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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ________________ to
_____________
COMMISSION FILE NUMBER: 0-21003
TWINLAB CORPORATION
(Exact name of Registrant as Specified in Its Charter)
DELAWARE
(State or Other Jurisdiction of
Incorporation or Organization)
2120 SMITHTOWN AVENUE
RONKONKOMA, NEW YORK
(Address of Principal Executive Offices)
11-3317986
(I.R.S. Employer
Identification No.)
11779
(Zip Code)
Registrant's telephone number, including area code: (516) 467-3140
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $1.00
PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of shares of Common Stock of the registrant held
by non-affiliates based on the closing sale price of the Common Stock on March
21, 1997 as reported on The Nasdaq National Market System was $127,654,800.
As of March 21, 1997, the registrant had 27,000,000 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1997 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Report.
TWINLAB CORPORATION
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business....................................................................................................1
Item 2. Properties.................................................................................................11
Item 3. Legal Proceedings..........................................................................................11
Item 4. Submission of Matters to a Vote of Security Holders........................................................12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................13
Item 6. Selected Financial Data....................................................................................14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................16
Item 8. Financial Statements and Supplementary Data................................................................19
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................19
PART III
Item 10. Directors and Executive Officers of the Registrant.........................................................19
Item 11. Executive Compensation.....................................................................................19
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................................19
Item 13. Certain Relationships and Related Party Transactions.......................................................19
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................20
Signatures
Information contained or incorporated by reference in this report contains
"forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business - Business Strategy." No assurance can be given that the future
results covered by the forward-looking statements will be achieved. The
following information includes cautionary statements identifying important
factors with respect to such forward-looking statements, including certain risks
and uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
PART I
ITEM 1. BUSINESS
Unless the context otherwise requires, the term "Company" refers to (a)
Twinlab Corporation ("TLC") and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. and Advanced Research Press, Inc. ("ARP"),
when used with respect to information about events occurring since May 7, 1996
and (b) collectively Natur-Pharma Inc., Twin Laboratories Inc., Alvita Products,
Inc., Twinlab Export Corp., Twinlab Specialty Corporation, B. Bros. Realty
Corporation and Advanced Research Press, Inc., all of which were affiliated
entities, as such entities existed prior to May 7, 1996, when used with respect
to historical information contained herein. Except where otherwise indicated,
the information in this report gives effect to an 18.5 for 1 stock split
effected as a stock dividend with respect to the Common Stock which was effected
prior to the consummation of TLC's initial public offering (the "IPO") in
November 1996.
GENERAL
The Company believes based upon its knowledge of the nutritional supplement
industry that it is one of the leading manufacturers and marketers of brand name
nutritional supplements sold through domestic health food stores. Since the
Company's founding in 1968, the Company has emphasized the development and
introduction of high-quality, unique products in response to emerging trends in
the nutritional supplement industry. The Company produces a full line of
nutritional supplements and offers the broadest product line in the industry
with more than 840 products and 1,600 SKU's. The Company's product line includes
vitamins, minerals, amino acids, fish and marine oils, sports nutrition products
and special formulas marketed under the TWINLAB (R) trademark and a full line of
herbal supplements and phytonutrients and herb teas marketed under the Nature's
Herbs (R) and Alvita (R) trademarks, respectively. None of the Company's
products individually accounted for more than 5.3% of total net sales in 1996.
The Company's broad product line, strong history of new product introductions
and innovations, superior marketing and advertising programs and premium product
quality have established TWINLAB, Nature's Herbs and Alvita as leading brands in
the nutritional supplement industry.
The Company has diversified its product line through internal growth,
product development and selected acquisitions, including the acquisition in 1989
of Natur-Pharma Inc., a leading manufacturer and marketer of herbal supplements
and phytonutrients under the Nature's Herbs brand name, and the acquisition in
1991 of Alvita Products, Inc., a leading marketer of herb teas. The Company has
achieved increased net sales and income from operations every year since 1990.
In particular, during the three-year period from 1994 through 1996, the Company
achieved a compound annual growth rate in net sales and income from operations
of 20.4% and 28.0%, respectively. For the fiscal year ended December 31, 1996,
the Company achieved net sales growth of 14.3% to $170.1 million and growth in
income from operations of 24.8% to $39.5 million, as compared to fiscal year
1995.
The Company's products target consumers who utilize nutritional supplements
in their daily diet and who demand premium quality ingredients in a broad
variety of dosages and delivery methods. The Company's products compete
primarily in the health food store market, where the dominant competitive
factors include product attributes such as quality, potency and the uniqueness
of the product formulation. The Company sells its products domestically
primarily through a network of approximately 60 distributors who service
approximately 11,000 health food stores and other selected retail outlets. The
Company believes that its products are available in over 90% of the health food
stores in the United States. However, the Company believes that growth
opportunities are available in this market as only approximately 12% of such
stores carry the full line of TWINLAB products. The health food store channel of
distribution has expanded significantly in recent years and is expected to grow
further as national chains, including those which sell the Company's products
such as General Nutrition Companies, Inc. ("GNC"), Whole Foods Market ("WFM"),
Wild Oats Markets, Fresh Fields, and other industry participants continue to add
stores in new and existing markets. The health food store market differs
significantly from the mass market for vitamin and other nutritional supplements
where price and convenience constitute the primary bases of competition. The
nutritional supplement products sold in grocery stores, drug stores and mass
merchandisers are typically
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manufactured by large pharmaceutical companies and private label manufacturers.
The Company's products are also offered in Europe, Asia, South America and other
international markets through arrangements with overseas distributors.
The Company believes it is well positioned to capitalize on the growth of
the nutritional supplement market which management believes will be fueled by
(i) favorable demographic trends towards older Americans who are more likely to
consume nutritional supplements; (ii) product introductions in response to new
scientific research findings; (iii) the nationwide trend toward preventive
medicine in response to rising health care costs; and (iv) the heightened
understanding and awareness of the connection between diet and health. Moreover,
although the industry has grown dramatically in recent years, there is still a
large untapped domestic market as only an estimated 40% of Americans currently
consume vitamins, minerals and herbal supplements on a regular basis.
In November 1996, following the consummation of the Company's IPO, the
Common Stock of TLC was listed on the Nasdaq National Market under the symbol
"TWLB". TLC was incorporated under the laws of the State of Delaware in 1996 and
maintains its principal executive offices at 2120 Smithtown Avenue, Ronkonkoma,
New York 11779. Its telephone number is (516) 467-3140.
BUSINESS STRATEGY
The Company's strategy is to continue to enhance its leadership position in
the sale of vitamins, minerals and other nutritional supplements in domestic
health food stores and to increase its market share and sales while continuing
to improve its overall operating efficiency and financial performance. The
Company intends to capitalize on the TWINLAB brand name by growing market share
domestically, increasing penetration of the Company's other brands, continuing
to introduce new products and product extensions, and expanding internationally.
Specifically, the Company seeks to:
Capitalize on Powerful Brand Name Recognition. The Company's recognized
product quality, broad product line, strong history of new product introductions
and innovations, and superior marketing and advertising programs have
established TWINLAB, Nature's Herbs and Alvita as leading brands in the
nutritional supplement industry. The Company's extensive marketing and
advertising programs have been critical components of its products' strong brand
name recognition, and management believes that the Company offers its customers
the strongest marketing and advertising support programs in the industry. In
fiscal 1996, the Company invested $12.7 million, an increase of 14.0% over
fiscal 1995, in marketing and advertising to promote its products.
Increase Penetration in the Growing Health Food Market. Management believes
that the expansion of retail distribution channels and the strong growth
characteristics of the nutritional supplement industry provide the Company with
significant opportunities to increase sales. Management further believes that
the established brand name recognition of the Company's products positions it to
increase its penetration of shelf space as health food retailers seek to align
themselves with companies which possess strong brand names, offer a wide range
of products, demonstrate continued marketing and advertising support and provide
consistently high levels of customer service. Since Nature's Herbs and Alvita
products currently are available in fewer domestic health food stores than
TWINLAB products, the Company believes that it will be able to capitalize on
health food retailers' success with the TWINLAB product line in order to
significantly increase shelf space for the Company's herbal supplements,
phytonutrients and herb teas.
Continue to Introduce New Products and Product Innovations. A cornerstone
of the Company's success has been its ability to rapidly utilize recent
scientific and medical findings in its new product development efforts. The
Company has consistently been among the first in its industry to introduce new
products and product innovations which anticipate and meet customer demands for
newly identified nutritional supplement benefits. Furthermore, the Company's
geographically diverse network of more than 60 distributors allows the Company
to achieve immediate and broad distribution for new product launches. As part of
its ongoing research and development effort, the Company maintains an extensive
database and actively researches and monitors a wide variety of publications
containing scientific and medical research. From 1991 through 1996, the Company
introduced over 460 products, with over 110 new products introduced in 1996
alone. Gross sales during 1996 from new products introduced in 1996 were $16.3
million, or approximately 9.0% of gross sales. The Company intends to continue
to introduce new and innovative products.
Build Upon Established Customer Relationships. The Company's established
relationships with distributors and health food store retailers are based upon
the Company's commitment to a high level of customer service. In order to ensure
that its customers receive prompt and reliable service, the Company has designed
a flexible and responsive manufacturing process and has achieved a fill rate of
approximately 98% for customer orders. In addition, the Company's sales force
consists of approximately 30 dedicated sales professionals who operate in sales
territories which cover the entire continental United States and Alaska. The
primary functions of the Company's sales force are to gain better placement and
additional shelf space for the Company's products and to stay abreast of
customer needs. The sales force personnel work with direct accounts,
distributors and individual retailers to enhance knowledge of TWINLAB, Nature's
Herbs and Alvita products and to achieve maximum exposure for these products.
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Increase Penetration of Foreign Markets. Management believes that there are
substantial opportunities for the Company to expand its presence in foreign
markets. The Company has an international department, headed by a senior sales
professional, dedicated to increasing sales in such markets. The Company's
foreign marketing effort is primarily focused on establishing additional
relationships with leading overseas distributor organizations as a
cost-effective method of increasing international sales. The Company presently
has distribution agreements covering over 44 foreign countries. In 1996, the
Company had net sales of $11.7 million to foreign markets.
Supplement Internal Growth Through Strategic Acquisitions. As the
nutritional supplement industry is highly fragmented with many companies
producing only a single product line or single product, the Company believes
that it is strategically positioned to participate in the consolidation of the
industry due to its established brand name, broad distribution capabilities and
ability to generate sales of its products through successful marketing programs.
Since 1989 the Company has acquired two businesses, Natur-Pharma Inc. (Nature's
Herbs) and Alvita Products, Inc., and in each case has embarked on expansion
programs which resulted in substantially higher sales and income from operations
for the acquired companies. Net sales for Nature's Herbs products increased from
$5.2 million in 1990 (the first full year after its acquisition) to $21.0
million in 1996, and net sales for Alvita products increased from $1.7 million
in 1992 (the first full year after its acquisition) to $7.7 million in 1996. The
Company intends to pursue acquisition opportunities, including product line
acquisitions, that complement its existing products, expand its distribution
channels or are compatible with its business philosophy and strategic goals.
There can be no assurance that the Company will successfully implement all
or any part of its strategy.
INDUSTRY
The retail market for vitamins, minerals and other supplements, herbal
supplements, and herb teas has demonstrated strong growth in recent years. The
Company believes that these market segments will continue to experience strong
growth due to recent scientific research suggesting potential health benefits
from regular consumption of vitamins and other nutritional supplement products,
increasing national interest in preventive health measures and favorable
demographic trends that indicate increased usage of vitamins and other
nutritional supplements.
The Company expects that the aging of the United States population,
together with a corresponding increased focus on preventive health measures,
will result in increased demand for nutritional supplement products. The
35-and-older age group of consumers, which represent a significant proportion of
regular users of vitamin and mineral supplements, is expected to grow
dramatically over the next two decades. Based on data provided by the U.S.
Bureau of the Census, from 1990 to 2010, the 35-44 and 45-and-older age groups
are projected to grow at rates 175% and 225% faster than the general U.S.
population, respectively. In addition, the "baby boom echo" (the children of
baby boomers) is projected to result in substantial growth in the 16-21 age
group, the largest segment of consumers of sports nutrition products. The
Company expects that growth in this age group will result in increased demand
for its sports nutrition products.
Vitamins and other nutritional supplements are sold primarily through six
channels of distribution: health food stores, drug stores, supermarkets and
other grocery stores, discount stores, mail order, and direct sales
organizations. Mass market retailers (drug stores, grocery stores and discount
stores) account for approximately 60% of sales, while health food stores, mail
order and direct selling account for approximately 40% of sales.
The United States health food store market is comprised of approximately
11,000 stores, which are generally either independently owned or associated with
one of several regional or national chains, including GNC and WFM. The health
food store channel of distribution has grown significantly in recent years and
is expected to continue to grow as customers of the Company, such as GNC, WFM,
Wild Oats Markets and Fresh Fields, and other industry participants continue to
add stores in new and existing markets.
The Company believes the recent growth experienced by the nutritional
supplement market is based in part on national media attention regarding recent
scientific research suggesting potential health benefits from regular
consumption of certain vitamins and other nutritional products. Such research
has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and there
can be no assurance of future favorable scientific results and media attention
or of the absence of unfavorable or inconsistent findings.
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PRODUCTS
The Company has a highly diversified array of products which achieve strong
gross margins. The Company manufactures and markets over 840 products and over
1,600 SKU's in two primary business areas: the TWINLAB Division and the herbal
products category. Products sold under the TWINLAB brand name include vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products and
special formulas. The herbal products category includes a full line of herbal
supplements and phytonutrients marketed by the Nature's Herbs Division and a
full line of herb teas marketed by the Alvita Tea Division. The Company also
operates a subsidiary which publishes health, fitness and nutrition-related
publications.
TWINLAB Products
Vitamins, Minerals and Amino Acids. Vitamin, mineral and amino acid
products include a complete line of multivitamins and single-entity vitamins
(such as B-complex, C and E), minerals (such as calcium and magnesium) and amino
acids (such as glutamine and carnitine) marketed under the TWINLAB brand name.
These products are available in a variety of delivery forms, including liquid,
powder, capsule and tablet to accommodate a variety of consumer preferences.
This category targets a broad array of health conscious consumers, with
particular emphasis on consumers who utilize nutritional supplements in their
daily diet and who demand premium quality ingredients in a broad variety of
dosages and delivery methods.
Sports Nutrition. Sports nutrition products include a wide variety of
nutritional supplements designed for and targeted to athletes. Sports nutrition
products include Hydra Fuel and Ultra Fuel drinks, which replenish glucose and
electrolytes depleted during strenuous exercise; and DietFuel, RxFuel, and
Ripped Fuel, which are marketed, as part of a low fat diet and exercise program,
for the preservation of lean body mass and the building of muscle mass. The
Company's sports nutrition products are utilized by both amateur and
professional athletes in a variety of competitive sports. The Company believes
that its strong sports nutrition business serves to increase the Company's brand
awareness among customers who, as they grow older, will shift their buying
patterns to include vitamins, minerals and herbal products, and who, based on
their positive experiences with the Company's brand name, are more likely to
purchase the Company's other products.
