustained by the plaintiff in the action was a constituent
of the raw material sold by SDA to Schiff Products, or was a factor for which
SDA or any of its affiliates was responsible, except to the extent that action
by the Company or Schiff Products proximately contributed to the injury, and
except for certain claims relating to punitive damages. SDK has posted a
revolving irrevocable letter of credit for the benefit of the indemnified group
if SDA is unable or unwilling to satisfy any claims or judgments. SDK has
unconditionally guaranteed the payment obligations of SDA under the
Indemnification Agreement.
The Company was named as one of several defendants in a suit filed in
December 1996 alleging unfair competition and false advertising under California
law. A second amended complaint was filed on or about June 1997. The plantiff
purports to assert such claims on behalf of himself, the general public and a
nationwide class of consumers, although no class has yet been certified. The
plantiff alleges that the defendants, including the Company, promoted and sold a
certain product, the labels and advertising materials for which contained
incorrect information concerning the product's nutritional content. The plantiff
seeks, among other things, injunctive relief prohibiting the alleged product and
compelling restitution of monies obtained from the sale of the product and
attorneys' fees. The Company answered the complaint, denying liability.
The Company is presently engaged in various other legal actions, and,
although ultimate liability cannot be determined at the present time, the
Company currently believes that the amount of any such liability from these
other actions and the lawsuits described in the preceding paragraphs, after
taking into consideration the Company's insurance coverage, will not have a
material adverse effect on its results of operations and financial condition.
However, no assurance can be given that such legal actions would not have a
material adverse effect on the results of operations or financial condition of
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to the vote of security holders since the
Company's initial public offering of Class A common stock.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In May 1997, the Company completed its initial public equity offering of
6,440,000 shares (includes over-allotment of 840,000 shares) of Class A common
stock, $.01 par value per share, which were issued at $11.00 per share, (the
"IPO"). The Company's Class A common stock is traded on the New York Stock
Exchange under the symbol "WNI".
The Company paid its first quarterly dividend of $0.0375 per share
subsequent to year end. The dividend was declared to be payable on June 15, 1997
to holders of all classes of common stock of record at the close of business on
June 1, 1997. The Company's Board of Directors will determine dividend policy in
the future based upon, among other things, the Company's results of operations,
financial condition, contractual restrictions and other factors deemed relevant
at the time. In addition, the Company entered into an amended credit agreement
with General Electric Capital Corporation which contains certain customary
financial covenants that may limit the Company's ability to pay dividends on its
common stock (See Note 5 to the Consolidated Financial Statements). Accordingly,
there can be no assurance that the Company will be able to sustain the payment
of dividends in the future.
The high and low closing prices of the Company's common stock subsequent
to the IPO were $12.75 and $11.13, respectively, for the fourth quarter of
fiscal 1997. Pricing information for previous quarters is not available as the
Company's common stock was not publicly traded prior to May 1, 1997.
14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following selected consolidated financial data as of, and for the
fiscal years ended May 31, 1994, 1995, 1996 and 1997 have been derived from the
Company's consolidated financial statements, which have been audited by Deloitte
& Touche LLP, independent auditors. The following selected consolidated
financial data for the fiscal year ended May 31, 1993 is derived from the
audited consolidated financial statements of WHF. The financial data should be
read in conjunction with the consolidated financial statements and notes
thereto, included elsewhere in this Annual Report on Form 10-K. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FISCAL YEAR ENDED MAY 31,
-------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- -------- --------
INCOME STATEMENT DATA:
Net sales........................... $63,144 $67,870 $90,927 $186,405 $218,566
Cost of goods sold.................. 37,002 39,287 55,411 116,177 136,875
------- ------- ------- -------- --------
Gross profit........................ 26,142 28,583 35,516 70,228 81,691
Operating expenses.................. 19,036 20,344 24,226 41,068 51,745
Impairment of intangible assets..... -- -- -- -- 2,095
Management and employee compensa-
tion charge........................ -- -- -- -- 14,495
------- ------- ------- ------- --------
Total operating expenses............ 19,036 20,344 24,226 41,068 68,335
------- ------- ------- ------- --------
Income from operations.............. 7,106 8,239 11,290 29,160 13,356
Other income (expense):
Interest, net...................... (170) (245) (1,079) (3,736) (5,791)
Other.............................. (950) (1,015) 147 (253 (557)
------- ------- ------- -------- --------
Total............................ (1,120) (1,260) (932) (3,989) (6,348)
------- ------- ------- -------- --------
Income before income taxes.......... 5,986 6,979 10,358 25,171 7,008
Provision for income taxes.......... 2,423 2,845 4,266 10,207 2,708
------- ------- ------- -------- --------
Net income.......................... $ 3,563 $ 4,134 $ 6,092 $ 14,964 $ 4,300
======= ======= ======= ======== ========
Weighted average shares outstanding(1) 24,699,238 24,881,954
========== ==========
Net income per common share(1)....... $ .61 $ .17
===== =====
Proforma net income per common share(1) $ .61 $ .68(2)
===== =====
MAY 31,
------------------------------------
1994 1995 1996 1997
---- ---- ---- ----
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 2 $ 2,272 $ 1,592 $ 1,259
Working capital..................... 14,082 25,044 42,605 63,992
Total assets........................ 39,548 70,048 133,147 168,756
Total debt.......................... 7,410 28,616 68,054 45,094
Total stockholders' equity.......... 22,946 28,100 39,332 92,424
(1) Net income and Proforma net income per common share for the years ended May
31, 1996 and 1997 have been computed by dividing net income by the number of
weighted average shares outstanding and assumes as outstanding, as of June 1,
1995, the 1,557,604 shares of Class A common stock (adjusted for the
14,428.9-for-one stock split) issued and outstanding prior to consummation of
the IPO, the 15,687,432 Class B common shares (adjusted for the 14,428.9-for-one
stock split), the 6,440,000 shares of Class A common stock issued in connection
with the IPO, the 972,247 shares of Class A common stock issued pursuant to
management incentive agreements, the 41,955 shares of Class A common stock
issued to certain employees based on tenure with the Company at the time of the
IPO, and dilutive common stock equivalents. See Notes 7 and 9 to Consolidated
Financial Statements.
(2) Proforma net income per common share for the year ended May 31, 1997
excludes the impairment of intangible assets of $2.1 million and the management
and employee compensation charge of $14.5 million; and, interest expense is
reduced to $2.1 million ($5.8 million as reported) as if $45.6 million of the
net proceeds from the IPO were applied against outstanding debt as of June 1,
1996.
14
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
THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. EXCEPT FOR THE HISTORICAL
INFORMATION CONTAINED HEREIN, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ARE
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, INCLUDING THE
TIMELY DEVELOPMENT AND ACCEPTANCE OF NEW PRODUCTS, THE IMPACT OF COMPETITIVE
PRODUCTS AND PRICING, AND THE OTHER RISKS DETAILED FROM TIME TO TIME IN THE
COMPANY'S SEC REPORTS, COPIES OF WHICH ARE AVAILABLE UPON REQUEST FROM THE
COMPANY'S INVESTOR RELATIONS DEPARTMENT. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE PROJECTED. THESE FORWARD-LOOKING STATEMENTS REPRESENT THE COMPANY'S
JUDGEMENT AS OF THE DATE OF THIS REPORT. THE COMPANY DISCLAIMS, HOWEVER, ANY
INTENT OR OBLIGATION TO UPDATE THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
Net income for the years ended May 31, 1995, 1996 and 1997 amounted to
$6.1 million, $15.0 million and $4.3 million, respectively. On a pro forma
basis, net income for 1997 amounted to $16.7 million. Pro forma earnings for
1997 exclude a charge of $2.1 million ($1.3 million after tax) resulting from
the June 1996 adoption by the Company of SFAS No. 121 and a one-time charge of
$14.5 million ($8.9 million after tax) attributable to compensation expense
recognized in connection with the IPO. Pro forma interest expense is adjusted
downward to $2.1 million ($5.8 million as reported) as if $45.6 million of the
net proceeds from the IPO were applied against outstanding debt as of the
beginning of the year.
The Company experienced growth in sales over the past three fiscal years.
Net sales were $90.9 million, $186.4 million and $218.6 million for fiscal 1995,
1996 and 1997, respectively. The Company's growth has been a result of increased
demand for the Company's products, the Company's increased penetration of the
growing mass volume retail distribution channel, acquisition strategy and
introduction of new products. The Company acquired a number of businesses in the
three-year period ending May 31, 1997 which contributed to the Company's growth.
For example, acquisitions in 1997 contributed $7.4 million in net sales and $1.1
in operating income. Excluding acquisitions, the Company's internal net sales
grew at a compound annual growth rate of 26.5 percent for the three-year period
ended May 31, 1997.