Special Formulas. Special formulas include a broad assortment of products
formulated with specific health conditions or objectives in mind. Special
formulas are primarily targeted to sophisticated users of health related
products, including regular customers of health food stores. Examples include
OcuGuard, which is formulated for nutritional support of the eyes, Coenzyme Q10,
which is designed for cardiovascular health, and the MaxiLIFE Protector Series,
a complete array of formulas marketed towards the aging "baby boomers" which
includes women's protector formulas for the skin and bones and a complete line
of MaxiLIFE formulas for prostate, colon and heart health. In addition, the
Company sells a variety of fish and marine oils in a number of different
delivery forms which offer a multitude of nutritional benefits, including
favorable effects on cardiovascular health.
Herbal Products
Herbal Supplements and Phytonutrients. Herbal supplements and
phytonutrients (nutrients from botanical sources that are considered to have
medicinal properties) have become increasingly important categories in health
food stores. Through its Nature's Herbs product line, the Company produces a
full line of herbal supplements and phytonutrients which offer natural
alternatives to over-the-counter ("OTC") medications. The Company manufactures
and markets approximately 500 SKU's of herbal and botanical supplements which
are produced at the Company's modern FDA registered manufacturing facility in
American Fork, Utah and sold under the Nature's Herbs brand name. Nature's Herbs
products include single herbs, such as saw palmetto, garlic, gingko, ginseng and
golden seal; traditional combinations, such as echinacea-golden seal;
standardized extracts, such as Bilberry Power and Milk Thistle Power sold under
the POWER HERBS(R) brand name; and natural HealthCare product formulations, such
as Allerin and Coldrin. Nature's Herbs products are packaged using the
innovative FRESH CARE(R) System developed by the Company. The FRESH CARE System
is the first all-glass and antioxidant-protected herbal packaging system that
helps remove oxygen while locking out air, moisture and light in order to
maintain potency and to extend freshness. Management believes that the
association of the Nature's Herbs product line with TWINLAB's strong name brand
recognition and reputation for premium quality and service, combined with the
increased penetration of herbal supplements and phytonutrients in the growing
health food store channel of distribution, have contributed to the rapid growth
experienced by this product line.
Herb Teas. Through its Alvita product line, the Company offers
approximately 185 SKU's of herb teas in both single use bags and bulk. Alvita is
a leading brand of herb teas and is one of the most recognizable tea brands sold
through health food stores. Alvita was founded in 1922 and is one of the
nation's oldest herb tea companies. Alvita purchases tea in bulk form,
formulates blends of natural herb teas and designs the packaging for its
products. Alvita's teas are currently blended and packaged by an independent
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contractor. Representative Alvita teas include Peppermint Leaf, Chamomile,
Echinacea, Golden Seal, Ginger and Senna Leaf, as well as new-age blends such as
Chinese Green Tea which is available in a choice of citrus flavors, and TrimTime
Thermogenic Diet Tea. Alvita markets its products with an environmentally
conscious theme by packaging bulk tea and tea bags in paper and by not utilizing
shrink wrap for either its outer boxes or tea bags. Alvita recently launched a
new line of herbal tea blends named Herbal Remeteas, including Highland Lullaby,
Manchurian Brain Blend, Jamaica Digesti Brew, and Canadian Natur-Tussin. The
Company also recently expanded its Alvita product line by combining Alvita teas
with vitamins and other nutritional supplements, creating a new delivery form
for vitamins and other nutritional supplements.
Publishing
Through Advanced Research Press, Inc., the Company publishes All Natural
Muscular Development, a high-quality bodybuilding and fitness magazine featuring
a scientific advisory board and contributors considered to be among the most
accomplished and knowledgeable in their respective fields. In 1996, the magazine
reinforced its commitment to drug-free bodybuilding by becoming the first modern
periodical to showcase and endorse only steroid-free bodybuilding. The magazine
covers recent developments and provides innovative information in the fields of
training and nutrition research, supplements, health, fitness and diet. This
publication serves as a useful vehicle to increase public awareness of the
Company's products and as an outlet for a portion of the Company's advertising
program. All Natural Muscular Development currently has a monthly paid
circulation of approximately 115,000 readers. The Company also publishes health
and fitness related books and is exploring the introduction of new health and
fitness related products.
PRODUCT DEVELOPMENT
The Company is recognized as an industry leader in new product development.
The Company closely monitors consumer trends and scientific research, and has
consistently introduced innovative products and programs to respond to such
trends and research. The Company's product development staff regularly studies
over 50 different health and nutrition periodicals, including the New England
Journal of Medicine and the Journal of the American Medical Association, in
order to generate ideas for new product formulations. Management believes that
the Company's introduction of new products has increased market share for both
the Company and its retail customers, and the Company intends to continue
developing new products and programs in the future. The Company was the first
major nutritional supplement manufacturer to introduce such industry-wide
innovations as: an all-capsule vitamin and mineral line that is well tolerated
by allergy-prone individuals; a complete line of amino acids and fish and marine
oils; the most advanced and complete array of antioxidants, including
L-glutathione, L-cysteine, N-acetyl cysteine (NAC) and an entirely new class of
antioxidants, including polyphenols, flavonoids and isoflavones; concentrated
Coenzyme Q10; high potency phosphatidyl choline and patented GTF Chromium;
pioneering thermogenic products; standardized herbal extracts guaranteeing
potency (Certified Potency); the FRESH CARE packaging system designed to
preserve potency and freshness; a full line of Ayurvedic Indian herbal products;
and a complete line of herb teas in single use bag and bulk form. From 1991
through 1996, the Company introduced over 460 products with over 110 new
products introduced in 1996 alone.
The Company's research and development expenses were $1.1 million in 1996,
$1.1 million in 1995 and $1.0 million in 1994, including the support of
scientific research at independent research centers located at major
universities and medical centers.
SALES AND DISTRIBUTION
The Company believes that its TWINLAB products are available in
approximately 90% of domestic health food stores. However, the Company believes
that growth opportunities are available in this market as only approximately 12%
of such stores carry the full line of TWINLAB products. The Company sells its
products primarily through a network of approximately 60 distributors, which
service approximately 11,000 health food stores throughout the country and
selected retail outlets. Sales to domestic distributors represented
approximately 88% of the Company's gross sales in 1996. The Company's
distributor customers include GNC, Tree of Life, Cornucopia, Stow Mills,
Nature's Best and other distributors that supply retailers of vitamins, minerals
and other nutritional supplements. Management believes that it sells its
products to every major domestic nutritional supplement distributor servicing
health food stores and is generally the largest independent supplier of
nutritional supplements to each such distributor. The Company is also currently
expanding distribution into domestic military exchanges.
Several of the Company's distributors, such as GNC, Cornucopia and Tree of
Life, are national in scope, but most are regional in nature and operate one or
more localized distribution centers. Generally, the Company enters into
nonexclusive area rights agreements with its domestic distributors, who are also
responsible for new account development. Retailers typically place orders with
and are supplied directly by the Company's distributors. In the past ten years,
the Company has not lost a major distributor customer other than through
consolidation with an existing customer of the Company. The breadth and depth of
the products
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manufactured and the ability to manufacture with minimal throughput times
enables the Company to maintain extremely high order fill rates which management
believes are among the highest in the industry.
The Company's success depends in part upon its ability to attract, retain
and motivate a large base of distributors, and its ability to maintain a
satisfactory relationship with GNC, the largest retail organization which sells
the Company's products and which operates approximately 3,000 stores. Tree of
Life and GNC accounted for approximately 25.0% and 20.0%, respectively, of the
Company's net sales in 1996. No other single customer accounted for more than
10% of the Company's net sales in 1996. The loss of either Tree of Life as a
distributor or GNC as a customer, or the loss of a significant number of other
distributors, or a significant reduction in purchase volume by Tree of Life, GNC
or such other distributors, for any reason, would have a material adverse effect
on the Company's results of operations and financial condition.
Approximately 6.9%, or $11.7 million, of the Company's net sales in 1996
were derived from international sales which originate from overseas distributor
organizations. The Company presently has distribution agreements for
approximately fifteen European countries, including Great Britain, The Benelux
Countries and the Scandinavian countries; approximately fourteen Latin American
countries, including Mexico, Brazil and Paraguay; approximately eight Middle
Eastern countries, including Israel and Saudi Arabia; and various other
countries in the Far East and the Caribbean.
MARKETING AND CUSTOMER SALES SUPPORT
The Company's marketing strategy, which centers around an extensive
advertising and promotion program, and customer sales support services have been
critical components of the Company's growth, strong brand name recognition and
leading position within the nutritional supplement industry.
The Company's marketing and advertising expenditures were approximately
$12.7 million in 1996, $11.1 million in 1995 and $8.7 million in 1994. Of the
Company's $10.2 million in 1996 advertising expenditures, approximately $6.5
million, or 64%, was spent on print advertising, approximately $2.2 million, or
21%, was spent on television and radio advertising and approximately $1.5
million, or 15%, was spent on production of advertising materials. As the
Company's customers align themselves with fewer vendors of brand name products,
the Company believes that its strong commitment to advertising and promotion
will continue to constitute a significant competitive advantage. The Company's
advertising strategy stresses brand awareness of the Company's various product
segments in order to generate purchases by customers and also communicates the
points-of-difference between the Company's products and those of its
competitors.
A significant portion of the Company's advertising budget is focused on
advertisements in magazines. The Company regularly advertises in consumer
magazines such as Better Nutrition, Delicious, Vegetarian Times, Let's Live,
Natural Health, New Age Journal, Bicycling, VeloNews, Triathlete, Runner's
World, Muscle & Fitness, Flex, and Ironman, as well as trade magazines such as
Natural Foods Merchandiser, Vitamin Retailer, Nutrition Science News, Health
Foods Business and Whole Foods.
Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as running competitions,
including the Boston Marathon and the Los Angeles Marathon, and bodybuilding
competitions, including the Arnold Classic and the NPC National Bodybuilding
Championships, and sponsorship of health-oriented television and radio programs.
In addition, the Company promotes its products at major industry trade shows and
through in-store point of sale materials. The Company also engages athletic
personalities as well as scientists to communicate on the Company's behalf with
the trade and the public and to promote the Company's products.
The Company's established customer relationships are based upon the
Company's long-standing commitment to a high level of customer service. The
Company's sales force currently consists of approximately 30 dedicated sales
professionals whose primary functions are to gain better placement and
additional shelf space for TWINLAB, Nature's Herbs and Alvita products and to
stay abreast of customer needs. These sales representatives are assigned to
specific territories covering the entire continental United States and Alaska.
These personnel work with direct accounts, distributors and individual retailers
to enhance knowledge of the Company's products and to maximize exposure for
TWINLAB, Nature's Herbs and Alvita products. An additional three person sales
and marketing staff supports Nature's Herbs products and the servicing of
customer needs. The Company also designs and supplies marketing literature to
help educate retailers and consumers as to the benefits of the Company's
products.
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The Company operates an in-house customer service department to respond to
inquiries requesting information concerning product applications, background
data, ingredient compositions and the efficacy of products. The department is
currently staffed by six nutrition experts.
MANUFACTURING AND PRODUCT QUALITY
Virtually all of the Company's TWINLAB products are manufactured at the
Company's 80,000 square foot manufacturing facility located in Ronkonkoma, New
York. Herbal supplements and phytonutrients are manufactured at the Company's
60,000 square foot FDA registered manufacturing facility in American Fork, Utah.
Herb teas are currently packaged by an independent contractor and are warehoused
at the American Fork, Utah, facility. The Company's two modern manufacturing
facilities provide the Company with the capability to meet customers' sales
demands with a prompt response time and to maintain the highest level of quality
control. The Company is continuously upgrading its facilities and enhancing its
manufacturing capabilities through new equipment purchases and technological
improvements. Management believes that the Company's manufacturing facilities
are among the most advanced in the nutritional supplement industry. See
"Properties."
The Company's modern manufacturing operations feature pharmaceutical
quality blending, filling and packaging capabilities, which enable the Company
to offer quality and consistency in formulation and delivery. The Company
operates flexible manufacturing lines which enables it to efficiently and
effectively shift output among various products as dictated by customer demand.
The Company is capable of producing over 25 million capsules and tablets, over
100,000 pounds of blended powder and up to 2,500 gallons of liquid preparations
per day. The Company has seven high-speed capsule and tablet packaging lines,
two high-speed liquid filling lines, two powder filling lines and one chewable
tablet packaging line which are capable of operating simultaneously at its
Ronkonkoma, New York, and American Fork, Utah, facilities. The Company
manufactures the powders used in its line of single-serving sports drink
products but utilizes a contract bottler for the hydration and bottling of these
products. The Company operates on a 24-hour work day that includes two
production shifts and a third shift dedicated primarily to cleaning, maintenance
and equipment set-up.
The Company sources its raw material needs from over 200 different
suppliers, including some of the largest pharmaceutical and chemical companies
in the world. The Company's raw materials and packaging supplies are readily
available from multiple suppliers, and the Company is not dependent on any
single supplier for its needs. No single supplier accounted for more than 10% of
the Company's total purchases in 1996.
Substantially all of the Company's herbal supplements and herb teas contain
ingredients that are harvested by and obtained from third-party suppliers, and
many of those ingredients are harvested internationally and only once per year
or on a seasonal basis. An unexpected interruption of supply, such as a harvest
failure, could cause the Company's results of operations derived from such
products to be adversely affected. Although the Company has generally been able
to raise its prices in response to significant increases in the cost of such
ingredients, the Company has not always in the past been, and may not in the
future always be, able to raise prices quickly enough to offset the effects of
such increased raw material costs.
The Company's quality standards are a critical factor in consumer purchase
decisions, and the Company believes it has established a competitive advantage
based on the quality of its products. All of the Company's capsule and tablet
products are visually inspected before being packaged in virtually light-proof
amber glass for better product freshness and stability. Moreover, each of the
Company's products undergoes comprehensive quality control testing procedures
from the receipt of raw materials to the release of the packaged product. The
Company utilizes real-time computerized monitoring of its manufacturing
processes to ensure proper product weights and measures. In addition, the
Company maintains two in-house analytical laboratories with state-of-the-art
testing and analysis equipment where the Company performs most of its testing,
including active component characterization utilizing thin-layer and
high-pressure liquid chromatography, UV visible and infrared spectrometry, and
atomic absorption spectrometry. The Company contracts with independent
laboratories to perform the balance of its testing requirements. A team of 57
full-time quality assurance professionals regularly conducts a wide variety of
visual and scientific tests on all manufactured products, and samples of raw
materials and finished products are retained for quality control purposes for up
to four years. See "--Regulatory Matters--Government Regulation."