Net sales increased 17.3% in fiscal 1997 compared to an increase of 105.1%
experienced in fiscal 1996. The Company experienced a much higher growth rate in
fiscal 1996, in comparison to fiscal 1997, as a result of the incrementally
greater effects of acquisitions, growth in mass market sales volume and higher
sales of melatonin. The nutritional supplement industry is influenced by
products, such as melatonin, that can become popular due to changing consumer
tastes and heightened media attention. The Company sold $8.5 million of
melatonin during fiscal 1997 compared to $18.9 million in fiscal 1996. Excluding
melatonin sales in fiscal 1997 and 1996, the net sales increase in fiscal 1997
approximates 25.0%. In addition, net sales for fiscal 1997 were impacted by
manufacturing capacity constraints. By distribution category, sales volume
increased in mass market (22.7%), private label (13.5%), beverage distribution
(sports drinks) (26.9%) and international markets (226.1%) in 1997 compared to
1996. Sales volume in the health food market decreased by approximately 10.2% in
1997 compared to 1996.
15
The Company has made significant investments in manufacturing and
distribution infrastructure in fiscal 1997 to support future growth. These
expenditures include higher depreciation associated with additional capital
equipment, as well as costs associated with hiring additional personnel and
upgrading information systems.
The following table shows selected items expressed on an actual basis and
as a percentage of net sales for the years indicated:
1995 1996 1997
------------- -------------- --------------
(dollars in thousands )
Net sales............. $90,927 100.0% $186,405 100.0% $218,566 100.0%
Cost of goods
sold................ 55,411 60.9 116,177 62.3 136,875 62.6
------- ---- -------- ---- -------- -----
Gross profit.......... 35,516 39.1 70,228 37.7 81,691 37.4
------- ---- -------- ---- -------- -----
Operating
expenses............ 24,226 26.6 41,068 22.0 51,745 23.7
Management
compensation
program............. -- -- -- -- 14,495 6.6
Impairment of
intangible
assets.............. -- -- -- -- 2,095 1.0
-------- ---- -------- ---- -------- ----
Total operating
expenses............ 24,226 26.6 41,068 22.0 68,335 31.3
------- ---- -------- ---- -------- ----
Income from
operations.......... 11,290 12.4 29,160 15.6 13,356 6.1
Other expense......... 932 1.0 3,989 2.1 6,348 2.9
Provision for
income taxes........ 4,266 4.7 10,207 5.5 2,708 1.2
------- ---- -------- ---- -------- ----
Net income............ $ 6,092 6.7% $ 14,964 8.0% $ 4,300 2.0%
======= ==== ======== ==== ======== ====
RESULTS OF OPERATIONS
(FISCAL 1997 COMPARED TO FISCAL 1996)
NET SALES. Net sales for the year ended May 31, 1997 increased $32.2
million, or 17.3% to $218.6 million from $186.4 million for the year ended May
31, 1996. Sales to mass volume retailers, beverage distributors and
international markets together with private label sales volume increased during
1997 compared to 1996. Sales to mass volume retailers increased approximately
22.7% to $78.0 million in 1997 from $63.6 million in 1996. The increase in sales
to mass volume retailers resulted primarily from increased penetration of the
market and the introduction of new products. Sales to beverage distributors
increased approximately 26.9% to $23.1 million in 1997 from $18.2 million in
1996. The increase in sales to beverage distributors was primarily a result of
additional sports drink sales to health clubs and gyms enhanced in part by the
acquisition of Science Foods, Inc., effective January 1, 1997. Sales to private
label customers increased approximately 13.5% to $48.0 million in 1997 from
$42.3 million in 1996 primarily as a result of increased volumes with existing
customers. Sales to health food distributors and retailers decreased
approximately 10.2% to $45.5 million in 1997 from $50.7 million in 1996. The
decrease in sales to health food distributors and retailers resulted primarily
from limitations on the Company's capsule and tablet manufacturing capacity.
The Company's penetration into international markets, while still
amounting to less than 10% of total sales volume, increased significantly during
1997. Sales to international markets increased 226.1% to $17.6 million in 1997
from $5.4 million in 1996. The increase in sales to international markets
resulted primarily from the Company's acquisition of businesses in Western
Europe and Canada, consummated in the second half of 1996 and the first half of
1997.
16
The following table shows comparative net sales results categorized by
distribution channel on an actual basis and as a percentage of net sales for the
years indicated (dollars in thousands):
1996 1997
---------------- ----------------
Mass volume retailers........ $ 63,561 34.1% $ 77,993 35.6%
Health food.................. 50,656 27.2 45,484 20.8
Private label................ 42,302 22.7 48,009 22.0
Beverage distributors........ 18,209 10.0 23,108 10.6
International markets........ 5,407 2.6 17,630 8.1
Other........................ 6,270 3.4 6,342 2.9
-------- ----- -------- -----
Total.................. $186,405 100.0% $218,566 100.0%
======== ===== ======== =====
GROSS PROFIT. Gross profit increased approximately 16.4% to $81.7 million
in the year ended May 31, 1997 from $70.2 million in the year ended May 31,
1996. Gross profit as a percentage of net sales was 37.4% for the year ended May
31, 1997 compared to 37.7% for the year ended May 31, 1996. The slight decrease
in the gross profit percent resulted primarily from the Company's decision,
implemented in 1997, to invest in manufacturing and distribution infrastructure
to support future growth.
OPERATING EXPENSES. Operating expenses increased approximately 66.4% to
$68.3 million in the year ended May 31, 1997 from $41.1 million in the year
ended May 31, 1996. In connection with the Company's initial public offering,
the Company recognized a one-time compensation charge relating to the vested
portion of certain management incentive agreements and certain other charges as
a result of issuing stock to other employees based on years of service totaling
approximately $14.5 million ($8.9 million after tax). In addition, the Company
adopted SFAS No. 121 effective June 1, 1996 and recognized an asset impairment
loss of approximately $2.1 million ($1.3 million after tax). Excluding these
charges, operating expenses increased approximately $10.6 million, or 26.0%, to
$51.7 million in 1997 compared to $41.1 million in 1996. As a percentage of net
sales, operating expenses (excluding the aforementioned charges) were 23.7% for
1997 compared to 22.0% for 1996. Operating expenses increased primarily as a
result of additional personnel, new information systems and increased legal
costs.
Selling and marketing expenses as a percentage of net sales were 15.0% for
the year ended May 31, 1997 compared to 14.3% for the year ended May 31, 1996.
The increase in selling and marketing expense resulted primarily from the
incremental costs of additional sales personnel and increased royalty expense.
General and administrative expense as a percentage of net sales were 6.7%
for the year ended May 31, 1997 compared to 5.9% for the year ended May 31,
1996. The increase resulted primarily from increased legal costs and costs
associated with additional personnel.
Excluding the effects of adopting SFAS No. 121, amortization of intangible
assets expense remained relatively constant for the years ended May 31, 1997 and
1996, respectively, at approximately 1.0% and 1.1% of net sales. The Company
adopted SFAS No. 121 effective June 1, 1996 and, primarily as a result of the
Company's decision to discontinue manufacturing and marketing products
containing ephedrine (Ma Huang) in capsule and tablet form, recognized an
impairment of intangible assets loss of approximately $2.1 million ($1.3 million
after tax).
OTHER EXPENSE. Other expense amounted to $6.3 million for the year ended
May 31, 1997 compared to $4.0 million for the year ended May 31, 1996. The net
increase of approximately $2.3 million consists primarily of increased interest
costs associated with additional indebtedness incurred in connection
17
with certain acquisitions, increased working capital requirements and additions
to property and equipment.
PROVISION FOR INCOME TAXES. Provision for income taxes amounted to $2.7
million for the year ended May 31, 1997 compared to $10.2 million for the year
ended May 31, 1996. The decrease in the Company's provision for income taxes
resulted primarily from the reduction in pre-tax earnings in 1997 compared to
1996. As noted above, pre-tax earnings in fiscal 1997 were impacted by the
one-time compensation charge of $14.5 million and the adoption of SFAS No. 121
($2.1 million). Income taxes as a percentage of pre-tax income amounted to
approximately 38.6% for the year ended May 31, 1997 compared to 40.6% for the
year ended May 31, 1996. The reduction in the effective tax rate in 1997
resulted primarily from a reduction in the Federal statutory rate applicable to
the Company and a reduction in the overall effective state income tax rate.
ACQUISITIONS. In September 1996, the Company acquired certain assets and
international distribution rights from a related party in Canada for $4.0
million. The purchase of these assets was accounted for at the historical cost
of $25,000 in the records of the Company, and the results of operations have
been included since September 1, 1996. Included in distributions to WHF is an
amount of $3,975,000 representing the difference between the purchase price and
historical cost.
In September 1996, the Company acquired trademarks and nutritional
supplement operations providing distribution capabilities in primarily Spain and
Portugal for a total purchase price of $3.4 million. Of the total amounts paid,
$2,650,000 was paid to an affiliate of which $1,350,000 represents an amount in
excess of historical cost that is accounted for as a distribution to WHF.
Results of operations have been included since September 1, 1996.
In January 1997, the Company acquired the net assets of Science Foods,
Inc., a competing sports nutrition beverage manufacturer, for $3.9 million in
cash plus the assumption of $.7 million in debt. The Company accounted for this
acquisition as a purchase and recognized goodwill of $3.2 million which is being
amortized over 35 years. Results of operations have been included since January
1, 1997.
RESULTS OF OPERATIONS
(FISCAL 1996 COMPARED TO FISCAL 1995)
NET SALES. Net sales increased approximately 105.1% to $186.4 million in
fiscal 1996 from $90.9 million in fiscal 1995. The increase in net sales in
fiscal 1996 resulted primarily from increased distribution to mass volume
retailers and greater contributions from the Company's acquisitions during
fiscal 1996 than fiscal 1995.
The following table shows comparative net sales results categorized by
distribution channel on an actual basis and as a percentage of net sales for the
fiscal years indicated:
1995 1996
---------------- ----------------
(dollars in thousands)
Mass volume retailers.................. $24,267 26.7% $ 63,561 34.1%
Health food............................ 40,074 44.1 50,656 27.2
Private label.......................... 11,502 12.6 42,302 22.7
International markets.................. 4,335 4.8 5,407 2.9
Other, including beverage distributors. 10,749 11.8 24,479 13.1
------- ----- -------- -----
Total............................ $90,927 100.0% $186,405 100.0%
======= ===== ======== =====
18
Sales to mass volume retailers increased approximately 161.9% to $63.6
million in fiscal 1996 from $24.3 million in fiscal 1995. The increase in sales
to mass volume retailers in fiscal 1996 resulted primarily from the Company
obtaining new accounts, expanding distribution to existing accounts and
introducing new branded products, including a line of melatonin products under
the Schiff brand. Sales to health food stores increased approximately 26.4% to
$50.7 million in fiscal 1996 from $40.1 million in fiscal 1995. The increase in
sales to health food stores was primarily the result of the introduction of new
branded products. Sales to private label customers increased approximately
267.8% to $42.3 million in fiscal 1996 from $11.5 million in fiscal 1995. The
increase in sales to private label customers was primarily due to the
acquisition of Nion. Sales to international markets increased approximately
24.7% to $5.4 million in fiscal 1996 from $4.3 million in fiscal 1995. The
increase in sales to international markets resulted primarily from the
acquisition of Weider U.K. Sales to other customers increased approximately
127.7% to $24.5 million in fiscal 1996 from $10.7 million in fiscal 1995. The
increase in sales to other customers, including health clubs and gyms, was
primarily attributable to the ABB acquisition in fiscal 1995.
GROSS PROFIT. Gross profit increased approximately 97.8% to $70.2 million
in fiscal 1996 from $35.5 million in fiscal 1995. The increase in gross profit
in fiscal 1996 resulted primarily from the increase in sales in fiscal 1996 from
fiscal 1995. Gross margin decreased to 37.7% for fiscal 1996 from 39.1% for
fiscal 1995, primarily as a result of shifts in product mix to lower margin
beverages, nutrition bars and private label capsules and tablets manufacturing,
which was partially mitigated by increased manufacturing efficiencies, higher
sales prices and increased concentration on branded capsules and tablets.
OPERATING EXPENSES. Selling and marketing expenses, including sales,
marketing, advertising and freight costs, increased approximately 71.6% to $26.6
million in fiscal 1996 from $15.5 million in fiscal 1995. The increase in
selling and marketing expenses in fiscal 1996 resulted primarily from increased
advertising and personnel required to handle higher volumes of products
associated with increased sales and acquisitions in fiscal 1996. Selling and
marketing expenses as a percentage of net sales were 14.3% in fiscal 1996
compared to 17.0% in fiscal 1995.
General and administrative expenses increased approximately 75.8% to $10.9
million in fiscal 1996 from $6.2 million in fiscal 1995. The dollar increase in
general and administrative expenses in fiscal 1996 resulted primarily from
incremental expenses added by the acquisition of Nion and ANB. General and
administrative expenses as a percentage of net sales were 5.9% in fiscal 1996
compared to 6.8% in fiscal 1995. The decrease in general and administrative
expenses as a percentage of net sales was primarily a result of increased sales
volumes.
The expense for amortization of intangible assets increased approximately
90.9% to $2.1 million for fiscal 1996 from $1.1 million for fiscal 1995. The
increase in amortization of intangible assets resulted primarily from
acquisitions consummated during fiscal years 1996 and 1995. Amortization of
intangible assets expense as a percentage of net sales was 1.1% in fiscal 1996
compared to 1.2% in fiscal 1995.
OTHER EXPENSE. Other expense increased approximately 329.2% to $4.0
million in fiscal 1996 from $932,000 in fiscal 1995. The increase in other
expense resulted primarily from an increase in interest expense of 236.4% to
$3.7 million in fiscal 1996 from $1.1 million in fiscal 1995. Interest expense
increased in fiscal 1996 as a result of the Company's incurrence of additional
indebtedness in connection with the Weider U.K., Nion and ANB
19
acquisitions and increased investment in inventory and fixed assets.
PROVISION FOR INCOME TAXES. Provision for income taxes increased
approximately 137.2% to $10.2 million in fiscal 1996 from $4.3 million in fiscal
1995. The dollar increase in provision for income taxes resulted primarily from
increased taxable income in fiscal 1996 compared to fiscal 1995. Provision for
income taxes as a percentage of net sales was 5.5% in fiscal 1996 compared to
4.7% in fiscal 1995.
ACQUISITIONS. In January 1995, the Company acquired certain assets of
American Body Building Products, Inc. ("ABB") and two other related companies
for cash of $8,620, a note of $2,000, and the assumption of certain liabilities.
The Company accounted for this acquisition as a purchase and recognized goodwill
of approximately $8,788, which is being amortized over 15 years. ABB
manufactures and distributes energy drinks and nutrition bars.
In June 1995, the Company acquired the assets of National Institute of
Nutrition, Inc. (dba Nion Laboratories) ("Nion") for cash of $8,190, notes of
$7,063, and the assumption of certain liabilities. The Company accounted for
this acquisition as a purchase and recognized goodwill of approximately $8,149
which is being amortized over 15 years. Nion manufactures and distributes
nutritional supplements in capsule and tablet form.
In October 1995, the Company acquired certain assets of American Nutrition
Bars ("ANB") for the forgiveness of a note receivable of $850 and the assumption
of certain liabilities. The Company accounted for this acquisition as a purchase
and recognized goodwill of approximately $3,126 which is being amortized over a
15-year period. ANB manufactures and distributes nutritional bars.
In January 1996, the Company purchased net assets with a recorded value of
approximately $49 and rights to use the Weider name in England and Ireland, and
with certain customer accounts in Austria, France, and Switzerland for
approximately $557 ("Weider U.K.") from a commonly controlled entity. The
Company also incurred liabilities of $250 to the benefit of the commonly
controlled entity. As a result, $758 is included in distribution to WHF for the
purchase of such assets. The purchase of these assets was accounted for at the
historical cost of $49 in the records of the Company and the results of
operations have been included since January 1, 1996. Included in distributions
to WHF is an additional $900 paid for the rights to use the Weider name in the
European countries not included above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the IPO, the Company's operations and capital requirements were
financed through internally generated funds, borrowings under a credit agreement
and loans from WHF.
Concurrent with the Company's IPO, the Company entered into an amended
credit agreement (the "Credit Agreement") with General Electric Capital
Corporation ("GECC"). The Credit Agreement is a $130.0 million senior secured,
long-term credit facility that contains standard terms and conditions, including
subject to permitted amounts, a limitation on the ability of the Company to pay
dividends on the common stock and minimum net worth requirements. The
obligations of the Company under the Credit Agreement are secured by a first
priority lien on all owned or acquired tangible and intangible assets of the
Company and a pledge to GECC of the capital stock of the U.S. subsidiaries of
the Company (including the subsidiary that owns the Company's foreign
subsidiaries). Borrowings available under the Credit Agreement are used for
general working capital and to support capital
20
expenditures and, if necessary, to effect acquisitions. Borrowings under the
Credit Agreement bear interest at floating rates and mature in February 2000. At
May 31, 1997, the Company had $92.0 million of available credit under the Credit
Agreement.
The Company expects to fund its long-term capital requirements, including
construction of capital projects for the next twelve months through the use of
operating cash flow supplemented as necessary by borrowings under the Credit
Agreement and, if necessary, through debt financing or the issuance of
additional equity. The Company may also enter into strategic acquisitions as the
nutritional supplements industry continues to consolidate. The funding of future
acquisitions may also require borrowings under the Credit Agreement and/or other
debt financing or the issuance of additional equity.