The Company has a strong commitment to maintaining the quality of the
environment. All of the Company's plastic containers are recyclable and,
wherever possible, the Company uses recyclable glass. The Company was also one
of the first companies in the industry to use biodegradable starch pellets for
packing materials. In addition, the Company has removed most solvents from its
production processes (using natural, environmentally-safe alternatives) and
helped develop a special glue for manufacturing purposes that contains virtually
no harmful hydrocarbons. The Company believes it is in material compliance with
all applicable environmental regulations.
7
COMPETITION
Within the nutritional supplement industry, suppliers can be divided into
three major categories: specialty firms, like the Company, which focus on
vitamins, minerals and other nutritional supplements targeted to health food
store retailers; major pharmaceutical companies and private label contractors,
which sell vitamins and other nutritional supplements that are targeted to mass
market retailers; and direct sale and mail order companies. The domestic
nutritional supplement industry that targets products to the health food store
market is highly fragmented, with a number of small competitors involved in
manufacturing and marketing vitamin and other nutritional supplement products to
health food retailers and distributors. Most of these companies are relatively
small businesses operating on a local or regional level. Although most companies
are privately held, resulting in the Company's inability to precisely assess the
size of its competitors, management believes that the Company is substantially
larger than the next largest firm that targets independently-owned health food
stores and that, among competitors which sell through independent distributors,
it is the largest company which manufactures a majority of its own products.
The Company's principal competitors in the health food store market include
Nutraceuticals, Weider/Schiff, Nature's Way, Solgar and Nature's Plus. Private
label products of the Company's customers also provide competition to the
Company's products. For example, a substantial portion of GNC's vitamin and
mineral supplement offerings are products offered under GNC's own private label.
Many of the Company's competitors in markets other than the health food store
market, including the major pharmaceutical companies, have substantially greater
financial and other resources than the Company.
The Company believes that the growing number of health food retailers are
increasingly likely to align themselves with those companies which offer a wide
variety of high quality products, have a loyal customer base, support their
brands with strong marketing and advertising programs and provide consistently
high levels of customer service. The Company believes that it competes favorably
with other nutritional supplement companies because of its comprehensive line of
products, premium brand names, commitment to quality, ability to rapidly
introduce innovative products, competitive pricing, high customer-order fill
rate, strong and effective sales force and distribution network and
sophisticated advertising and promotional support. The wide variety and
diversity of the forms, potencies and categories of the Company's products are
important points of differentiation between the Company and many of its
competitors.
The business of developing, manufacturing and selling vitamins, minerals,
sports nutrition products and other nutritional supplements is highly
competitive. Certain of the Company's competitors are substantially larger and
have greater financial resources than the Company.
REGULATORY MATTERS
Government Regulation
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product Safety
Commission, the United States Department of Agriculture and the Environmental
Protection Agency. These activities are also regulated by various agencies of
the states, localities and foreign countries to which the Company's products are
distributed and in which the Company's products are sold. The FDA, in
particular, regulates the formulation, manufacture and labeling of vitamin and
other nutritional supplements.
On October 25, 1994, the President signed into law the Dietary Supplement
Health and Education Act of 1994 ("DSHEA"). This new law revises the provisions
of the Federal Food, Drug, and Cosmetic Act (the "FFDC Act") concerning the
composition and labeling of dietary supplements and, in the judgment of the
Company, is favorable to the dietary supplement industry. The legislation
creates a new statutory class of "dietary supplements." This new class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients on the market before October 15, 1994. A
dietary supplement which contains a new dietary ingredient, one not on the
market before October 15, 1994, will require evidence of a history of use or
other evidence of safety establishing that it will reasonably be expected to be
safe, such evidence to be provided by the manufacturer or distributor to the FDA
before it may be marketed. The DSHEA also invalidated the FDA's enforcement
theory that dietary supplements were food additives requiring pre-market
approval.
The substantial majority of the products marketed by the Company are
classified as dietary supplements under the FFDC Act. Advertising and label
claims for dietary supplements have been regulated by state and federal
authorities under a number of disparate
8
regulatory schemes. There can be no assurance that a state will not interpret
claims presumptively valid under federal law as illegal under that state's
regulations, or that future FDA regulations or FTC decisions will not restrict
the permissible scope of such claims.
The labeling requirements for dietary supplements have not been clearly
established. In December 1995, the FDA issued proposed regulations to govern the
labeling of dietary supplements. These regulations are expected to become final
in 1997 and would require the Company to revise all of its dietary supplement
labels by 1998.
Both foods and dietary supplements are subject to the Nutrition Labeling
and Education Act of 1990 (the "NLEA") which prohibits the use of any health
claim for foods, including dietary supplements, unless the health claim is
supported by significant scientific agreement and is pre-approved by the FDA. To
date, the FDA has approved the use of health claims for dietary supplements only
in connection with calcium for osteoporosis, and folic acid for neural tube
defects. However, among other things, the DSHEA amends, for dietary supplements,
the NLEA by providing that "statements of nutritional support" may be used in
labeling for dietary supplements without FDA pre-approval if certain
requirements, including prominent disclosure on the label of the lack of FDA
review of the relevant statement, possession by the marketer of substantiating
evidence for the statement and post-use notification to the FDA, are met. Such
statements may describe how particular nutritional supplements affect the
structure, function or general well-being of the body (e.g. "promotes your
cardiovascular health").
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
These distributors are independent contractors over whom the Company has limited
control.
As a result of the Company's efforts to comply with applicable statutes and
regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
The Company's American Fork, Utah, facility is registered with the FDA as a
manufacturer of OTC drugs and is subject to periodic inspection by the FDA.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company.
See also "Legal Proceedings."
FTC Proceeding
In 1989, the Company received an informal inquiry from the New York
Regional Office of the FTC seeking substantiation for certain advertising claims
made for a segment of its "Fuel" bodybuilding and sports nutrition line of
products. In response, the Company submitted scientific substantiation and
financial information to the FTC.
The Company has engaged in negotiations with the FTC relating to the
proposed terms of a consent order (the "Consent Order") to settle this matter.
The most recent draft of the proposed Consent Order provides for, among other
things, injunctive relief prohibiting the Company from making certain muscle
building and fat burning claims for four of its Fuel products and substantially
similar products without scientific substantiation and a $200,000 payment to the
FTC. The FTC staff has indicated that unless a settlement is reached, it would
proceed to recommend to the FTC Commissioners that a civil administrative
complaint be issued against the Company. The Company has determined at the
current time not to settle this matter on the terms set forth in the most recent
draft of the Consent Order, which draft the FTC has stated is its final offer
for a negotiated settlement. The Company cannot at this time predict whether it
will be able to reach a negotiated settlement of this matter.
The Company believes that it has adequate scientific substantiation for the
claims at issue, and intends to vigorously defend this matter if a settlement is
not reached. There can be no assurance that any injunctive relief, monetary
payment (including potential
9
consumer redress payments) or other terms resulting from a negotiated or
litigated resolution of this matter would be limited to those sought in the most
recent draft of the Consent Order or would not have a material adverse effect on
the Company.
Ma Huang
Approximately 15 of the Company's products include an herb known as "Ma
Huang," which contains naturally-occurring ephedrine. Certain of such products
also contain caffeine or other central nervous system stimulants. Such products
accounted for approximately 9.8% of the Company's gross sales in 1996. The
Company's products which contain Ma Huang are generally marketed for
bodybuilding, weight loss, sports nutrition and for other purposes, including
increased endurance and energy, generally in conjunction with diet or exercise,
and as natural alternatives to over-the-counter medications.
Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects,
including the deaths of several individuals. The FDA has placed on public file a
list of over 600 such alleged adverse events. On April 10, 1996, the FDA issued
a statement warning consumers not to purchase or consume dietary supplements
containing ephedrine with labels that often portray the products as apparent
alternatives to illegal street drugs. None of the Company's products which
contain Ma Huang are marketed for such purpose. In August 1996, the FDA convened
a Food Advisory Committee meeting to review and make recommendations concerning
the safety and appropriate labeling of Ma Huang-containing dietary supplements.
The FDA may propose regulations that will require reduced dosages coupled with
strict manufacturing standards, labeling restrictions and a prohibition against
combining Ma Huang with other central nervous system stimulants such as
caffeine. There can be no assurance that such regulations will not prohibit
either the sale of dietary supplements containing Ma Huang in combination with
any other ingredients or the sale of all dietary supplements containing any Ma
Huang. The promulgation of such regulations would require the Company to
reformulate and relabel substantially all of its Ma Huang products and there can
be no assurance as to the effect that any resulting reformulation and relabeling
of the Company's products would have on the sales of such products. The
Company's sales of products that contain Ma Huang increased slightly during
fiscal year 1996, as compared to fiscal year 1995.
A number of states and local governmental entities have instituted bans on
sales of Ma Huang-containing products that are portrayed as apparent
alternatives to illegal street drugs; other states and foreign jurisdictions
limit ephedrine levels and require appropriate warnings on product labels,
regulate ephedrine-containing products as controlled substances or prohibit the
sales of products which contain Ma Huang other than by licensed pharmacists.
There are also federal, state and local proposals to broaden the regulation of,
or otherwise limit or prohibit, the sale of products containing ephedrine. The
Company's products containing Ma Huang may become subject to further federal,
state, local or foreign laws or regulations, which could require the Company to
reformulate its products with reduced ephedrine levels or with a substitute for
Ma Huang and/or relabel its products with different warnings or revised
directions for use. See "Legal Proceedings."
EMPLOYEES
At December 31, 1996, the Company employed 551 persons, of which 120 were
involved in executive, sales and administrative activities. The balance of the
Company's employees were engaged in production, packaging and shipping
activities. None of the Company's employees are covered by a collective
bargaining agreement, and management considers relations with its employees to
be good.
TRADEMARKS
The Company's trademarks are valuable assets which are very important to
the marketing of its products.The Company's policy is to pursue registrations
for all of the trademarks associated with its key products. The Company owns
trademarks registered with the United States Patent and Trademark Office and/or
similar regulatory authorities in many other countries for its TWINLAB, Nature's
Herbs, Alvita and Fuel family of trademarks, and has rights to use other names
material to its business. In addition, the Company has obtained trademarks for
various of its products and has approximately 250 trademark registrations with
the United States Patent and Trademark Office for TWINLAB, Nature's Herbs and
Alvita brands. Federally registered trademarks have perpetual life, provided
they are renewed on a timely basis and used properly as trademarks, subject to
the rights of third parties to seek cancellation of the marks. The Company
relies on common law trademark rights to protect its unregistered trademarks.
Common law trademark rights do not provide the Company with the same level of
protection as would U.S. federal registered trademarks. In addition, common law
trademark rights extend only to the geographic area in which the trademark is
actually used, while U.S. federal registration prohibits the use of the
trademark by any third party anywhere in the United States. The Company
vigorously protects its trademarks against infringement.
10
ITEM 2. PROPERTIES
The Company owns a modern vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. This 80,000 square foot facility
also houses the Company's executive offices. The Company leases 26,300 square
feet of warehouse space in Ronkonkoma, 60,000 square feet of warehouse space in
Hauppauge, New York, and 5,000 square feet of office space in Ronkonkoma. In
addition, the Company owns a modern FDA-registered 60,000 square foot
manufacturing facility in American Fork, Utah. This facility, which was
initially constructed in 1993, houses office, manufacturing and warehousing
facilities for the operations of the Nature's Herbs Division of the Company and
office and warehousing facilities for the operations of the Alvita Tea Division
of the Company.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. The Company recently completed an
8,500 square foot addition to its Utah facility at a cost of approximately
$700,000 to provide additional plant capacity for the operations of the Nature's
Herbs and Alvita Tea Divisions of the Company. Management believes that the
Company's Utah facility will be sufficient to enable the Company to meet sales
demand for the foreseeable future. The Company has entered into a contract for
the purchase of an approximately 110,000 square foot facility near its currently
owned facility in Ronkonkoma, New York, which would be used to expand the
Company's manufacturing and warehousing capabilities and office-space in a
manner which the Company believes would be sufficient to meet its growth
requirements for the foreseeable future. The cost to the Company of the
facility, including anticipated renovations, is expected to aggregate
approximately $6.5 million. The purchase is expected to be consummated in the
second quarter of 1997 and is subject to customary conditions, including due
diligence review by the Company. There can be no assurance at this time that the
Company will acquire this facility.
ITEM 3. LEGAL PROCEEDINGS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. The Company currently has $75.0 million of product liability
insurance (which does not cover matters relating to L-Tryptophan) with a $10,000
self insurance retention per occurrence and $100,000 self insurance retention in
the aggregate. There can be no assurance that such insurance will continue to be
available at a reasonable cost, or if available will be adequate to cover
liabilities.
The Company, like various other participants in the nutritional supplement
industry, has been a defendant in court actions seeking damages for alleged
personal injuries resulting from products containing allegedly contaminated
added manufactured L-Tryptophan. To date, approximately 131 of the approximately
133 suits in which the Company was a named defendant (the "L-Tryptophan
Actions") have been dismissed or settled at no cost to the Company pursuant to
an Indemnification Agreement (the "Indemnification Agreement") between the
Company and a U.S. subsidiary of the Japanese manufacturer of the allegedly
contaminated ingredient. The Company believes, after consultation with outside
counsel, that few new lawsuits are likely to be brought in view of applicable
statutes of limitation and, in light of the Indemnification Agreement and the
resolution of virtually all of the L-Tryptophan Actions at no cost to the
Company, that the prospect of the remaining L-Tryptophan Actions and any
possible future actions having a material adverse effect on the Company's
results of operations or financial condition is remote. The Company no longer
markets any products containing added manufactured L-Tryptophan.
The State of California has established permissable lead levels in foods
pursuant to Proposition 65 of its Health & Safety Code ("Proposition 65").
Proposition 65 requires a warning on all products that contain identified
reproductive toxins or carcinogens in excess of permitted levels. In February
1997, the Attorney General of the State of California filed a Complaint for
Civil Penalty and Injunctive Relief in the Superior Court of the State of
California (San Francisco) (Action No. 984503) against a number of corporations,
including the Company, alleging that dietary supplements containing calcium
compounds marketed by such entities contain lead levels that exceed acceptable
levels under Proposition 65 without providing the warning required by
Proposition 65. The Company disputes this assertion relating to its calcium
products. While it is premature to assess the potential outcome of this
litigation, the Company believes that the resolution of this matter should not
have a material adverse effect on the Company's results of operations or
financial condition.
The Company is presently engaged in various other legal actions, and
although ultimate liability cannot be determined at the present time, the
Company is currently of the opinion that the amount of any such liability from
these other actions, after taking into consideration the Company's insurance
coverage, will not have a material adverse effect on its results of operations
and financial condition.
See also "Business--Regulatory Matters."
11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1996, no matters were submitted to
a vote of security holders of the Company.
12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq National Market
System since the Company's initial public offering (the "IPO") of its Common
Stock in November 1996, in which 8,500,000 shares of Common Stock were issued by
the Company. Prior to the IPO, there was no public market for the Common Stock.