The Company paid a quarterly dividend of $0.0375 per share subsequent to
year end. The dividend was declared to be payable on June 15, 1997 to holders of
all classes of common stock of record at the close of business on June 1, 1997.
The Company's Board of Directors will determine dividend policy in the future
based upon, among other things, the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant at the
time. In addition, the Company entered into the Credit Agreement which contains
certain customary financial covenants that may limit the Company's ability to
pay dividends on its common stock. Accordingly, there can be no assurance that
the Company will be able to sustain the payment of dividends in the future.
IMPACT OF INFLATION
The Company has historically been able to pass inflationary increases for
raw materials and other costs onto its customers through price increases and
anticipates that it will be able to continue to do so in the future.
SEASONALITY
The Company's business is seasonal, with lower sales typically realized
during the first and second fiscal quarters and higher sales typically realized
during the third and fourth fiscal quarters. The Company believes such
fluctuations in sales are the result of greater marketing and promotional
activities toward the end of each fiscal year, customer buying patterns, and
consumer spending patterns related primarily to the consumers' interest in
achieving personal health and fitness goals after the beginning of each new
calendar year and before the summer fashion season.
Furthermore, as a result of changes in product sales mix and other
factors, as discussed above, the Company experiences fluctuations in gross
profit and operating margins on a quarter-to-quarter basis.
ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" which defines a fair value based method of accounting
for stock-based employee compensation plans. Under SFAS No. 123, companies are
encouraged, but are not required, to adopt the fair value method for fiscal
years beginning after December 15, 1995 for all employee awards granted after
the beginning of such year. Companies are permitted to continue to account for
such transactions under accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), but must disclose in a note to the
financial statements pro forma net income and earnings per share as if SFAS
No.123 had been applied. The Company has determined that it will not adopt the
fair value method but
21
will continue to account for stock-based compensation under APB No. 25. For
1996 and 1997, the application of SFAS No. 123 in regards to pro forma net
income and pro forma earnings per share is not significant.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
supersedes Accounting Principles Board Opinion No. 15 "Earnings per Share" and
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and provides
guidance on other computational changes. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Earlier application is not permitted. The Company does not expect the adoption
of SFAS No. 128 to have a material impact on the financial position and results
of operations of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be
material in relation to its financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data for the Company are on the
following pages F-1 through F-19.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth certain information concerning the directors
and executive officers of the Company at May 31, 1997.
DIRECTORS AND EXECUTIVE OFFICERS AGE POSITION
-------------------------------- --- --------
Eric Weider . . . . . . . . . . . 33 Chairman of the Board
and Director
Richard B. Bizzaro. . . . . . . . 55 Chief Executive Officer,
President and Director
Robert K. Reynolds. . . . . . . . 40 Chief Operating Officer,
Executive Vice President,
Secretary and Director
Richard A. Blair . . . . . . . . 37 Executive Vice President--Sales
and Marketing
Stephen D. Young. . . . . . . . . 43 Executive Vice President--
Operations and Chief Financial
Officer
Ronald L. Corey . . . . . . . . . 58 Director
Roger H. Kimmel . . . . . . . . . 51 Director
George F. Lengvari. . . . . . . . 55 Director
ERIC WEIDER has been a director of the Company since June 1989, Chairman
of the Board since August 1996 and is currently President and Chief Executive
Officer of WHF. Mr. Weider also serves as a member of the board of directors of
a number of public and private companies in the United States and Canada,
including WHF and Mpact Immedia Corporation. Mr. Weider is also the President of
the Joe Weider Foundation.
RICHARD B. BIZZARO has been Chief Executive Officer, President and a
director of the Company since June 1990. Prior to his appointment as Chief
Executive Officer and President of the Company, he was Vice President of Sales
for WHF, responsible for sales at the Company and Weider Exercise Equipment. Mr.
Bizzaro has worked for the Company, WHF or one of WHF's affiliates since 1983.
ROBERT K. REYNOLDS has been Executive Vice President, Chief Operating
Officer and Secretary of the Company since July 1992 and a director of the
Company since January 1994. Mr. Reynolds joined the Company in September 1990
as Chief Financial Officer. Mr. Reynolds, a certified public accountant, is
primarily responsible for all domestic and international operations.
RICHARD A. BLAIR has been Executive Vice President--Sales and Marketing of
the Company since January 1997. From January 1994 to January 1997, Mr. Blair was
Senior Vice President--Sales of the Company. Mr. Blair is primarily responsible
for overseeing the national sales force and distribution channels and for
directing marketing, creative and advertising strategies. Mr. Blair joined the
Company in June 1991 and prior thereto was Director of Sales and Marketing at
Tunturi Sports Equipment Company, which he joined in 1984.
STEPHEN D. YOUNG has been Executive Vice President--Operations and Chief
Financial Officer of the Company since January 1997. From January 1994 to
January 1997, Mr. Young was Senior Vice President--Finance and Chief Financial
Officer of the Company. Mr. Young joined the Company in September 1993. He
is responsible for all finance, accounting, information systems, human
23
resources, administration, due diligence on acquisitions, operations and
product development. Mr. Young is a certified public accountant and, prior to
September 1993, was Vice President Finance at First Health Strategies, which
he joined in 1983.
RONALD L. COREY has been a director of the Company since August 1996.
Mr. Corey has been President of the Club de Hockey Canadien Inc. (the Montreal
Canadiens) and the Molson Center Inc. since 1982. In addition, between 1985
and 1989, Mr. Corey held the position of Chairman of the Board and director of
the Montreal Port Corporation. Mr. Corey has served as a director of numerous
companies, including Banque Laurentienne, Reno-Depot Inc. and Transamerica
Life Companies.
ROGER H. KIMMEL has been a director of the Company since August 1996.
Mr. Kimmel has been a partner at the law firm of Latham & Watkins for more
than five years. Mr. Kimmel is a director of Algos Pharmaceutical Corporation
and TSR Paging Inc.
GEORGE F. LENGVARI has been a director of the Company since August 1996.
Mr. Lengvari has been Vice Chairman of WHF since June 1995 and Chairman of
Weider Publications U.K. since September 1994. Prior to joining WHF, Mr.
Lengvari was a partner for 22 years in the law firm Lengvari Braman and is
currently of counsel to the law firm LaPointe Rosenstein. Mr. Lengvari
currently serves as a member of the board of directors of WHF.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement, incorporated by references in Part III
of this Form 10-K, under the headings "Executive Compensation" and "Certain
Relationships and Related Party Transactions."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement, incorporated by reference in Part III
of this Form 10-K, under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
See the Company's Proxy Statement, incorporated by reference in Part III
of this Form 10-K, under the heading "Certain Relationships and Related Party
Transactions."
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
(1) Financial Statements
See "Item 8. Financial Statements and Supplementary Data" for
Financial Statements included with this Annual Report on Form 10-K.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted because they are not required, not
applicable, or the information is otherwise set forth in the financial
statements or notes thereto.
(3) Exhibits
3.1 Amended and Restated Certificate of Incorporation of Weider Nutrition
International, Inc. (1)
3.2 Amended and Restated Bylaws of Weider Nutrition International, Inc. (1)
10.1 Build-To-Suit Lease Agreement, dated March 20, 1996, between SCI
Development Services Incorporated and Weider Nutrition Group, Inc. (1)
10.2 Agreement by and between Joseph Weider and Weider Health and Fitness
10.3 1997 Equity Participation Plan of Weider Nutrition International, Inc. (1)
10.4 Form of Tax Sharing Agreement by and among Weider Nutrition International,
Inc. and its subsidiaries and Weider Health and Fitness and its
subsidiaries (1)
10.5 Form of Employment Agreement between Weider Nutrition International, Inc.
and Richard B. Bizzaro (1)
10.6 Form of Employment Agreement between Weider Nutrition International, Inc.
and Robert K. Reynolds (1)
10.7 Form of Senior Executive Employment Agreement between Weider Nutrition
International, Inc. and certain senior executives of the Company (1)
10.8 Advertising Agreement between Weider Nutrition International, Inc. and
Weider Publications, Inc.(1)
10.9 Amended and Restated Shareholders Agreement between Weider Health and
Fitness and Hornchurch Investments Limited (1)
10.10 Amended and Restated Shareholders Agreement between Weider Health and
Fitness, Bayonne Settlement and Ronald Corey(1)
10.11 Indemnification Agreement between Weider Nutrition Group, Inc. And Showa
Denko America (1)
10.12 License Agreement between Mariz Gestao E Investmentos Limitada and Weider
Nutrition Group Limited (1)
21 Subsidiaries of Weider Nutrition International, Inc.(1)
23.1 Consent of Deloitte & Touche LLP (2)
27.1 Financial Data Schedule Summary (2)
- -----------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(File No. 333-12929)and incorporated herein by reference.
(2) FIled herewith.
(b) Reports on Form 8-K
No report on Form 8-K was filed during the fourth quarter of fiscal 1997.
(c) Item 601 Exhibits
The exhibits required by Item 601 of Regulation S-K are set forth in
(a) (3) above.
(d) Financial Statement Schedules
The financial statement schedules required by Regulation S-K are set
forth in (a) (2) above.
25
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Weider Nutrition International, Inc.
Dated: August 29, 1997 By: /s/ RICHARD B. BIZZARO
Richard B. Bizzaro
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ ERIC WEIDER Chairman of the Board August 29, 1997
and Director
/s/ RICHARD B. BIZZARO Chief Executive Officer, August 29, 1997
President and Director
(Principal Executive Officer)
/s/ ROBERT K. REYNOLDS Chief Operating Officer, August 29, 1997
Executive Vice President and
Director (Principal Financial
Accounting Officer)
/s/ RONALD L. COREY Director August 29, 1997
/s/ ROGER H. KIMMEL Director August 29, 1997
/s/ GEORGE F. LENGVARI Director August 29, 1997
*By: /s/ ROBERT K. REYNOLDS
Attorney-in-fact
26
WEIDER NUTRITION INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................... F-2
Consolidated Balance Sheets at May 31, 1996 and 1997........... F-3
Consolidated Statements of Income, Years Ended
May 31, 1995, 1996 and 1997.................................... F-4
Consolidated Statements of Stockholders' Equity,
Years Ended May 31, 1995, 1996 and 1997........................ F-5
Consolidated Statements of Cash Flows, Years
Ended May 31, 1995, 1996 and 1997.............................. F-6
Notes to Consolidated Financial Statements..................... F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Weider Nutrition International, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Weider Nutrition
International, Inc. and subsidiaries (collectively, the "Company") as of May 31,
1996 and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended May 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Weider Nutrition International,
Inc. and subsidiaries at May 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
July 8, 1997
F-2
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MAY 31, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS 1996 1997
--------- ------
Current assets:
Cash and cash equivalents $ 1,592 $ 1,259
Accounts receivable, net of allowance for doubtful
accounts of $137 (1996) and $212 (1997) 33,526 43,634
Other receivables 1,035 3,038
Inventories 37,482 40,782
Prepaid expenses and other 4,806 4,605
Deferred taxes 2,704 4,093
--------- --------
Total current assets 81,145 97,411
--------- --------
Property and equipment, net 21,411 35,930
--------- --------
Other assets:
Intangible assets, net 23,783 26,550
Deposits and other assets 6,304 7,888
Deferred taxes 504 977
--------- --------
Total other assets 30,591 35,415
--------- --------
Total assets $ 133,147 $168,756
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,093 $ 22,727
Accrued expenses 6,668 8,511
Current portion of long-term debt 9,032 2,181
Payable to WHF 3,747 --
--------- -----
Total current liabilities 38,540 33,419
--------- --------
Long-term debt 55,275 42,913
--------- --------
Commitments and contingencies (Notes 7, 8 and 9)
Stockholders' equity:
Preferred stock, par value $.01 per share; shares
authorized-10,000,000; no shares issued and outstanding -- --
Class A common stock, par value $.01 per share; shares
authorized-50,000,000; shares issued and
outstanding-1,557,604 (1996) and 9,011,806 (1997) 16 90
Class B common stock, par value $.01 per share; shares
authorized-25,000,000; shares issued and
outstanding-15,687,432 (1996 and 1997) 157 157
Additional paid-in capital 4,308 79,271
Foreign currency translation -- (177)
Retained earnings 34,851 13,083
--------- --------
Total stockholders' equity 39,332 92,424
--------- --------
Total liabilities and stockholders' equity $ 133,147 $168,756
========= ========
See notes to consolidated financial statements.
F-3
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MAY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1995 1996 1997
--------- --------- ---------
Net sales $ 90,927 $ 186,405 $ 218,566
Cost of goods sold 55,411 116,177 136,875
--------- --------- ---------
Gross profit 35,516 70,228 81,691
--------- --------- ---------
Operating expenses:
Selling and marketing 15,472 26,596 32,776
General and administrative 6,198 10,924 14,594
Research and development 1,449 1,469 2,291
Amortization of intangible assets 1,107 2,079 2,084
Impairment of intangible assets -- -- 2,095
Management and employee
compensation charge -- -- 14,495
--------- --------- ---------
Total operating expenses 24,226 41,068 68,335
--------- --------- ---------
Income from operations 11,290 29,160 13,356
--------- --------- ---------
Other income (expense):
Interest, net (1,079) (3,736) (5,791)
Other 147 (253) (557)
--------- --------- ---------
Total (932) (3,989) (6,348)
--------- --------- ---------
Income before income taxes 10,358 25,171 7,008
Provision for income taxes 4,266 10,207 2,708
--------- --------- ---------
Net income $ 6,092 $ 14,964 $ 4,300
========= ========= =========
Proforma weighted average common shares and
common equivalent shares outstanding 24,699,238 24,881,954
========== ==========
Proforma net income per common share and
common equivalent share outstanding $0.61 $0.17
===== =====
See notes to consolidated financial statements.
F-4
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MAY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Class A Class B Additional Foreign
Common Common Paid-In Currency Retained
Stock Stock Capital Translation Earnings Total
--- ---- ------- ----- -------- --------
Balance at June 1, 1994 $ 2 $157 $ -- $-- $ 22,787 $ 22,946
Net income -- -- -- -- 6,092 6,092
Issuance of common stock,
including reallocation of
capital 14 -- 4,308 -- 158 4,480
Distributions to WHF -- -- -- -- (5,418) (5,418)
--- ---- ------- ----- -------- --------
BALANCE AT MAY 31, 1995 16 157 4,308 -- 23,619 28,100
Net income -- -- -- -- 14,964 14,964
Distributions to WHF -- -- -- -- (3,732) (3,732)
--- ---- ------- ----- -------- --------
BALANCE AT MAY 31, 1996 16 157 4,308 -- 34,851 39,332
Net income -- -- -- -- 4,300 4,300
Shares issued in 14,428.9-for-one
stock split, applied retroactively
at June 1, 1994 (Note 9) -- -- -- -- -- --
Distributions to WHF -- -- -- -- (26,068) (26,068)
Initial public offering of common
stock 64 -- 63,817 -- -- 63,881
Issuance of stock in connection with
management incentive agreements
(Note 7) and in connection with
equity plan (Note 9) 10 -- 11,146 -- -- 11,156
Foreign currency translation
adjustments -- -- -- (177) -- (177)
--- ---- ------- ----- -------- --------
BALANCE AT MAY 31, 1997 $90 $157 $79,271 $(177) $ 13,083 $ 92,424
=== ==== ======= ===== ======== ========
See notes to consolidated financial statements.
F-5
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1995 1996 1997
------- ------- ------
Cash flows from operating activities:
Net income $ 6,092 $14,964 $ 4,300
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for bad debts 108 98 151
Deferred taxes (911) (1,550) (1,862)
Depreciation, amortization and
asset impairment 2,000 5,001 8,050
Management and employee stock
compensation -- -- 11,156
Changes in operating assets and liabilities-
net of assets acquired:
Accounts receivable (4,240) (8,219) (9,539)
Other receivables (519) (496) (1,802)
Inventories (8,928) (18,452) (2,509)
Prepaid expenses and other (83) (3,742) 204
Deposits and other assets 75 (428) (1,211)
Accounts payable 1,031 881 2,812
Accrued expenses 25 (259) (71)
------- ------- -------
Net cash provided by (used in)
operating activities (5,350) (12,202) 9,679
------- ------- -------
Cash flows from financing activities:
Issuance of common stock 4,480 -- 63,881
Distributions to WHF (5,418) (3,731) (26,068)
Net change in payable to WHF 1,914 182 (3,747)
Proceeds from long-term debt 17,953 35,250 40,647
Payments on long-term debt (1,519) (4,949) (60,367)
------- ------- -------
Net cash provided by financing activities 17,410 26,752 14,346
------- ------- -------
Cash flows from investing activities:
Purchase of companies, net of cash acquired (8,495) (9,011) (5,082)
Purchase of intangible assets -- (135) (1,699)
Purchase of property and equipment (1,295) (6,084) (17,400)
------- ------- -------
Net cash used in investing activities (9,790) (15,230) (24,181)
------- ------- -------
Effect of exchange rate changes on cash -- -- (177)
------- ------- -------
Increase (decrease) in cash and cash
equivalents 2,270 (680) (333)
Cash and cash equivalents, beginning of year 2 2,272 1,592
------- ------- -------
Cash and cash equivalents, end of year $ 2,272 $ 1,592 $ 1,259
======= ======= =======
(Continued)
See notes to consolidated financial statements.