On March 21, 1997, the closing price of the Company's Common Stock as reported
by Nasdaq was $13.00. As of March 21, 1997, there were 74 holders of record of
the Company's Common Stock. The high and low sales prices for the Common Stock
for the fourth quarter of 1996 (from November 15, 1996) were $12.375 and
$11.375, respectively.
From 1993 until May 7, 1996, the Company consisted solely of "S"
corporations. While maintaining such status, the Company periodically declared
and paid dividends to its shareholders, including amounts sufficient for its
shareholders to pay their income taxes on the earnings of the Company that were
treated as having been earned by the Company's shareholders. The Company
terminated its "S" corporation status on May 7, 1996.
The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. TLC conducts its business through its
direct and indirect subsidiaries and has no operations of its own. The principal
assets of TLC are the capital stock of its direct and indirect subsidiaries,
Twin Laboratories Inc. and ARP. Accordingly, TLC has no independent means of
generating revenues. As a holding company, TLC's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. Financing
arrangements under which Twin Laboratories Inc. is the borrower restrict the
payment of dividends and the making of loans, advances or other distributions to
TLC, except in certain limited circumstances. The payment of cash dividends in
the future will depend upon, among other things, the Company's results of
operations, financial condition, cash requirements and other factors deemed
relevant by the Company's Board of Directors.
On May 7, 1996, Twin Laboratories Inc. sold $100,000,000 aggregate
principal amount of its 10 1/4% Senior Subordinated Notes due 2006 (the "Old
Notes") to Donaldson, Lufkin & Jenrette Securities Corporation and Chase
Securities Inc. (collectively, the "Initial Notes Purchasers") for $100,000,000
in cash (less the Initial Notes Purchasers' discount of $3,000,000). Such
securities were sold in a transaction that was exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
Subsequently, pursuant to a Registration Statement on Form S-4, on October 28,
1996, the Company consummated a fully-subscribed registered exchange offer under
the Securities Act for the Old Notes and issued in exchange therefor
$100,000,000 aggregate principal amount of its registered 10 1/4% Senior
Subordinated Notes due 2006 (collectively with the Old Notes, the "Notes").
On May 7, 1996, TLC sold (i) an aggregate of 30,000 shares of its 14%
Non-Voting Senior Cumulative Preferred Stock (the "Senior Preferred Stock") to
five investors (the "Senior Preferred Stock Purchasers") for $30,000,000 in
cash, (ii) 37,000 shares of its 11 1/4% Non-Voting Junior Cumulative Preferred
Stock (the "Junior Preferred Stock") to Green Equity Investors II, L.P. ("GEI")
for $37,000,000 in cash, (iii) 1,295,000 shares of Common Stock to the Senior
Preferred Stock Purchasers for an aggregate of $700,000 in cash, (iv) 8,880,000
shares of Common Stock to GEI for an aggregate of $4,800,000 in cash, and (v) an
aggregate of 8,325,000 shares of Common Stock valued at $4,500,000 to certain
members of its senior management in exchange for certain of their shares of
common stock of Natur-Pharma Inc. Such securities were sold in transactions that
were exempt from registration under Section 4(2) of the Securities Act. In
connection with the consummation of the IPO, in November 1996, the Company
redeemed all of the outstanding shares of Senior Preferred Stock and Junior
Preferred Stock, which together had an aggregate liquidation preference of $67.0
million, plus accrued and unpaid dividends thereon.
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of December 31, 1996,
1995, 1994, 1993 and 1992, and for each of the years then ended has been derived
from the audited Consolidated Financial Statements of the Company. The report of
Deloitte & Touche LLP, independent auditors, on the Consolidated Financial
Statements as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996 is included elsewhere herein. The selected
consolidated financial data should be read in conjunction with, and is qualified
in its entirety by, the Consolidated Financial Statements of the Company and the
notes thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the other financial information included elsewhere
herein.
YEAR ENDED DECEMBER 31,
1996 1995 1994 1993 1992
------------ ------------- ------------- ------------ ------------
STATEMENT OF INCOME DATA:
Net sales.............................. $170,075 $148,735 $117,342 $ 99,897 $83,014
Cost of sales.......................... 99,827 89,932 70,247 62,131 51,214
--------- --------- --------- --------- ---------
Gross profit........................... 70,248 58,803 47,095 37,766 31,800
Operating expenses..................... 30,784 27,191 23,022 21,125 17,463
-------- -------- -------- -------- --------
Income from operations................. 39,464 31,612 24,073 16,641 14,337
-------- -------- ------ ------ --------
Other (expense) income:
Interest income.................... 593 313 254 242 302
Interest expense................... (10,005) (866) (761) (487) (494)
Transaction expenses............... (400) (656) --- --- ---
Nonrecurring non-competition
agreement expense.................. (15,300) --- --- --- ---
Other.............................. 32 61 354 510 (135)
---------- ---------- ---------- ---------- ----------
25,080 (1,148) (153) 265 (327)
--------- ---------- ----------- --------- ---------
Income before unusual item, provision for
income taxes and extraordinary item.... 14,384 30,464 23,920 16,906 14,010
Unusual item - nonrecurring charge for prior
years' income tax assessment........... --- --- 1,982 --- ---
Provision for income taxes............. 796 240 245 230 651
-------- -------- -------- -------- --------
Income before extraordinary item....... 13,588 30,224 21,693 16,676 13,359
Extraordinary item..................... (1,792) -- -- -- 76
---------- ------------ ------------ ------------ -----------
Net income............................. $ 11,796 $ 30,224 $ 21,693 $ 16,676 $ 13,435
========= ======== ========= ========= ========
PRO FORMA RELATING TO CHANGE IN TAX STATUS: (A)
Historical income before provision for
income taxes........................... $14,384 $30,464 $21,938 $16,906 $14,010
Pro forma provision for income taxes... 5,466 12,060 9,087 6,644 5,436
-------- ---------- --------- --------- ---------
Pro forma income relating to change in tax
status before extraordinary item....... 8,918 18,404 12,851 10,262 8,574
Extraordinary item..................... (1,792) -- -- -- --
-------- ------------ ------------ ----------- -----------
Pro forma net income relating to change in
tax status............................. $ 7,126 $18,404 $12,851 $10,262 $ 8,574
======== ======= ======= ======= =======
Pro forma net income relating to change in
tax status per share (b)............... $ 0.08 $ 0.68
========= =========
Weighted average shares outstanding (c) 27,000 27,000
======== ========
PRO FORMA FOR THE TRANSACTIONS AND THE IPO: (D)
Net sales.............................. $170,075 $148,735
Interest expense....................... 12,372 12,355
Net income............................. 16,729 11,429
Net income per share................... 0.62 0.42
Weighted average shares outstanding.... 27,000 27,000
OTHER DATA:
14
Year Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ------------ ------------ -----------
EBITDA (e)............................. $ 41,619 $ 33,516 $ 25,023 $ 17,446 $ 15,229
Capital expenditures................... 2,252 2,641 1,786 4,904 $ 1,304
Depreciation........................... 1,121 909 851 710 806
Amortization........................... 759 102 99 95 86
Net sales growth....................... 14.3% 26.8% 17.5% 20.3% 18.3%
Income from operations growth.......... 24.8 31.3 44.7 16.1 31.2
Pro forma net income growth............ (87.7) 43.2 25.2 19.7 35.8
Income from operations margin (f)...... 23.2 21.3 20.5 16.7 17.3
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ------------ ------------ ------------ -----------
BALANCE SHEET DATA:
Net working capital (excluding cash and
cash equivalents, marketable securities $43,569
and current debt........................ $39,405 $35,056 $25,437 $18,575
Property, plant and equipment, net..... 14,157 13,036 12,071 10,732 7,863
Total assets........................... 141,537 75,309 64,706 55,587 44,368
Total debt (including current debt).... 120,654 8,792 9,288 8,039 6,066
Shareholders' equity................... 1,688 55,405 48,671 40,543 33,180
- ----------------
(a) The Company consisted of S corporations and, accordingly, federal and state
taxes were generally paid at the shareholder level only. On May 7, 1996,
the Company eliminated its S corporation status and, accordingly, will be
subject to federal and state income taxes.
(b) Pro forma net income per share for the year ended December 31, 1996 has
been computed by dividing pro forma net income, after reduction for
Preferred Stock dividends of $4.9 million, by the weighted average shares
outstanding.
(c) Weighted average shares outstanding represents the number of equivalent
shares outstanding after giving retroactive effect to TLC's 18.5 for 1
stock split (effected in the form of a stock dividend) and assumes that the
10,175,000 shares issued in connection with the Acquisition (as defined
herein) and the 8,500,000 shares of Common Stock offered in the IPO are
outstanding during each of the periods indicated. See Notes to the
Consolidated Financial Statements of the Company included elsewhere in this
Report.
(d) The unaudited pro forma results of operations assume the Transactions (as
defined herein) and the subsequent IPO occurred on January 1, 1995, and
excludes the effect of (i) the nonrecurring non-competition agreement
expense, (ii) the Transaction expenses, (iii) the extraordinary item, and
(iv) the dividends paid on the Preferred Stock which was redeemed in
connection with the IPO, and reflects the additional interest expense
relating to the financing of the Acquisition and the change in tax status
described in Note (a) above. The pro forma operations data has been
prepared for comparative purposes only and does not purport to represent
what the Company's actual results of operations would have been had the
Transactions and the subsequent IPO in fact occurred on January 1, 1995.
(e) EBITDA represents income from operations before depreciation and
amortization expense, and certain other charges related to legal
settlements, increases in inventory reserves, a tax settlement relating to
a limited partnership interest, which interest was sold in 1996, and
certain management fees paid to GEI. While EBITDA is not intended to
represent cash flow from operations as defined by generally accepted
accounting principles ("GAAP") and should not be considered as an indicator
of operating performance or an alternative to cash flow (as measured by
GAAP) as a measure of liquidity, it is included herein to provide
additional information with respect to the ability of the Company to meet
its future debt service, capital expenditure and working capital
requirements.
(f) Income from operations margin equals income from operations as a percentage
of net sales.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited Consolidated Financial Statements of
the Company and the notes thereto included elsewhere herein. The Company
consisted of "S" corporations for the years ended December 31, 1995 and 1994 and
through the consummation of the Acquisition on May 7, 1996. Accordingly, federal
and state taxes were generally paid at the shareholder level only. The provision
for income taxes through May 7, 1996 and for the years ended December 31, 1995
and 1994 represented state taxes for New York, which imposes a corporate tax for
all income in excess of $0.2 million. Upon consummation of the Transactions (as
defined herein), the Company eliminated its "S" corporation status and,
accordingly, is subject to federal and state income taxes.
The Company operates in one business segment, the manufacture and marketing
of brand name nutritional supplements. Within this segment, the Company operates
in two primary business areas: the TWINLAB Division and the herbal products
category. Products sold under the TWINLAB brand name include vitamins, minerals,
amino acids, fish and marine oils, sports nutrition products and special
formulas. The herbal products category includes a full line of herbal
supplements and phytonutrients marketed by the Nature's Herbs Division and a
full line of herb teas marketed by the Alvita Tea Division. In addition, the
Company's publishing activities are conducted through its subsidiary, Advanced
Research Press, Inc.
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales for fiscal 1996 was $170.1 million, an increase of
$21.4 million, or 14.3%, as compared to net sales of $148.7 million for fiscal
1995. The 14.3% increase was attributable to increases in gross sales, partially
offset by an increase in discounts and allowances which was associated with the
Company's increased sales volume. Net sales of TWINLAB products contributed
$136.1 million, an increase of $15.6 million, or 12.9%, as compared to $120.5
million for fiscal 1995. This increase was primarily due to increased demand for
products sold under the TWINLAB brand name, which increase was due in
substantial part to the successful introduction of a number of new special
formula and sports nutrition products. Herbal products contributed $28.7
million, an increase of $5.2 million, or 22.1%, as compared to $23.5 million for
fiscal 1995. The net sales increase in the herbal products category was
primarily due to increased demand for both Nature's Herbs and Alvita products,
which increase was due in part to the successful introduction of new products,
continued strong consumer interest in existing products and increased
penetration of both Alvita and Nature's Herbs products into domestic health food
stores. Publishing contributed net sales of $5.2 million, as compared to $4.7
million for fiscal 1995.
Gross Profit. Gross profit for fiscal 1996 was $70.2 million, which
represented an increase of $11.4 million, or 19.5%, as compared to $58.8 million
for fiscal 1995. Gross profit margin was 41.3% for fiscal 1996 as compared to
39.5% for fiscal 1995. The overall increase in gross profit was attributable to
the Company's higher sales volume for fiscal 1996 as compared to fiscal 1995.
The increase in gross profit margin for fiscal 1996 as compared to fiscal 1995
was due primarily to higher gross profit margins on recently introduced new
product formulations and to continued absorption of manufacturing overhead
expenses over a larger sales base and improved manufacturing production
efficiencies, offset in part by an increase in sales discounts and allowances.
Operating Expenses. Operating expenses were $30.8 million for fiscal 1996,
representing an increase of $3.6 million, or 13.2%, as compared to $27.2 million
for fiscal 1995. As a percent of net sales, operating expenses declined from
18.3% for fiscal 1995 to 18.1% for fiscal 1996. The increase in operating
expenses was primarily attributable to increased selling and advertising
expenses and higher operating expenses resulting from the Company's increased
sales for fiscal 1996. The decline in operating expenses as a percent of net
sales was due to the Company's ability to maintain its research and development
expenditures and a substantial portion of its general and administrative costs
at approximately the same level as in fiscal 1995, while substantially
increasing the Company's sales volume.
Income from Operations. Income from operations was $39.5 million for fiscal
1996, representing an increase of $7.9 million, or 24.8%, as compared to $31.6
million for fiscal 1995. Income from operations margin increased to 23.2% of net
sales for fiscal 1996, as compared to 21.3% of net sales for fiscal 1995. The
increase in income from operations and income from operations margin was
16
primarily due to the Company's higher sales volume, higher gross margins and
lower operating expenses as a percent of net sales for fiscal 1996.
Other Income (Expense). Other expense was $25.1 million for fiscal 1996, as
compared to $1.1 million for fiscal 1995. The net increase is primarily
attributable to a non-recurring $15.3 million charge relating to the write-off
of certain non-competition agreements and a $9.1 million increase in interest
expense which resulted from increased borrowings.
FISCAL 1995 COMPARED TO FISCAL 1994
Net Sales. Net sales for fiscal 1995 was $148.7 million, an increase of
$31.4 million, or 26.8%, as compared to net sales of $117.3 million in fiscal
1994. The 26.8% increase was attributable to an increase in gross sales,
partially offset by an increase in discounts and allowances due to the Company's
increased sales volume. Net sales of TWINLAB products contributed $120.5
million, an increase of $24.2 million, or 25.2%, as compared to $96.3 million in
fiscal 1994. This increase was due primarily to increased demand for a variety
of sports nutrition products and the successful introduction of new product
formulations and strong growth in existing product lines in the special formulas
category, and to a lesser extent to continued strong consumer interest in
vitamins, minerals and amino acids products. Herbal products contributed $23.5
million, an increase of $5.9 million, or 33.3%, as compared to $17.6 million in
fiscal 1994. The net sales increase in the herbal products category was
primarily due to new product introductions, continued strong consumer interest
in existing products and increased penetration of both Alvita and Nature's Herbs
products into domestic health food stores. Publishing contributed net sales of
$4.7 million, as compared to $3.4 million in fiscal 1994.
Gross Profit. Gross profit for fiscal 1995 was $58.8 million, which
represented an increase of $11.7 million, or 24.9%, as compared to $47.1 million
for fiscal 1994. Gross margin was 39.5% for fiscal 1995, as compared to 40.1%
for fiscal 1994. The overall increase in gross profit dollars was attributable
to the Company's higher sales volume in fiscal 1995. The decrease in gross
margin for fiscal 1995 as compared to fiscal 1994 was due primarily to lower
gross margins on certain herbal products due to certain raw materials price
increases and an increase in sales discounts and allowances offered on certain
TWINLAB and herbal products under certain sales incentive programs introduced in
1995, which programs were continued in 1996. Such decreases in gross margin were
partially offset by increased sales from a more favorable product mix and
increases in the Company's gross margins on certain TWINLAB and herbal products.
Operating Expenses. Operating expenses were $27.2 million for fiscal 1995,
representing an increase of $4.2 million, as compared to $23.0 million for
fiscal 1994. As a percent of net sales, operating expenses declined from 19.6%
in fiscal 1994 to 18.3% in fiscal 1995. The increase in operating expenses was
primarily attributable to increased selling and advertising expenses and higher
operating expenses resulting from the Company's increased level of sales in
fiscal 1995. The decline in operating expenses as a percent of net sales is due
to the Company's ability to maintain its expenditures for research and
development and certain general and administrative functions at approximately
the same level as in fiscal 1994, while substantially increasing the Company's
sales volume.
Income from Operations. Income from operations was $31.6 million in fiscal
1995, representing an increase of $7.5 million, or 31.3%, as compared to $24.1
million for fiscal 1994. Income from operations margin increased to 21.3% of net
sales in fiscal 1995, as compared to 20.5% of net sales in fiscal 1994. The
increase in income from operations and income from operations margin was
primarily due to the Company's higher sales volume in fiscal 1995 and a
reduction in the Company's operating expenses as a percent of net sales, which
was partially offset by a reduction in gross margin as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
On May 7, 1996, (i) GEI acquired 48% of the Common Stock of TLC for
aggregate consideration of $4.8 million and shares of Junior Preferred Stock for
aggregate consideration of $37.0 million, (ii) the Senior Preferred Stock
Purchasers acquired 7% of the Common Stock of TLC for aggregate consideration of
$0.7 million and shares of Senior Preferred Stock of TLC (the "Senior Preferred
Stock," and, together with the Junior Preferred Stock, the "Preferred Stock")
for aggregate consideration of $30.0 million, (iii) the Blechman Brothers and
Stephen Welling (collectively, the "Continuing Stockholders") exchanged certain
of their shares of common stock of Natur-Pharma Inc. for 45% of the outstanding
shares of Common Stock of TLC, valued at $4.5 million, (iv) TLC purchased all of
the remaining shares of common stock of Natur-Pharma Inc. from the existing
stockholders for cash, resulting in Natur-Pharma Inc. becoming a wholly owned
subsidiary of TLC, (v) Twin Laboratories Inc., Alvita Products, Inc., Twinlab
Export Corp., Twinlab Specialty Corporation and B. Bros. Realty Corporation
merged into Natur-Pharma Inc. (the "Natur-Pharma Merger");
17
and Advanced Research Press, Inc. merged with Natur-Pharma II Inc., a wholly
owned subsidiary of Natur-Pharma Inc. (the surviving entity in such merger is
referred to herein as "ARP"), and (vi) in connection with such mergers the
existing stockholders received cash in consideration for all of their shares of
capital stock of Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export
Corp., Twinlab Specialty Corporation, B. Bros. Realty Corporation and Advanced
Research Press, Inc. The total cash consideration that the existing stockholders
received was approximately $212.5 million, approximately $15.3 million of which
represented consideration for non-competition agreements with each of the
existing stockholders. The transactions described above are hereinafter referred
to as the "Acquisition." Concurrently with the consummation of the Acquisition,
the Company entered into a credit facility (which provided for a term loan
facility in the amount of $53.0 million and a revolving credit facility in the
amount of $15.0 million) (the "Old Credit Facility") and issued $100.0 million
aggregate principal amount of the Notes (the "Note Offering," and, collectively
with the Acquisition and the Old Credit Facility, the "Transactions"). The net
cash proceeds of the Note Offering were used, together with borrowings under the
Old Credit Facility, the proceeds from the issuance of the Common Stock and
Preferred Stock of TLC and available cash of the Company, to finance the
Acquisition, to refinance approximately $7.0 million aggregate principal amount
of debt of the Company and to pay related fees and expenses. In connection with
the Acquisition, Natur-Pharma Inc.'s name was changed to Twin Laboratories Inc.
Subsequent to the consummation of the Transactions, the Company repaid $6.0
million of outstanding indebtedness under the term loan facility contained in
the Old Credit Facility.
The Natur-Pharma Merger was treated as taxable asset purchases for federal
and state income tax purposes and as a recapitalization for financial accounting
purposes. For federal and state income tax purposes, the purchase price was
allocated among the various corporations and their respective assets and
liabilities based on the respective fair values as of the date of the
consummation of the Acquisition. This resulted in different book and tax asset
bases for the assets of Twin Laboratories Inc., Alvita Products, Inc., Twinlab
Export Corp., Twinlab Specialty Corporation and B. Bros. Realty Corporation,
which resulted in deferred tax assets of approximately $55.6 million which will
reduce future tax liabilities.
In November 1996, the Company consummated the IPO, with the sale to the
public of 8.5 million shares of Common Stock, representing approximately 31.5%
of the outstanding capital stock of the Company. In connection with the
consummation of the IPO, the Company entered into the New Credit Facility, which
provides for a revolving credit facility of $50.0 million. The net proceeds to
the Company of the IPO of approximately $93.7 million, together with available
cash resources of the Company and approximately $20.0 million of borrowings
available under the New Credit Facility, were used to repay all of the Company's
outstanding indebtedness under the term loan facility contained in the Old
Credit Facility, plus accrued and unpaid interest thereon, and to redeem all of
the outstanding shares of Preferred Stock having an aggregate liquidation
preference of $67.0 million, plus accrued and unpaid dividends thereon. As of
February 28, 1997, the Company repaid approximately $5.0 million of the
outstanding indebtedness under the New Credit Facility.
For fiscal 1996, cash provided by operating activities was $25.5 million,
compared to $26.8 million during fiscal 1995 and $12.9 million in fiscal 1994.
The decrease in fiscal 1996 compared to fiscal 1995 was primarily due to higher
interest expense, substantially offset by higher income from operations. Cash
used in financing activities was $28.0 million in fiscal 1996, reflecting the
net cash effects of the Transactions (including the payments to the stockholders
made pursuant to the Acquisition) and the IPO and the application of the
proceeds therefrom, the prepayment of $6.0 million of outstanding indebtedness
under the term loan facility contained in the Old Credit Facility prior to the
consummation of the IPO, and distributions of $8.9 million to stockholders prior
to the consummation of the Acquisition. Cash used in financing activities was
$24.0 million in fiscal 1995 and $13.0 million in fiscal 1994 and primarily
consisted of distributions to stockholders of $23.5 million and $13.6 million
for fiscal 1995 and fiscal 1994, respectively.
Capital expenditures, including purchases under capital leases for fiscal
1994, were $2.3 million, $2.6 million and $2.5 million for fiscal 1996, fiscal
1995 and fiscal 1994, respectively. Such capital expenditures were primarily
used to purchase production equipment, expand capacity and improve manufacturing
efficiency. The Company estimates that its historical level of maintenance
capital expenditures has been approximately $0.5 million per fiscal year.
Capital expenditures, including maintenance capital expenditures, are expected
to be approximately $4.8 million during fiscal 1997 and will be used primarily
to purchase manufacturing equipment for the Company's manufacturing facilities.
In addition, the Company has entered into a contract for the purchase of an
approximately 110,000 square foot warehouse, manufacturing and office facility
in Ronkonkoma, New York. The purchase is expected to be consummated in the
second quarter of 1997 and is subject to customary conditions, including due
diligence review by the Company. If this acquisition is completed, the Company
anticipates making additional capital expenditures of approximately $6.5 million
in fiscal 1997 to acquire and renovate such facility. See "Properties."
18
TLC has no operations of its own and accordingly has no independent means
of generating revenue. As a holding company, TLC's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. The indenture,
dated as of May 7, 1996, among TLC, Twin Laboratories Inc., ARP and Fleet
National Bank, as trustee, relating to the Notes and the New Credit Facility
impose upon the Company certain financial and operating covenants, including,
among others, requirements that the Company maintain certain financial ratios
and satisfy certain financial tests, limitations on capital expenditures and
restrictions on the ability of the Company to incur debt, pay dividends or take
certain other corporate actions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the next 18 to 24 months. The
Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations and borrowings under the New Credit
Facility. As of February 28, 1997, approximately $35.0 million of borrowings
were available under the New Credit Facility for working capital requirements
and general corporate purposes.
One of the Company's business strategies is to pursue acquisition
opportunities, including product line acquisitions, that complement its existing
products, expand its distribution channels or are compatible with its business
philosophy and strategic goals. Future acquisitions could be financed by
internally generated funds, bank borrowings, public offerings or private
placements of equity or debt securities, or a combination of the foregoing. Up
to $35.0 million of borrowings under the New Credit Facility will be available
to fund future acquisitions, subject to certain conditions and reductions
(including a reduction for the approximately $15.0 million of borrowings under
the New Credit Facility outstanding as of February 28, 1997, until such time as
such borrowings are repaid). There can be no assurance that the Company will be
able to make acquisitions on terms favorable to the Company and that funds to
finance an acquisition will be available or permitted under the Company's
financing instruments.
IMPACT OF INFLATION
Generally, the Company has been able to pass on inflation-related cost
increases; consequently, inflation has not had a material impact on the
Company's historical operations or profitability.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto are presented under
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Information required under PART III (Items 10, 11, 12, and 13) is incorporated
herein by reference to the Company's definitive proxy statement to be filed with
the Securities and Exchange Commission within 120 days after the year covered by
this Form 10-K with respect to its Annual Meeting of Stockholders to be held on
May 29, 1997.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) AND (2). FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE:
Page
TWINLAB CORPORATION AND SUBSIDIARIES
Independent Auditors' Report..................................................................................................F-1
(1) FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1996 and 1995.........................................................F-2
Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994...............................F-3
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1996,
1995 and 1994.......................................................................................................F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994...........................F-5
Notes to Consolidated Financial Statements...........................................................................F-6
(2) FINANCIAL STATEMENT SCHEDULE
For the Three Years Ended December 31, 1996
Schedule II - Valuation and Qualifying Accounts......................................................................S-1
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
(C) EXHIBITS:
Exhibit
Number Description of Exhibit
2.1 -- Stock Purchase and Sale Agreement, dated as of March 5, 1996,
among David Blechman, Jean Blechman, Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman, Stephen
Welling, the Registrant, Natur-Pharma Inc. and Green Equity
Investors II, L.P. ("GEI") (the "Stock Purchase and Sale
Agreement") (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, dated June 4, 1996, as
amended, filed by the Registrant, Registration No. 333- 05191;
"TLC S-1").
2.1.1 -- Amendment to the Stock Purchase and Sale Agreement, dated May 6,
1996 (incorporated by reference to Exhibit 2.1.1 to TLC S-1).
3.1 -- Second Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.4 to the
Registration Statement on Form S-4, dated June 25, 1996, as
amended, filed by Twin Laboratories Inc. ("Twin"), Registration
No. 333-06781; "Twin S-4").
3.2 -- Amended and Restated By-laws of the Registrant (incorporated by
reference to Exhibit 3.5 to Twin S-4).
4.1 -- Indenture, dated May 7, 1996, among Twin, and ARP and the
Registrant (together, the "Guarantors"), and Fleet National Bank
as Trustee, Registrar, Paying Agent and Securities Agent,
regarding Twin's
20
10 1/4% Senior Subordinated Notes due 2006 and the 10 1/4% Senior
Subordinated Notes due 2006 issued in exchange therefor
(incorporated by reference to Exhibit 4.2 to TLC S-1).
10.1 -- Credit and Guarantee Agreement, dated May 7, 1996, among Twin,
the Registrant, the financial institutions named therein,
Chemical Bank as Administrative Agent and The Bank of New York as
Documentation Agent (incorporated by reference to Exhibit 4.3 to
TLC S-1).
10.2 -- Amended and Restated Credit and Guarantee Agreement, dated
November 15, 1996, among Twin, the Registrant, the financial
institutions named therein, The Chase Manhattan Bank as
Administrative Agent and The Bank of New York as Documentation
Agent.*
10.3 -- Guarantee and Collateral Agreement, dated May 7, 1996, among the
Registrant, Twin, and ARP in favor of Chemical Bank, as
Administrative Agent (incorporated by reference to Exhibit 10.1
to TLC S-1).
10.4 -- Form of Revolving Credit Note.*
10.5 -- Form of Swing Line Note.*
10.6 -- Deed of Trust, dated May 7, 1996 (the "Deed of Trust"), from Twin
to First American Title Company of Utah, Trustee for the use and
benefit of Chemical Bank, as Administrative Agent, Beneficiary
(incorporated by reference to Exhibit 10.6 to TLC S-1).
10.7 -- Amendment to Deed of Trust, dated November 20, 1996, among Twin
and The Chase Manhattan Bank.*
10.8 -- Stockholders Agreement, dated May 7, 1996, among Brian Blechman,
Neil Blechman, Ross Blechman, Steve Blechman, Dean Blechman and
Stephen Welling, the Registrant and GEI (incorporated by
reference to Exhibit 10.8 to TLC S-1).
10.9 -- Secondary Stockholders Agreement among Brian Blechman, Neil
Blechman, Ross Blechman, Steve Blechman, Dean Blechman and
Stephen Welling, the Registrant, GEI, DLJ Investment Funding,
Inc., DLJ Investment Partners, L.P., Chase Equity Associates,
L.P., PMI Mezzanine Fund, L.P. and State Treasurer of the State
of Michigan, Custodian of the Michigan Public School Employees'
Retirement System, State Employees' Retirement System, Michigan
State Police Retirement System, and Michigan Judges Retirement
System (incorporated by reference to Exhibit 10.9 to TLC S-1).
10.10 -- Employment Agreement, dated May 7, 1996, between Twin and Brian
Blechman (incorporated by reference to Exhibit 10.10 to TLC S-1).