F-6
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MAY 31, 1995, 1996, AND 1997
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
1995 1996 1997
------ ------ -----
Cash paid during the year for:
Interest $1,163 $ 3,816 $5,721
Income taxes 2,279 11,920 5,185
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In connection with the acquisitions of net assets from other companies (see
Note 8), the Company assumed liabilities as follows:
1995 1996 1997
------ ------ -----
Fair value of assets acquired $6,250 $18,497 $4,471
Cost in excess of fair value of
net assets acquired 8,788 11,275 4,017
Cash paid, net of cash acquired (8,495) (9,011) (5,082)
Debt and liabilities issued (2,000) (7,063) (1,837)
------ ------- ------
Liabilities assumed $4,543 $13,698 $1,569
====== ======= ======
(Concluded)
See notes to consolidated financial statements.
F-7
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 1995, 1996, AND 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of Weider Nutrition International, Inc. and its wholly-owned
subsidiaries (collectively, the "Company") which is a majority-owned subsidiary
of Weider Health and Fitness ("WHF"). All significant intercompany accounts and
transactions have been eliminated.
INITIAL PUBLIC OFFERING--Effective May 1, 1997, the Company consummated an
initial public offering of its Class A common stock (the "IPO"). A total of
6,440,000 shares were sold to the public at $11 per share. The net proceeds to
the Company from the IPO amounted to approximately $63.9 million (after
underwriters' discounts of $5.0 million and offering costs of $2.0 million). The
net proceeds were used to pay a one-time distribution to WHF (see Note 9) and to
pay down long-term debt (see Note 5). Concurrent with consummation of the IPO,
the Company entered into an amended credit agreement which provides for a
revolving credit facility of $130.0 million with General Electric Capital
Corporation ("GECC") (see Note 5).
DESCRIPTION OF BUSINESS--The Company is a manufacturer of branded and
private label nutritional supplements. The Company manufactures a broad range of
capsules and tablets, powdered drink mixes, bottled beverages and nutrition
bars. The Company markets its branded products through several distribution
channels, including mass volume retailers, health foods stores, health clubs and
gyms, and international markets.
USE OF ESTIMATES IN PREPARING 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
sales and expenses during the reporting period. Such accounts include, among
others, the allowance for doubtful accounts, reserve for inventory obsolescence,
allowance for sales returns, and contingency reserves associated with
acquisitions. Actual results could differ from the estimates.
CASH EQUIVALENTS--Cash equivalents include highly liquid investments with
an original maturity of three months or less.
INVENTORIES--Inventories are stated at the lower of cost (on a first-in,
first-out basis) or market.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization expense was $893 (1995),
$2,922 (1996) and $3,871 (1997), computed primarily using the straight-line
method over the estimated useful lives of 31 years for buildings and 2 to 7
years for other property and equipment. Effective June 1, 1997, certain
manufacturing and distribution equipment placed into service as of, or
subsequent to such date, will be depreciated on a straight-line basis over a
ten-year period.
F-8
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INTANGIBLE ASSETS--Intangible assets are stated at cost and amortized
using the straight-line method over the estimated useful lives of the assets as
follows:
Cost in excess of fair value of net assets acquired 10-35 years
Patents and trademarks 10-20 years
Noncompete agreements 5 years
The Company evaluates the economic factors for determining requisite
recovery periods for certain intangible assets on a case-by-case basis.
LONG-LIVED ASSETS--Impairment of long-lived assets is determined in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to
be Disposed Of," which was adopted June 1, 1996. The Company recognized asset
impairments in the amount of $2,095 in fiscal 1997.
INCOME TAXES--Historically, the Company has filed consolidated returns
with WHF for Federal and, where appropriate, state income tax purposes. For
financial statement purposes, the Company has provided for income taxes as if it
was filing separate tax returns. Current income taxes payable are included in
payable to WHF on the accompanying balance sheet as of May 31, 1996. Effective
May 1,1997, the Company is required to file separate Federal income tax returns
as a result of the reduction in WHF's ownership percentage due to consummation
of the Company's IPO. Current income taxes receivable as of May 31, 1997 are
included in other receivables on the accompanying balance sheet. The Company
records in its balance sheet deferred income tax liabilities and assets for
temporary differences in the bases of assets and liabilities as reported for
financial statement purposes and income tax purposes.
NET SALES--The Company recognizes sales upon shipment of a product to a
customer. Allowances are made for uncollectible accounts and future credits. The
Company's largest customers, General Nutrition Center ("GNC") and Wal-Mart,
accounted for approximately 26% and 5%, respectively, of net sales in fiscal
1995; approximately 16% and 10%, respectively, in fiscal 1996; and 10% and 9%,
respectively, in fiscal 1997.
PRO FORMA COMMON SHARES OUTSTANDING AND EARNINGS PER SHARE--Pro forma net
income per common share and common equivalent share outstanding for the years
ended May 31, 1996 and 1997 has been computed by dividing net income by the
number of weighted average shares outstanding and assumes as outstanding, as of
June 1, 1995, the 1,557,604 shares of Class A common stock (adjusted for the
14,428.9-for-one stock split--see Note 9) issued and outstanding prior to
consummation of the IPO, the 15,687,432 Class B common shares (adjusted for the
14,428.9-for-one stock split), the 6,440,000 shares of Class A common stock
issued in connection with the IPO, the 972,247 shares of Class A common stock
issued pursuant to management incentive agreements (see Note 7), the 41,955
shares of Class A common stock issued to certain employees based on tenure with
the Company at the time of the IPO (see Note 9), and dilutive common stock
equivalents.
FINANCIAL INSTRUMENTS--The Company's financial instruments, when valued
using market interest rates, would not be materially different from the amounts
presented in the consolidated financial statements.
F-9
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RECLASSIFICATIONS--Certain amounts in prior year financial statements have
been reclassified to conform with the current year presentation.
ACCOUNTING STANDARDS--In October 1995, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation"
which defines a fair value based method of accounting for stockbased employee
compensation plans. Under SFAS No. 123, companies are encouraged, but are not
required, to adopt the fair value method for fiscal years beginning after
December 15, 1995 for all employee awards granted after the beginning of such
year. Companies are permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), but must disclose in a note to the financial statements
pro forma net income and earnings per share as if SFAS No. 123 had been applied.
The Company has determined that it will not adopt the fair value method but will
continue to account for stock-based compensation under APB No. 25. For 1996 and
1997, the application of SFAS No. 123 in regards to pro forma net income and pro
forma earnings per share is not significant.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" which
supersedes APB No. 15 "Earnings per Share" and replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and provides guidance on other computational
changes. SFAS No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. The Company does not expect the adoption of SFAS No. 128 to have a
material impact on the financial position and results of operations of the
Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
does not expect the impact of SFAS No. 130 to be material in relation to its
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." SFAS No. 131 established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosure about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company does not expect the impact of SFAS No. 131 to be
material in relation to its financial statements.
F-10
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2. INVENTORIES
Inventories consist of the following at May 31:
1996 1997
------- -------
Raw materials $11,940 $17,569
Work in process 3,164 2,629
Finished goods 22,378 20,584
------- -------
Total $37,482 $40,782
======= =======
Inventory totaling $4,453 ($4,901 in 1996), primarily consisting of a raw
material,is included as a long-term asset in deposits and other assets in the
accompanying balance sheets.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at May 31:
1996 1997
------- -------
Land $ 1,679 $ 1,679
Buildings 6,970 6,970
Furniture and equipment 15,772 19,881
Leasehold improvements 2,616 3,246
Construction in progress -- 13,815
------- -------
27,037 45,591
Less accumulated depreciation
and amortization (5,626) (9,661)
------- -------
Total $21,411 $35,930
======= =======
In March 1996, the Company purchased a 24-acre parcel of land located in
Salt Lake City, Utah for cash of $2,091. The land was subsequently sold to a
leasing company for cost and the Company entered into a build-to-suit operating
lease agreement to construct its headquarters and manufacturing facility on the
land. The lease term is for 16 years beginning April 1, 1997 and includes two
five-year renewal options. The lease agreement requires the Company to fund
certain excess leasehold improvements, included above in construction in
progress. Construction of the facility was substantially complete by July 1,
1997.
F-11
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
4. INTANGIBLE ASSETS
Intangible assets consist of the following at May 31:
1996 1997
------- -------
Cost in excess of fair value
of net assets acquired $26,360 $28,626
Patents and trademarks 2,371 4,933
Noncompete agreements 500 219
------- -------
29,231 33,778
Less accumulated amortization (5,448) (7,228)
------- -------
Total $23,783 $26,550
======= =======
5. LONG-TERM DEBT
Long-term debt consists of the following at May 31:
1996 1997
------- -------
Advances under a $130,000 revolving line
of credit to GECC bearing interest at
floating rates (7.94% to 9.25% at
May 31, 1997) through February 2000 $19,700 $37,946
Term note payable to GECC bearing interest
at LIBOR plus 2.50%. The term note was
repaid with net proceeds of the IPO 18,250 --
Note payable to WHF, unsecured, bearing
interest at LIBOR plus 2.25%, or
prime plus 1.00%, through January
2000. The note was repaid with net
proceeds of the IPO 15,000 --
Mortgage loan, due in monthly installments of
$30 including interest at 7-5/8% due
February 2009 3,078 2,978
F-12
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Note payable to the previous owner of Nion
(See Note 8), quarterly installments of
$151 plus interest at 8% through
September 1998 1,209 756
Noninterest bearing notes arising as a
result of certain acquisitions
consummated in September 1996 (see Note 8) -- 1,800
Notes payable in connection with
acquisitions, repaid in 1997 6,250 --
Other 820 1,614
------- -------
Total 64,307 45,094
Less current portion 9,032 2,181
------- -------
Long-term portion $55,275 $42,913
======= =======
As of May 31, 1997, future payments of long-term debt are due as follows:
$2,181 (1998), $1,401 (1999), $38,288 (2000), $259 (2001), $243 (2002), and
$2,722 thereafter.