10.11 -- Employment Agreement, dated May 7, 1996, between Twin and Neil
Blechman (incorporated by reference to Exhibit 10.11 to TLC S-1).
10.12 -- Employment Agreement, dated May 7, 1996, between Twin and Ross
Blechman (incorporated by reference to Exhibit 10.12 to TLC S-1).
10.13 -- Employment Agreement, dated May 7, 1996, between Twin and Steve
Blechman (incorporated by reference to Exhibit 10.13 to TLC S-1).
10.14 -- Employment Agreement, dated May 7, 1996, between Twin and Dean
Blechman (incorporated by reference to Exhibit 10.14 to TLC S-1).
10.15 -- Employment Agreement, dated May 7, 1996, between Twin and Stephen
Welling (incorporated by reference to Exhibit 10.15 to TLC S-1).
21
10.16 -- Consulting Agreement, dated May 7, 1996, between Twin and David
Blechman (incorporated by reference to Exhibit 10.16 to TLC S-1).
10.17 -- Consulting Agreement, dated May 7, 1996, between Twin and Jean
Blechman (incorporated by reference to Exhibit 10.17 to TLC S-1).
10.18 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
David Blechman (incorporated by reference to Exhibit 10.18 to TLC
S-1).
10.19 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Jean Blechman (incorporated by reference to Exhibit 10.19 to TLC
S-1).
10.20 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Brian Blechman (incorporated by reference to Exhibit 10.20 to TLC
S-1).
10.21 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Neil Blechman (incorporated by reference to Exhibit 10.21 to TLC
S-1).
10.22 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Ross Blechman (incorporated by reference to Exhibit 10.22 to TLC
S-1).
10.23 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Steve Blechman (incorporated by reference to Exhibit 10.23 to TLC
S-1).
10.24 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Dean Blechman (incorporated by reference to Exhibit 10.24 to TLC
S-1).
10.25 -- Noncompetition Agreement, dated May 7, 1996, between Twin and
Stephen Welling (incorporated by reference to Exhibit 10.25 to
TLC S-1).
10.26 -- Management Services Agreement, dated May 7, 1996, between Twin
and Leonard Green & Partners, L.P. (incorporated by reference to
Exhibit 10.26 to TLC S-1).
10.27 -- Form of Restated Standard Indemnity Agreement, dated August 1992,
between Twin and Showa Denko America, Inc. (incorporated by
reference to Exhibit 10.28 to TLC S-1).
10.28 -- Form of SDR Guaranty Agreement, dated August 1992, between Twin
and Showa Denko K.K. (incorporated by reference to Exhibit 10.29
to TLC S-1).
10.29 -- Twinlab Corporation 1996 Stock Incentive Plan (incorporated by
reference to Exhibit 10.30 to TLC S-1).
21.1 -- List of Registrant's Subsidiaries (incorporated by reference to
Exhibit 21.1 to Twin S-4).
23.1 -- Consent of Deloitte & Touche LLP.*
27 -- Financial Data Schedule.*
- ------------
* Filed herewith.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
TWINLAB CORPORATION
By: /s/Ross Blechman
----------------------------
Ross Blechman
Chairman of the Board, Chief
Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE
/s/ Ross Blechman Chairman of the Board, Chief Executive March 24, 1997
- --------------------- Officer, President and Director (Principal
Ross Blechman Executive Officer)
/s/ Neil Blechman Executive Vice President, Secretary and March 24, 1997
- --------------------- Director
Neil Blechman
/s/ Brian Blechman Executive Vice President, Treasurer and March 24, 1997
- ----------------------------- Director (Principal Financial and Accounting
Brian Blechman Officer)
/s/ Steve Blechman Executive Vice President and Director March 24, 1997
- -----------------------------
Steve Blechman
/s/ Dean Blechman Executive Vice President and Director March 24, 1997
- ------------------------------
Dean Blechman
/s/ Jonathan D. Sokoloff Director March 24, 1997
- ------------------------------
Jonathan D. Sokoloff
/s/ Jennifer Holden Dunbar Director March 24, 1997
- ------------------------------
Jennifer Holden Dunbar
/s/ John G. Danhakl
- ------------------------------ Director March 24, 1997
John G. Danhakl
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Twinlab Corporation and subsidiaries
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheets of Twinlab
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)(2).
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Twinlab Corporation
and subsidiaries as of December 31, 1996 and 1995, and the results of their
consolidated operations and their consolidated cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Jericho, New York
February 4, 1997
F-1
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1996 1995
---- ----
ASSETS (Note 7)
CURRENT ASSETS:
Cash and cash equivalents $ 3,794 $ 7,945
Marketable securities -- 201
Accounts receivable, net of allowance for bad debts of
$208 and $177, respectively (Note 14) 31,027 24,372
Inventories (Note 3) 29,443 25,273
Deferred tax assets (Note 10) 1,218 -
Prepaid expenses and other current assets 1,076 872
---------- -----------
Total current assets 66,558 58,663
PROPERTY, PLANT AND EQUIPMENT, Net (Notes 4 and 8) 14,157 13,036
DEFERRED TAX ASSETS (Note 10) 52,858 --
OTHER ASSETS (Note 5) 7,964 3,610
---------- -----------
TOTAL $ 141,537 $ 75,309
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 7) $ 20,085 $ 2,985
Current portion of capital lease obligations (Note 8) 146 136
Accounts payable 10,313 6,854
Accrued expenses and other current liabilities (Note 6) 8,882 4,258
---------- -----------
Total current liabilities 39,426 14,233
LONG-TERM DEBT, less current portion (Note 7) 100,265 5,367
CAPITAL LEASE OBLIGATIONS, less current portion (Note 8) 158 304
---------- -----------
Total liabilities 139,849 19,904
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)
SHAREHOLDERS' EQUITY (Notes 1 and 9):
Preferred stock, $.01 par value; 2,000,000 shares authorized;
none issued - -
Common stock, $1.00 par value; 75,000,000 shares authorized;
27,000,000 shares outstanding as of December 31, 1996
and 450,000 as of December 31, 1995 27,000 450
Additional paid-in capital 141,338 68
Retained earnings (deficit) (166,650) 54,887
---------- -----------
Total shareholders' equity 1,688 55,405
---------- -----------
TOTAL $ 141,537 $ 75,309
========== ===========
See notes to consolidated financial statements.
F-2
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994 (IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
NET SALES (Note 14) $ 170,075 $ 148,735 $ 117,342
COST OF SALES 99,827 89,932 70,247
---------- ---------- ----------
GROSS PROFIT 70,248 58,803 47,095
OPERATING EXPENSES 30,784 27,191 23,022
---------- ---------- ----------
INCOME FROM OPERATIONS 39,464 31,612 24,073
---------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest income 593 313 254
Interest expense (10,005) (866) (761)
Transaction expenses (Note 1) (400) (656) --
Nonrecurring non-competition agreement expense (Note 1) (15,300) -- --
Other 32 61 354
---------- ---------- ----------
(25,080) (1,148) (153)
---------- ---------- ----------
INCOME BEFORE UNUSUAL ITEM, PROVISION
FOR INCOME TAXES AND EXTRAORDINARY ITEM 14,384 30,464 23,920
UNUSUAL ITEM - Nonrecurring charge for prior years'
income tax assessment (Note 13) -- -- 1,982
PROVISION FOR INCOME TAXES (Note 10) 796 240 245
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 13,588 30,224 21,693
EXTRAORDINARY ITEM, net of income tax benefit of
$1,134 (Note 1) (1,792) -- --
--------- ---------- ----------
NET INCOME $ 11,796 $ 30,224 $ 21,693
========== ========== ==========
PRO FORMA RELATING TO CHANGE IN TAX STATUS
(Note 1)
Historical income before provision for income taxes and
extraordinary item $ 14,384 $ 30,464 $ 21,938
Pro forma provision for income taxes 5,466 12,060 9,087
---------- ---------- ----------
Pro forma income relating to change in tax status before
extraordinary item 8,918 18,404 12,851
Extraordinary item (1,792) -- --
---------- ---------- ----------
Pro forma net income relating to change in tax status 7,126 18,404 12,851
Preferred Stock dividends 4,862 -- --
---------- ---------- ----------
Pro forma net income relating to change in tax status
applicable to common stock $ 2,264 $ 18,404 $ 12,851
========== ========== ==========
Pro forma income relating to change in tax status before
extraordinary item per share $ 0.15 $ 0.68
Extraordinary item per share (0.07) --
---------- ---------
Pro forma net income relating to change in tax status per
share (Note 2) $ 0.08 $ 0.68
========== ==========
Weighted average shares outstanding (Note 2) 27,000 27,000
========== ==========
See notes to consolidated financial statements.
F-3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
ADDITIONAL RETAINED
COMMON STOCK PAID-IN EARNINGS
---------------------
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
------ ------ ------- --------- -----
Balance at January 1, 1994 $ 450,000 $ 450 $ 68 $ 40,025 $ 40,543
Net income -- -- -- 21,693 21,693
Distributions to shareholders -- -- -- (13,565) (13,565)
----------- ---------- ----------- ------------ -----------
Balance at December 31, 1994 450,000 450 68 48,153 48,671
Net income -- -- -- 30,224 30,224
Distributions to shareholders -- -- -- (23,490) (23,490)
----------- ---------- ----------- ------------ -----------
Balance at December 31, 1995 450,000 450 68 54,887 55,405
Net income -- -- -- 11,796 11,796
Distributions to shareholders -- -- -- (8,929) (8,929)
Issuance of common stock (Note 1) 550,000 550 4,950 -- 5,500
Repurchase of shareholders' common
stock and recapitalization including
income tax effects (Note 1) -- -- 68,654 (219,542) (150,888)
Additional shares issued in 18.5 for 1
stock split effected in the form of
a stock dividend (Note 9) 17,500,000 17,500 (17,500) -- --
Dividends on Preferred Stock -- -- -- (4,862) (4,862)
Initial public offering of common stock 8,500,000 8,500 85,166 -- 93,666
----------- ---------- ----------- ------------ -----------
Balance at December 31, 1996 27,000,000 $ 27,000 $ 141,338 $ (166,650) $ 1,688
=========== ========== =========== ============ ===========
See notes to consolidated financial statements.
F-4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,796 $ 30,224 $ 21,693
Adjustment to reconcile net income to net cash provided
by operating activities:
Extraordinary item 1,792 - -
Depreciation and amortization 1,880 1,011 950
Gain on sale of equipment -- (58) (153)
Bad debt expense 125 169 (59)
Deferred income taxes (3,484) -- --
Nonrecurring non-competition agreement expense 15,300 -- --
Other -- -- 1
Changes in operating assets and liabilities:
Accounts receivable (6,780) (6,649) (5,880)
Inventories (4,170) (2,541) (3,717)
Prepaid expenses and other current assets (204) 307 295
Accounts payable 3,459 3,242 (752)
Accrued expenses and other current liabilities 5,758 1,123 494
----------- ----------- ---------
Net cash provided by operating activities 25,472 26,828 12,872
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturities of marketable securities 201 1,178 1,120
Proceeds from sales of property, plant and equipment 10 825 435
Acquisition of property, plant and equipment (2,252) (2,641) (1,786)
Decrease (increase) in other assets 411 6 (519)
----------- ----------- ---------
Net cash used in investing activities (1,630) (632) (750)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 173,000 4,685 6,073
Proceeds from issuance of Preferred Stock 67,000 -- --
Dividends on Preferred Stock (4,862) -- --
Distributions to shareholders (8,929) (23,490) (13,565)
Payments of debt (61,002) (5,056) (5,389)
Redemption of Preferred Stock (67,000) -- --
Issuance of common stock 5,500 -- --
Repurchase of shareholders' common stock and recapitalization (216,780) -- --
Net proceeds from initial public offering of common stock 93,666 -- --
Payment of financing costs (8,450) -- --
Principal payments of capital lease obligations (136) (125) (121)
----------- ----------- ---------
Net cash used in financing activities (27,993) (23,986) (13,002)
----------- ----------- ---------
Net (decrease) increase in cash and cash equivalents (4,151) 2,210 (880)
Cash and cash equivalents at beginning of year 7,945 5,735 6,615
----------- ----------- ---------
Cash and cash equivalents at end of year $ 3,794 $ 7,945 $ 5,735
=========== =========== =========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest $ 8,020 $ 853 $ 780
=========== =========== =========
Income taxes $ 3,063 $ 216 $ 267
=========== =========== =========
Supplemental disclosure of non-cash investing activities -
Assets acquired under capital lease obligations $ -- $ -- $ 686
=========== =========== =========
F-5
See notes to consolidated financial statements.
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994 (DOLLAR AMOUNTS ARE IN THOUSANDS OF DOLLARS)
1. DESCRIPTION OF ENTITY, BASIS OF PRESENTATION AND INITIAL PUBLIC
OFFERING
Prior to May 7, 1996, Twin Laboratories Inc. ("Old Twin") and its
affiliates, Twinlab Export Corp. ("Export"), Twinlab Specialty
Corporation ("Specialty"), Alvita Products, Inc. ("Alvita"),
Natur-Pharma, Inc. ("Natur-Pharma"), B. Bros. Realty Corporation ("B.
Bros.") and Advanced Research Press, Inc. ("ARP") (collectively, the
"Companies") operated as separate corporations, all of which were
wholly-owned by the same individuals (with some companies having
different ownership percentages among such individuals) except for Natur
- Pharma and B. Bros., which were 97 percent owned by such individuals.
On February 27, 1996, Twinlab Corporation (formerly TLG Laboratories
Holding Corp.) ("TLC") was incorporated in contemplation of the
Acquisition (as hereinafter defined). The accompanying consolidated
financial statements include the accounts of TLC and subsidiaries (the
"Company") after giving retroactive effect, in a manner similar to a
pooling of interests, to the merger of the Companies pursuant to the
Acquisition.
The shareholders of the Companies entered into a stock purchase and sale
agreement dated as of March 5, 1996 and which was consummated on May 7,
1996 pursuant to which (i) Green Equity Investors II, L.P. ("GEI")
acquired 8,880,000 shares (adjusted for the 18.5 for 1 stock split - see
Note 9a) (48 percent) of the common stock of TLC for aggregate
consideration of $4,800 and shares of 11.25 percent non-voting junior
redeemable preferred stock of TLC (the "Junior Preferred Stock") for
aggregate consideration of $37,000, (ii) certain other investors acquired
1,295,000 shares (adjusted for the 18.5 for 1 stock split - see Note 9a)
(7 percent) of the common stock of TLC (each of these other investors
owns less than 5 percent of the common stock of TLC) for aggregate
consideration of $700 and shares of 14 percent non-voting senior
redeemable preferred stock of TLC for aggregate consideration of $30,000
(the "Senior Preferred Stock", and together with the Junior Preferred
Stock, the "Preferred Stock"), (iii) certain of the shareholders of the
Companies (the "Continuing Shareholders") exchanged certain of their
shares of common stock of Natur-Pharma for 8,325,000 shares (adjusted for
the 18.5 for 1 stock split - see Note 9a) (45 percent) of the outstanding
shares of common stock of TLC, valued at $4,500, (iv) TLC purchased all
of the remaining shares of common stock of Natur-Pharma from the existing
shareholders for cash, resulting in Natur-Pharma becoming a wholly-owned
subsidiary of TLC, (v) Twin, Alvita, Export, Specialty, and B. Bros.
merged into Natur-Pharma and ARP merged with Natur-Pharma II, Inc., a
wholly-owned subsidiary of Natur-Pharma (the surviving entity in such
merger is referred to herein as "ARP"), and (vi) in connection with such
mergers, the existing shareholders received cash in consideration for all
their shares of capital stock of Twin, Alvita, Export, Specialty, B.
Bros., and ARP. The total cash consideration that the existing
shareholders received was approximately $212,500, approximately $15,300
of which represented consideration for non-competition agreements with
each of the existing shareholders, which was recognized as a nonrecurring
expense upon the consummation of the Acquisition. The transactions
described above are hereinafter referred to as the "Acquisition."
Concurrently with the consummation of the Acquisition, the Company
entered into a credit facility (which provided for a term loan facility
in the amount of $53,000
F-6
and a revolving credit facility in the amount of $15,000) (the "Old
Credit Facility") and issued $100,000 aggregate principal amount of
senior subordinated notes in a private placement (the "Note Offering",
and, collectively with the Acquisition and the Old Credit Facility, the
"Transactions"), which notes were subsequently exchanged in October 1996
for publicly registered notes. The net cash proceeds of the Note Offering
were used, together with borrowings under the Old Credit Facility, the
proceeds from the issuance of the common stock and Preferred Stock of TLC
and available cash of the Company, to finance the Acquisition, to
refinance approximately $7,000 aggregate principal amount of debt of the
Company and to pay related fees and expenses. In connection with the
Acquisition, Natur-Pharma's name was changed to Twin Laboratories Inc.
("Twin"). In connection with the Transactions, the Company has expensed
$400 and $656 of professional fees for the year ended December 31, 1996
and 1995, respectively (the "Transaction Expenses").
Because the Acquisition did not result in a change in control as defined
in Emerging Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout
Transactions" ("EITF 88-16"), the transactions were accounted for as a
recapitalization under the guidance of EITF 88-16 and the Companies'
historical basis of accounting were applied to the consolidated financial
statements of TLC.
The Company manufactures and markets brand name nutritional supplements
sold primarily through domestic health food stores and international
distributors. The TWINLAB Division of Twin manufactures a complete line
of vitamins, minerals and amino acids, sports nutrition products, and
special formulas. The Alvita Tea Division markets natural single herb
teas and blends in both single use bags and bulk form. The Nature's Herbs
Division manufactures and markets a full line of herbal supplements and
phytonutrients. ARP is a publisher of health, fitness and
nutrition-related publications.
The following unaudited pro forma results of operations assume the
Transactions occurred on January 1, 1995 and excludes the effect of (I)
the nonrecurring non-competition agreement expense, and (II) the
Transaction Expenses, and reflects the additional interest expense
relating to the financing of the Acquisition and the change in tax
status. The pro forma operations data has been prepared for comparative
purposes only and does not purport to represent what the Company's actual
results of operations would have been had the Transactions in fact
occurred on January 1, 1995.
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995
----------- -----------
Net sales $ 170,075 $ 148,735
Interest expense 15,395 15,684
Income before extraordinary item 14,942 9,418
Income before extraordinary item per share 0.55 0.35
Weighted average shares outstanding
(in thousands) 27,000 27,000
On November 15, 1996, the Company consummated an initial public offering
of common stock (the "IPO"), with the sale to the public of 8,500,000
shares of common stock at $12.00 per share. In connection with the
consummation of the IPO, the Company entered into an amended credit
agreement which provides for a revolving credit facility of $50,000 (the
"Amended Revolving Credit Facility") (see Note 7). The net proceeds to
the Company of the IPO of approximately $93,666 (after underwriters'
discounts of $6,630 and offering expenses of
F-7
$1,704), together with available cash resources of the Company and
approximately $20,000 of borrowings under the Amended Revolving Credit
Facility, were used to repay all of the Company's outstanding
indebtedness under the term loan contained in the Old Credit Facility,
plus accrued and unpaid interest thereon of approximately $233, and to
redeem all of the outstanding shares of Preferred Stock having an
aggregate liquidation preference of $67,000, plus accrued and unpaid
dividends thereon of approximately $4,862 (the "Repayments"). In
connection with the prepayment of outstanding indebtedness under the term
loan facility and the establishment of the Amended Revolving Credit
Facility, the Company recorded an extraordinary charge representing the
write-off of previously deferred finance costs incurred in connection
with the Old Credit Facility of approximately $1,792 (net of tax benefit
of $1,134).
The following unaudited pro forma results of operations assume the
Transactions and the subsequent IPO occurred on January 1, 1995 and
excludes the effect of (I) the nonrecurring non-competition agreement
expense, (II) the Transaction Expenses, (III) the extraordinary item, and
(IV) the dividends paid on the Preferred Stock which was redeemed in
connection with the IPO, and reflects the additional interest expense
relating to the financing of the Acquisition and the change in tax
status. The pro forma operations data has been prepared for comparative
purposes only and does not purport to represent what the Company's actual
results of operations would have been had the Transactions and the
subsequent IPO in fact occurred on January 1, 1995.
Year Ended December 31,
-----------------------------------
1996 1995
----------- -----------
Net sales $ 170,075 $ 148,735
Interest expense 12,372 12,355
Net income 16,729 11,429
Net income per share 0.62 0.42
Weighted average shares outstanding
(in thousands) 27,000 27,000
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - All material intercompany accounts
and transactions have been eliminated.
B. CASH EQUIVALENTS - Investments with original maturities of three
months or less are considered cash equivalents.
C. MARKETABLE SECURITIES - The Company accounts for its investments
in marketable securities under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". The Company's
marketable securities portfolio primarily consisted of investments
in tax-exempt municipal bonds. Marketable securities were stated
at amortized cost as the Company had the intent and ability to
hold these securities to maturity. The aggregate fair value of
marketable securities as of December 31, 1995 was $201.
D. INVENTORIES - Inventories are stated at the lower of cost
(first-in, first-out method) or market value.
E. PROPERTY, PLANT AND EQUIPMENT - Depreciation is computed using the
straight-line meth-od based upon the estimated useful lives of the
related assets which range from three to forty
F-8
years. Amortization of leasehold improvements is computed by the
straight-line method over the shorter of the estimated useful
lives of the related assets or lease term.
F. INTANGIBLE ASSETS - Trademarks are being amortized on the
straight-line method over their expected lives, not to exceed
forty years. Goodwill, which represents the excess of purchase
price over fair value of net assets acquired, is being amortized
on the straight-line method over forty years.
G. INCOME TAXES - The Company accounts for income taxes under the
provisions of SFAS No. 109, "Accounting For Income Taxes", which
requires recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been
included in the Company's financial statements or tax returns.
Under this method, deferred tax assets and liabilities are
determined based on the differences between the financial
accounting and tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are
expected to reverse.
H. REVENUE RECOGNITION - Revenue from product sales is recognized at
the time of shipment to the customer. Revenue from magazine
subscriptions is recorded as deferred revenue at the time of sale
and a pro rata share is included in revenue as magazines are
delivered to subscribers. Advertising revenue is recognized when
the related magazines are issued.
I. RESEARCH AND DEVELOPMENT EXPENSES - The Company charges research
and development expenses to operations as incurred. Research and
development expenses were $1,119, $1,140 and $1,030 for the years
ended December 31, 1996, 1995 and 1994, respectively.
J. PRO FORMA NET INCOME PER SHARE - Pro forma net income per share
for the years ended December 31, 1996 and 1995 has been computed
by dividing pro forma net income, after reduction for Preferred
Stock dividends, by 27,000,000 shares, which represents the number
of weighted average shares outstanding and assumes as outstanding
for the entire year, the 10,175,000 shares (adjusted for the 18.5
for 1 stock split - see Note 9a) issued in connection with the
Acquisition and the 8,500,000 shares issued in connection with the
IPO (see Note 1). The incremental shares relating to the effect of
dilutive stock options were immaterial and, accordingly, were not
considered in the calculation of pro forma net income per share.
K. FAIR VALUE OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used to estimate the fair value of each class of
financial instruments:
1) MARKETABLE SECURITIES - Fair value approximates quoted
market value.
2) RECEIVABLES - The carrying amount approximates fair value
because of the short maturity of these instruments.
3) DEBT - The carrying amounts approximate fair value based on
borrowing rates currently available to the Company for
loans with similar terms.
L. IMPAIRMENT OF LONG-LIVED ASSETS - In accordance with SFAS No. 121,
"Accounting For the Impairment of Long-Lived Assets and For
Long-Lived Assets To Be Disposed Of", the Company reviews its
long-lived assets, including property and equipment, and
intangible assets for impairment whenever events or changes in
circumstances indicate that the
F-9
carrying amount of the assets may not be fully recoverable. To
determine recoverability of its long-lived assets, the Company
evaluates the probability that future undiscounted net cash flows
will be less than the carrying amount of the assets. Impairment
costs, if any, are measured by comparing the carrying amount of
the related assets to their fair value.
M. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
N. RECLASSIFICATIONS - Certain prior year balances have been
reclassified to conform with current year classifications.
3. INVENTORIES
Inventories consist of the following:
1996 1995
---- ----
Raw materials $ 10,802 $ 11,006
Work in process 8,712 4,550
Finished goods 9,929 9,717
---------- ----------
Total $ 29,443 $ 25,273
========== ==========
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment
consist of the following:
1996 1995
---- ----
Land, building and leasehold improvements $ 12,197 $ 11,204
Plant equipment 7,006 6,097
Office equipment 2,292 1,942
Automobiles 12 56
---------- ----------
21,507 19,299
Less: accumulated depreciation and amortization 7,350 6,263
---------- ----------
Property, plant and equipment - net $ 14,157 $ 13,036
========== ==========
Depreciation and amortization expense $ 1,121 $ 909
========== ==========
5. OTHER ASSETS
Other assets consist of the following
1996 1995
---- ----
Deferred finance costs, net of accumulated
amortization of $321 $ 4,915 $ --
Trademarks, net of accumulated amortization
of $213 and $157, respectively 1,400 1,063
Goodwill, net of accumulated amortization
of $131 and $114, respectively 573 590
Due from related trust (a) -- 1,786
Other 1,076 171
-------- --------
Total $ 7,964 $ 3,610
======== ========
F-10
(A) The Company had advanced, to a related party trust, payments for
premiums on a split dollar life insurance policy on the lives of the
former principal shareholders. The amounts advanced were to be repaid
from the benefits or cash value of the policy and were collateralized
by the cash surrender value of the policy. The former principal
shareholders were covered by a "second to die" policy in the face
amount of $10,000. Such policy was terminated in May 1996 in
connection with the consummation of the Acquisition and the related
advances were collected.
6. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
1996 1995
---- ----
Accrued salaries, employee benefits and payroll taxes $ 1,957 $ 935
Deferred revenue 890 787
Accrued professional fees 371 700
Other 5,664 1,836
-------- --------
Total $ 8,882 $ 4,258
======== ========
7. LONG-TERM DEBT
Long-term debt consists of the following
1996 1995
--------- --------
Amended Revolving Credit Facility (a) $ 20,000 $ --
Senior subordinated notes (b) 100,000 --
Mortgages payable to banks, refinanced in May 1996 -- 4,332
Notes payable to banks, refinanced in May 1996 -- 2,143
Notes payable to shareholders (c) -- 846
Borrowings under Natur-Pharma line of credit, refinanced in May 1996 -- 660
Note payable to a power authority, payable in monthly installments
of $2, including interest at 6.38 percent, maturing February 2011 277 289
Other 73 82
----------- --------
120,350 8,352
Less: current portion 20,085 2,985
----------- --------
Total $ 100,265 $ 5,367
=========== ========
(A) The Amended Revolving Credit Facility expires on May 7, 2002 and
provides for borrowings up to $50,000. Borrowings under the
Amended Revolving Credit Facility bear interest, at the Company's
discretion, at either the Alternative Base Rate, as defined, or at
the Eurodollar Rate (maximum six-month term), plus a margin of
1.25 percent, as defined. The effective interest rate on
borrowings under the amended revolving credit facility ranged from
6.75 to 8.25 percent as of December 31, 1996. Interest rates are
subject to increases or reduction based upon Twin's meeting
certain financial tests. The proceeds of the Amended Revolving
Credit Facility are available for working capital requirements and
for general corporate purposes, including up to $35,000 of which
is available to fund permitted acquisitions, as defined, subject
to certain conditions and reductions (including a reduction for
the approximately $20,000 of borrowings used for the Repayments
until such time as such borrowings are repaid). A portion of the
Amended Revolving Credit Facility
F-11
not to exceed $15,000 is available for the issuance of letters of
credit which generally have an initial term of one year or less.
The Amended Revolving Credit Facility is secured by first priority
security interests in all of the tangible and intangible assets of
Twin and its direct subsidiary and is guaranteed by TLC and ARP.
In addition, the Amended Revolving Credit Facility contains
certain restrictive covenants including, among other things, the
maintenance of certain debt coverage ratios, as well as
restrictions on additional indebtedness, dividends and certain
other significant transactions.
(B) The senior subordinated notes mature on May 15, 2006 and bear
interest at a rate of 10- 1/4 percent per annum. The senior
subordinated notes are jointly and severally guaranteed by TLC and
ARP on a full and unconditional unsecured senior subordinated
basis. The senior subordinated notes are callable after five years
at a premium to par which declines to par after eight years. Until
May 15, 1999, Twin has the option to redeem up to 35 percent of
the subordinated notes with the proceeds of a public offering at a
redemption price of 109-1/2 percent. Upon a change of control, as
defined, Twin is required to offer to redeem the subordinated
notes at 101 percent of the principal amount plus accrued and
unpaid interest. Restrictive covenants contained in the indenture
governing the subordinated notes (the "Note Indenture") include,
among other things, limitations on additional indebtedness,
investments, dividends and certain other significant transactions.
The Amended Revolving Credit Facility and the Note Indenture
restrict the payment of dividends and the making of loans,
advances or other distributions of assets to TLC, except in
certain limited circumstances.
(C) Natur-Pharma had outstanding notes payable to certain shareholders
totaling $500 as of December 31, 1995. Such notes bore interest at
ten percent per annum, which was payable semi-annually. Interest
expense on such notes was approximately $18, $100 and $150 for the
years ended December 31, 1996, 1995 and 1994, respectively. ARP
had outstanding notes payable to certain shareholders totaling
$346 as of December 31, 1995. Such notes were non-interest
bearing. All amounts outstanding were repaid in May 1996.