Concurrent with the Company's IPO, the Company entered into an amended
credit agreement (the "Credit Agreement") with GECC. The Credit Agreement is a
$130.0 million senior secured, long-term credit facility that contains standard
terms and conditions, including subject to permitted amounts, a limitation on
the ability of the Company to pay dividends on the common stock and minimum net
worth requirements. The obligations of the Company under the Credit Agreement
are secured by a first priority lien on all owned or acquired tangible and
intangible assets of the Company and a pledge to GECC of the capital stock of
the U.S. subsidiaries of the Company (including the subsidiary that owns the
Company's foreign subsidiaries). Borrowings available under the Credit Agreement
are used for general working capital needs and to support capital expenditures
and, if necessary, to effect acquisitions. Borrowings under the Credit Agreement
bear interest at floating rates (7.94% to 9.25% at May 31, 1997) and mature in
February 2000. As of May 31, 1997, the Company has $92.0 million of available
credit under the Credit Agreement.
F-13
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
6. INCOME TAXES
The components of income tax expense consist of the following for the
years ended May 31:
1995 1996 1997
------- ------- -----
Current $ 5,177 $11,757 $4,570
Deferred (911) (1,550) (1,862)
------- ------- ------
Total $ 4,266 $10,207 $2,708
======= ======= ======
The provision for income taxes differs from a calculated income tax at the
Federal statutory rate as follows:
1995 1996 1997
------- ------- -----
Computed Federal income tax expense
at the statutory rate of 35% $ 3,625 $ 8,810 $2,453
Amortization of cost in excess of
fair value of net assets acquired 133 133 147
Meals and entertainment 25 31 30
State income taxes 463 1,221 169
Other 20 12 (91)
------- ------- ------
Total $ 4,266 $10,207 $2,708
======= ======= ======
Net deferred income tax assets consist of the following at May 31:
1996 1997
------------------ -------------------
Long- Long-
Current Term Current Term
------- ------ ------- -------
Assets:
Accounts receivable allowances $ 539 $ -- $ 470 $ --
Inventory allowance 481 -- 675 --
Deferred compensation -- 369 -- 422
Accrued vacation and bonuses 112 -- 212 --
Accrued other -- -- 432 --
Amortization of intangibles -- -- -- 499
Capitalization of inventory costs 845 -- 909 --
Options and units -- 272 1,163 --
State taxes 727 -- 232 --
Noncompete agreement -- 66 -- 152
Basis difference in acquired
companies -- 118 -- 107
------ ------ ------ ------
Total 2,704 825 4,093 1,180
------ ------ ------ ------
Liabilities:
Amortization of intangibles -- 105 -- --
Depreciation -- 216 -- 203
------ ------ ------ ------
Total -- 321 -- 203
------ ------ ------ ------
Deferred income taxes, net $2,704 $ 504 $4,093 $ 977
====== ====== ====== ======
F-14
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
7. COMMITMENTS AND CONTINGENCIES
LEASES--The Company leases warehouse and office facilities, manufacturing
and production facilities, transportation equipment and other equipment under
several operating lease agreements expiring through 2013. As of May 31, 1997,
future minimum payments of $36,681 under the noncancelable operating leases are
due as follows: $3,672 (1998), $3,160 (1999), $2,426 (2000), $1,854 (2001),
$1,890 (2002) and $23,679 thereafter. Rental expense charged to operations
amounted to $629 (1995), $1,610 (1996), and $2,197 (1997).
MANAGEMENT INCENTIVE AGREEMENTS--The Company had management incentive
agreements (the "Agreements") pursuant to which certain employees of the Company
(the "Recipients") were granted performance units ("Performance Units") as
incentive compensation. The Performance Units entitled the Recipients to a cash
payment or, at the option of the Company, shares of Class A common stock upon
the conversion of the Performance Unit.
Simultaneously with the IPO, which triggered a conversion under the
Agreements, the Company paid in cash and shares of Class A common stock the
vested portion of the Performance Units. In aggregate, the Company paid $2,960
in cash and issued 972,247 shares of Class A common stock (valued at the IPO
price). The Company recognized compensation expense of $13.6 million (included
in management and employee compensation charge in the accompanying statement of
income) in 1997 as a result of the conversion of Performance Units into Class A
common stock.
In order to facilitate the payment of individual income taxes, the Company
will make available to each Recipient a loan in principal amount up to 30% of
the conversion value of the vested Performance Units held by each Recipient.
Such loans to the Recipients will bear interest at 8.0% per annum, are repayable
five years from the borrowing date and shall be secured by the Recipients'
stock. At May 31, 1997 there were no loans outstanding. Subsequent to May 31,
1997, certain Recipients elected to borrow a portion of, or the entire available
amount.
The unvested portion of the Performance Units (represented by restricted
shares of Class A common stock) will vest (contingent upon continued employment
and/or other factors) over the subsequent five-year period at 20% per year. An
aggregate maximum total of 182,716 restricted shares of Class A common stock may
ultimately become issued and outstanding. The Company will recognize an annual
compensation charge in accordance with the actual vesting of the remaining
Performance Units and issuance of unrestricted Class A common stock.
LITIGATION--The Company was named as one of several defendants in a suit
filed in December 1996 alleging unfair competition and false advertising under
California law. A second amended complaint was filed on or about June 1997. The
plaintiff purports to assert such claims on behalf of himself, the general
public and a nationwide class of consumers, although no class has yet been
certified. The plaintiff alleges that the defendants promoted and sold a certain
product, the label and advertising materials for which contained incorrect
information concerning the product's nutritional content. The plaintiff seeks,
among other things, injunctive relief prohibiting the alleged conduct and
compelling restitution of monies obtained from the sale of the product and
attorneys' fees. The Company answered the second amended complaint, denying
liability.
F-15
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company is presently engaged in various other legal actions, and,
although ultimate liability cannot be determined at the present time, the
Company currently believes that the amount of any such lability from these other
actions and the lawsuit described in the preceding paragraph, after taking into
consideration the Company's insurance coverage, will not have a material adverse
effect on its results of operations and financial condition.
ROYALTIES--The Company obtained the exclusive right to use the Weider name
and trademarks outside of specified royalty-free territories (most notably North
America) throughout the world, with the exceptions of Australia, New Zealand,
Japan and South Africa, pursuant to a sublicense agreement dated December 1,
1996 with Mariz Gestao E Investimentos Limitada ("Mariz"). Mariz is a company
incorporated under the laws of Portugal and owned by a trust of which the family
members of a director of the Company are included among the beneficiaries. Mariz
obtained its exclusive international rights to use the Weider name and
trademarks pursuant to a license agreement, effective June 1, 1994, between
Mariz and certain affiliates, including WHF (the "Licensors"). Pursuant to the
license agreement with Mariz, the Company is required to make annual royalty
payments to Mariz commencing on December 1, 1998 on sales of the Company's
brands in existence on December 1, 1996 in countries covered by the agreement.
The royalty payments are to be equal to (i) 4% of sales up to $33.0 million;
(ii) 3.5% of sales greater than $33.0 million and less than $66.0 million; (iii)
3.0% of sales from $66.0 million to $100.0 million; and (iv) 2.5% of sales over
$100.0 million. In addition, the sublicense agreement with Mariz includes an
irrevocable buy-out option exercisable by the Company after May 31, 2002 for a
purchase price equal to the greater of $7.0 million or 6.5 times the aggregate
royalties paid by the Company in the fiscal year immediately preceding the date
of the exercise of the option.
RETIREMENT PLAN--The Company sponsors a contributory 401(k) savings plan
covering all employees who have met minimum age and service requirements.
Contributions to this plan were approximately $90, $112 and $241 for the years
ended May 31, 1995, 1996, and 1997, respectively, and were included in general
and administrative expenses.
8. ACQUISITIONS
In January 1995, the Company acquired certain assets of American Body
Building Products, Inc. ("ABB") and two other related companies for cash of
$8,620, a note of $2,000, and the assumption of certain liabilities. The Company
accounted for this acquisition as a purchase and recognized goodwill of
approximately $8,788, which is being amortized over 15 years. ABB manufactures
and distributes energy drinks and nutrition bars.
In June 1995, the Company acquired the assets of National Institute of
Nutrition, Inc. (dba Nion Laboratories) ("Nion") for cash of $8,190, notes of
$7,063, and the assumption of certain liabilities. The Company accounted for
this acquisition as a purchase and recognized goodwill of approximately $8,149
which is being amortized over 15 years. Nion manufactures and distributes
nutritional supplements in capsule and tablet form.
In October 1995, the Company acquired certain assets of American Nutrition
Bars ("ANB") for the forgiveness of a note receivable of $850 and the assumption
of certain liabilities. The Company accounted for this acquisition as a purchase
and recognized goodwill of approximately $3,126 which is being amortized over a
15-year period. ANB manufactures and distributes nutritional bars.
F-16
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
In January 1996, the Company purchased net assets with a recorded value of
approximately $49 and rights to use the Weider name in England and Ireland, and
with certain customer accounts in Austria, France, and Switzerland for
approximately $557 from a commonly controlled entity. The Company also incurred
liabilities of $250 to the benefit of the commonly controlled entity. As a
result, $758 is included in distribution to WHF for the purchase of such assets.
The purchase of these assets was accounted for at the historical cost of $49 in
the records of the Company and the results of operations have been included
since January 1, 1996. Included in distributions to WHF is an additional $900
paid for the rights to use the Weider name in the European countries not
included above.
In September 1996, the Company acquired certain assets and international
distribution rights from a related party in Canada for $4,000. Of the $4,000
purchase price, $3,000 was paid in cash and $1,000 was in the form of an earnout
to be paid $40 per month for 25 months. The purchase of these assets was
accounted for at the historical cost of $25 in the records of the Company, and
the results of operations have been included since September 1, 1996. Included
in distributions to WHF is an amount of $3,975 representing the difference
between the purchase price and historical cost.
In September 1996, the Company acquired trademarks and nutritional
supplement operations providing distribution capabilities in primarily Spain and
Portugal for a total purchase price of $3,427. Of the $3,427, $627 was paid for
certain net assets in Spain, $200 was paid as consideration for a covenant not
to compete from the seller, $300 was paid as a condition to closing, $500 is to
be paid on each of the first and second anniversaries of the closing and $1,300
was paid for certain trademarks. Of the total amounts paid, $2,650 was paid to
an affiliate of which $1,350 represents an amount in excess of historical cost
that is accounted for as a distribution to WHF. Results of operations have been
included since September 1, 1996.
In January 1997, the Company acquired the net assets of Science Foods,
Inc., a competing sports nutrition beverage manufacturer, for $3,900 in cash
plus the assumption of $700 in debt. The Company accounted for this acquisition
as a purchase and recognized goodwill of $3,165 which is being amortized over 35
years. Results of operations have been included since January 1, 1997.
Requisite pro forma financial information is not provided as the results
would not be materially different.
F-17
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
9. STOCKHOLDERS' EQUITY
CHANGES IN AUTHORIZED CAPITAL AND STOCK SPLIT--In April 1997, the Board of
Directors (the "Board") authorized a stock split of all issued and outstanding
common shares at the rate of 14,428.9 for 1, which increased the number of
issued and outstanding Class A and B common shares from 1,195.17 to 17,245,036.
In August 1996, the Board had authorized the Company to issue shares of Class B
common stock to WHF in exchange for its Class A holdings. Each holder of Class B
common stock is entitled to ten votes per share on all matters presented to a
vote of stockholders, including the election of directors. Prior to the IPO,
15,687,432 shares of Class B common stock (giving effect to the 14,428.9-for-one
stock split) were issued to WHF.
ONE-TIME DISTRIBUTION TO WHF--In April 1997, the Board authorized the
Company to use a portion of the net proceeds of the IPO to make a one-time $18.3
million distribution to WHF, the holder of the Class B common stock.
EQUITY PARTICIPATION PLAN--In April 1997, the Board approved the 1997
Equity Participation Plan (the "Equity Plan"). The principal purpose of the
Equity Plan is to provide incentives for officers, employees, independent
directors and consultants of the Company through granting of options, stock
appreciation rights, restricted or deferred stock and other awards ("Awards").
Upon consummation of the IPO, the Company granted to certain executive
officers,employees and independent directors nonqualified stock options to
purchase an aggregate of 1,208,000 shares of Class A common stock, all at an
exercise price equal to the IPO price of $11 per share. Of the options granted,
588,000 (including an aggregate 40,000 to independent directors) become
exercisable over five years from the date of grant at the rate of 20 percent per
each successive anniversary date and expire eight years after the date of grant.
The remaining options granted (620,000) become exercisable after five years from
the date of grant and expire eight years after the date of grant.
The estimated weighted average fair value per option granted in fiscal
1997 amounts to $3.28 at May 31, 1997. This value uses the Binary Option Pricing
Module based on the following assumptions: 1.36% dividend yield; 29.76%
volatility rate; 6.49% risk-free interest rate; and, a weighted average expected
life of 3.9 years.
Under the Equity Plan, not more than 1,646,000 shares of Class A common
stock (or the equivalent in other equity securities) are authorized for issuance
upon exercise and/or vesting of Awards. Furthermore, the maximum number of
shares which may be subject to Awards granted under the Equity Plan to any
individual in any fiscal year of the Company cannot exceed 300,000.
In addition, upon consummation of the IPO, the Company made stock payments
of 41,955 shares in the aggregate of Class A common stock to certain employees
of the Company based upon years of service. The Company also paid, in cash,
estimated Federal and state income taxes on behalf of the same employees. The
Company recognized compensation expense of $.9 million (included in management
and employee compensation charge in the accompanying statement of income) in
1997.
F-18
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
RECONCILIATION OF SHARES OUTSTANDING--A reconciliation of total Class A
and Class B common stock outstanding at May 31, 1997, is as follows:
Shares outstanding, May 31, 1996 1,195
Stock split (14,428.9 for 1) 17,243,841
Initial public offering 6,440,000
Management incentive shares 972,247
Tenured employee shares 41,955
----------
Shares outstanding, May 31, 1997 24,699,238
==========
10. RELATED PARTY TRANSACTIONS
Significant related party transactions, not otherwise disclosed, are
summarized below.
Payments to reimburse WHF for Company expenses (including primarily
insurance, endorsements, retirement benefits, interest and royalties) consist of
the following for the years ended May 31:
1995 1996 1997
------- ------- ------
Operating expenses $ 1,483 $ 2,044 $ 2,510
Interest, net 897 3,327 5,500
Other 250 250 250
------- ------- -------
Total $ 2,630 $ 5,621 $ 8,260
======= ======= =======
Included in deposits and other assets are loans to officers in the
principal amount of $200 at May 31, 1996. Included in other receivables is an
amount due from an affiliated entity in the amount of $988 at May 31, 1997.
Prior to entering into the Credit Agreement (see Note 5), the Company was
the principal borrower under a credit agreement with GECC that was administered
and guaranteed by WHF. The Company paid a service charge to WHF in excess of the
interest paid to GECC in the amount of $133 (1995), $378 (1996) and $485 (1997),
respectively.
Effective June 1, 1994, the Company sold common stock representing 16-1/3%
ownership interest primarily to related parties. As consideration for the common
stock, the Company received from these parties certain equity and debt
instruments. Concurrent with the sale, the Company declared and paid a dividend
of that consideration to WHF. The Company recorded these transactions at the net
book value of the common shares exchanged ($4,480) and recognized no gain.
F-19
SCHEDULE II
WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MAY 31, 1995, 1996 AND 1997
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- ----------- ---------- ---------- ---------- -----------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
1995.....................$ 50,000 $ 107,976 $ (7,976) $ 150,000
---------- ---------- ----------- ----------
1996.....................$ 150,000 $ 98,300 $ (111,366) $ 136,934
---------- ---------- ----------- ----------
1997.....................$ 136,934 $ 151,373 $ (76,563) $ 211,744
---------- ---------- ----------- ----------
ALLOWANCE FOR SALES
RETURNS:
1995.....................$ 316,460 $ 478,539 $ (40,999) $ 754,000
---------- ---------- ----------- ----------
1996.....................$ 754,000 $ 522,076 $ (57,853) $1,218,223
---------- ---------- ----------- ----------
1997.....................$1,218,223 $ -- $ (230,714) $ 987,509
---------- ---------- ----------- ----------
INVENTORY RESERVE:
1995.....................$ 0 $1,440,398 $ (390,397) $1,050,001
---------- ---------- ----------- ----------
1996.....................$1,050,001 $2,043,804 $(1,885,703) $1,208,102
---------- ---------- ----------- ----------
1997.....................$1,208,102 $2,225,644 $(1,815,814) $1,617,932
---------- ---------- ----------- ----------
S-1