Maturities of long-term debt are as follows:
YEAR ENDING DECEMBER 31,
------------------------
1997 $ 20,085
1998 13
1999 14
2000 15
2001 16
Thereafter 100,207
-----------
Total $ 120,350
===========
8. CAPITAL LEASE OBLIGATIONS
The Company is obligated under leases for equipment, which are treated as
capital leases for financial reporting purposes due to certain provisions
in the lease agreements. Included in plant equipment at December 31, 1996
and 1995 are assets held under capital leases with a net
F-12
carrying value of $343 and $583, respectively. Accumulated amortization
on these assets at December 31, 1996 and 1995 was $343 and $103,
respectively.
The future minimum lease payments, by year and in the aggregate, and the
present value of the future minimum lease payments at December 31, 1996
are as follows:
YEAR ENDING DECEMBER 31,
--------------------------------------------------
1997 $ 164
1998 164
-----
Total 328
Amount representing interest 24
-----
Present value of the future minimum lease payments
(including $146 payable currently) $ 304
=====
9. SHAREHOLDERS' EQUITY
(A) CHANGES IN AUTHORIZED CAPITAL AND STOCK SPLIT - In July 1996, the
Board of Directors (the "Board") and the stockholders authorized
an increase in the number of common shares authorized to
75,000,000 and an increase in the number of shares of preferred
stock authorized to 2,000,000, which preferred stock may be issued
by the Board on such terms and with such rights, preferences and
designations as the Board may determine, without further
stockholder action. Prior to the IPO, on November 15, 1996, the
Board authorized a stock split (effected in the form of a stock
dividend) of all issued and outstanding common shares at the rate
of 18.5 for 1, which increased the number of issued and
outstanding shares from 1,000,000 to 18,500,000. The stock split
and the change in authorized common stock have been retroactively
reflected for all periods presented herein.
(B) STOCK INCENTIVE PLAN - In November 1996, the Board and
stockholders of the Company approved and adopted the Twinlab
Corporation 1996 Stock Incentive Plan (the "1996 Plan"). The 1996
Plan provides for the issuance of a total of up to 400,000
authorized and unissued shares of common stock, treasury shares
and/or shares acquired by the Company for purposes of the 1996
Plan. Awards under the 1996 Plan may be made in the form of (I)
incentive stock options; (II) nonqualified stock options; (III)
stock appreciation rights; (IV) restricted stock; and (V)
performance shares. Options become exercisable over five years
from the date of grant at the rate of 20 percent of the grant each
year and expire up to ten years after the date of grant. On
November 14, 1996, the Board granted 118,000 nonqualified stock
options under the 1996 Plan to certain key persons at an exercise
price equal to the initial public offering price of $12.00 per
share.
The Company applies Accounting Principles Board Opinion No. 25 and
related interpretations in accounting for awards granted under the
1996 Plan. Accordingly, no compensation cost has been recognized
for the fixed portion of awards granted under the 1996 Plan. Had
compensation cost for the Company's fixed stock options been
determined based upon the fair value at the grant date consistent
with the methodology prescribed under SFAS No. 123, "Accounting
For Stock-Based Compensation To Employees", the Company's pro
forma net income and pro forma net income per share would not have
been materially different than the reported amounts. The fair
value of the options granted during 1996 is estimated to be $804
on the date of grant (represent-ing a weighted average fair value
of $6.81 per option) using the Black-Scholes options pricing model
with the following assumptions: no dividend yield or assumed
forfeiture rate, a
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risk-free interest rate of 6.09 percent, an expected option life
of seven years, and an expected volatility of 45 percent.
10. INCOME TAXES
Prior to the consummation of the Acquisition, all of the Companies were
"S" corporations and as such Federal and state taxes were generally paid
at the shareholder level only. However, when corporate taxable income of
any company exceeded $200, such company was required to pay New York
State corporate income taxes equal to the difference between the personal
and the corporate tax rate (approximately 2 percent) for all taxable
income in excess of $200, except for Natur-Pharma, Alvita and B. Bros.,
which were subject to the tax laws of the State of Utah. The provision
for income taxes for the years ended December 31, 1994 and 1995 and
through the consummation of the Acquisition on May 7, 1996 represents
state taxes.
Upon consummation of the Acquisition, the Companies terminated their S
Corporation status. The mergers of Old Twin, Alvita, Export, Specialty
and B. Bros. into Natur-Pharma were treated as taxable asset purchases
for Federal and state income tax purposes and a recapitalization for
financial accounting purposes. For Federal and state income tax purposes,
the purchase price was allocated among the various corporations and their
respective assets and liabilities based on the respective fair values as
of the closing of the Acquisition. This resulted in different book and
tax asset bases for the assets of these companies, which resulted in
deferred tax assets of approximately $55,571.
The provision for (benefit from) income taxes consists of the following:
1996 1995 1994
----------- ----------- -----------
Current:
Federal $ 3,662 $ -- $ --
State and local 618 240 245
----------- ----------- -----------
4,280 240 245
----------- ----------- -----------
Deferred:
Federal (3,108) -- --
State and local (376) -- --
----------- ----------- -----------
(3,484) -- --
----------- ----------- -----------
$ 796 $ 240 $ 245
=========== =========== ===========
The difference between the statutory Federal tax rate and the Company's
effective tax rate is as follows (as a percentage of pre-tax income):
1996 1995 1994
--------- -------- --------
Statutory Federal income tax rate 34.0% 34.0% 34.0%
State and local income taxes (net of
Federal tax benefit) 1.1 0.8 1.0
Exempt income due to "S" Corporation
status (26.8) (34.0) (34.0)
Other (2.8) -- --
--------- -------- --------
Effective tax rate 5.5% 0.8% 1.0%
========= ======== ========
F-14
At December 31, 1996, the deferred tax assets, which required no
valuation allowance, consisted of:
1996
----------
Accounts receivable $ 856
Inventories 238
Property, plant and equipment 464
Intangible and other assets 52,394
Other 124
----------
$ 54,076
==========
11. EMPLOYEE BENEFIT PLANS
Old Twin provided a profit sharing plan, and Natur-Pharma provided an
Employee Savings and Investment Plan to all eligible employees, as
defined, through July 1, 1996. Effective July 1, 1996, the Company
adopted the Twin Laboratories Inc. 401(k) Plan (the "401(k) Plan") which
is an amendment and restatement of the Old Twin profit sharing plan and
merged the Natur-Pharma Employee Savings and Investment Plan into the
401(k) Plan. Eligible employees may contribute up to 15 percent of their
annual compensation, subject to certain limitations, and the Company will
match 50 percent of an employee's contribution. Total provisions with
respect to these plans approximated $164, $287 and $261 for the years
ended December 31, 1996, 1995, and 1994, respectively.
12. COMMITMENTS AND CONTINGENCIES
A. LEASES - The Company leases certain warehouse space and equipment
under operating leases. Generally, the leases carry renewal
provisions and require the payment of maintenance costs. Rental
payments may be adjusted for increases in taxes and other costs
above specific amounts. Rental expense charged to operations for
the years ended December 31, 1996, 1995 and 1994 was approximately
$1,579, $1,370 and $1,281, respectively.
Future minimum payments under noncancellable operating leases with
initial or remaining terms of more than one year are as follows:
YEAR ENDING DECEMBER 31,
1997 $ 1,376
1998 1,249
1999 747
2000 650
2001 131
Thereafter 76
--------
Total $ 4,229
========
B. LEGAL MATTERS - The Company, like various other participants in
the nutritional supplement industry, has been a defendant in court
actions seeking damages for alleged personal injuries resulting
from products containing allegedly contaminated added manufactured
L- Tryptophan. To date, approximately 131 of the approximately 133
suits in which the Company was a named defendant (the
"L-Tryptophan Actions") have been dismissed or settled at no cost
to the Company pursuant to an indemnification agreement (the
"Indemnification Agreement") between the Company and a U.S.
subsidiary of the Japanese manufacturer of the allegedly
contaminated ingredient. The Company believes, after
F-15
consultation with outside counsel, that few new lawsuits are
likely to be brought in view of applicable statutes of
limitation. Based upon consultation with outside counsel, the
Company also believes that , in light of the Indemnification
Agreement and the resolution of virtually all of the L-Tryptophan
Actions at no cost to the Company, the prospect of the remaining
L-Tryptophan Actions and any possible future actions having a
material adverse effect on the Company's results of operations or
financial condition is remote. The Company no longer markets any
products containing added manufactured L-Tryptophan.
In 1989, the Company received an informal inquiry from the New
York Regional Office of the Federal Trade Commission ("FTC")
seeking substantiation for certain advertising claims made for a
segment of its "Fuel" bodybuilding and sports nutrition line of
products. In response, the Company submitted scientific
substantiation and financial information to the FTC. The Company
has engaged in negotiations with the FTC relating to the proposed
terms of a consent order (the "Consent Order") to settle this
matter. The most recent draft of the proposed Consent Order
provides for, among other things, injunctive relief prohibiting
the Company from making certain muscle building and fat burning
claims for four of its Fuel products and substantially similar
products without scientific substantiation and a $200 payment to
the FTC. The FTC staff has indicated that unless a settlement is
reached, it would proceed to recommend to the FTC Commissioners
that a civil administrative complaint be issued against the
Company. The Company has determined at the current time not to
settle this matter on the terms set forth in the most recent draft
of the Consent Order, which draft the FTC has stated is its final
offer for a negotiated settlement. The Company believes that it
has adequate scientific substantiation for the claims at issue,
and intends to vigorously defend this matter if a settlement is
not reached. The Company has reserved $200 for this matter.
The Company is also engaged in various other litigation in the
ordinary course of business. Management is of the opinion that the
amounts which may be awarded or assessed, if any, in connection
with these matters will not have a material adverse effect on the
consolidated financial statements.
13. INVESTMENT IN LIMITED PARTNERSHIP
In connection with investments in certain limited partnerships, Hambrose
3 and 4 ("Partnerships"), the Company agreed to pay a total of $360 as an
additional capital contribution to the Partnerships by delivering to a
third party a nonrecourse note of $240 and another noninterest-bearing
note due in the year 2010 in the amount of $120 and by assigning 100
percent of certain distribution rights until such time as the assignee
has recovered the full amount of the such additional capital
contribution. During 1996, the Company sold its investments in the
Partnerships. These investments had not been assigned any value in the
accompanying consolidated balance sheets.
The Hambrose 3 limited partnership has been audited by the Internal
Revenue Service ("IRS") for the years ended December 31, 1985 and 1986,
at which time Twin was a "C" corporation. A settlement with the IRS was
reached during 1995 in which Twin paid approximately $2,082, including
interest. In addition, Twin was responsible for additional state taxes,
inclusive of interest of approximately $28. Twin recorded an estimated
settlement amount during 1994 totaling $1,982 which was reflected as a
nonrecurring charge to operations. An additional $128 of interest was
recorded in 1995, and was included in operating expenses in the
accompanying consolidated statement of income.
F-16
14. MAJOR CUSTOMERS AND CREDIT CONCENTRATIONS
The Company has two significant customers which accounted for
approximately 25 and 20 percent, respectively, of net sales for 1996; 27
and 21 percent, respectively, of net sales for 1995; and 28 and 20
percent, respectively, of net sales for 1994. No other customer accounted
for more than 10 percent of net sales in any of the three years ended
December 31, 1996.
The Company's customers are primarily large independent distributors of
health food products. At December 31, 1996 and 1995, approximately 64 and
73 percent, respectively, of accounts receivable related to two
customers.
15. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
As noted in Note 7b, the Amended Revolving Credit Facility and the Note
Indenture restrict the payment of dividends and the making of loans,
advances, or other distributions to TLC, except in certain limited
circumstances. After giving retroactive effect, in a manner similar to a
pooling of interests, to the merger of the Companies pursuant to the
Acquisition, the condensed financial information of TLC, on a stand-alone
basis, is as follows (because TLC had no cash prior to the consummation
of the Acquisition, no condensed statements of cash flows are presented
for the years ended December 31, 1995 and 1994):
CONDENSED BALANCE SHEETS
1996 1995
----------- -----------
ASSETS
Cash $ 162 $ --
Investment in subsidiaries 1,526 55,405
----------- -----------
$ 1,688 $ 55,405
=========== ===========
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value;
75,000,000 shares authorized;
27,000,000 and 450,000 shares
outstanding, respectively) $ 27,000 $ 450
Additional paid-in capital 141,338 68
Retained earnings (deficit) (166,650) 54,887
----------- -----------
$ 1,688 $ 55,405
=========== ===========
CONDENSED STATEMENTS OF INCOME
1996 1995 1994
----------- ----------- -----------
Equity interest in net income of subsidiaries $ 11,742 $ 30,224 $ 21,693
Interest income 54 -- --
----------- ----------- -----------
Net income $ 11,796 $ 30,224 $ 21,693
=========== =========== ===========
F-17
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED
DECEMBER 31, 1996
-----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,796
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Equity investment in subsidiaries 119,771 CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from issuance of senior and junior preferred stock 67,000
Dividends on senior and junior preferred stock (4,862)
Distributions to shareholders (8,929)
Redemption of senior and junior preferred stock (67,000)
Issuance of common stock 5,500
Repurchase of shareholders' common stock and recapitalization (216,780)
Proceeds from initial public offering of common stock 93,666
--------
Net cash used in financing activities (131,405)
--------
Net increase in cash 162
Cash at beginning of year --
--------
Cash at end of year $ 162
========
Twin and ARP are, respectively, a direct and indirect wholly-owned subsidiary of
TLC. TLC and ARP have provided joint and several full and unconditional senior
subordinated guarantees of the senior subordinated notes of Twin (see Note 7b).
The assets, results of operations and shareholders' equity of Twin comprise
substantially all of the assets, results of operations and shareholders' equity
of TLC on a consolidated basis. TLC has no separate operations and has no
significant assets other than TLC's investment in Twin and, through Twin, in
ARP. Twin has no direct or indirect subsidiaries other than ARP; and neither
Twin nor ARP has any stockholder other than, respectively, TLC and Twin.
Accordingly, the Company has determined that separate financial statements of
Twin and ARP would not be material to investors and, therefore, are not included
herein.
Summarized financial information of Twin is as follows:
1996 1995 1994
----------- ----------- -----------
Current assets $ 68,100 $ 58,663 $ 48,716
Noncurrent assets 74,979 16,646 15,990
Current liabilities 39,426 14,233 10,480
Noncurrent liabilities 100,423 5,671 5,555
Shareholder's equity 3,230 55,405 48,671
Net sales 170,075 148,735 117,342
Gross profit 70,248 58,803 47,095
Net income 11,742 30,224 21,693
F-18
Summarized financial information of ARP is as follows:
1996 1995 1994
----------- ----------- -----------
Current assets $ 1,577 $ 1,266 $ 1,339
Noncurrent assets 182 168 168
Current liabilities 1,200 1,211 1,157
Noncurrent liabilities -- -- --
Shareholder's equity 559 223 350
Net sales 5,862 5,200 3,930
Gross profit 886 259 711
Net income (loss) 392 (128) 466
16. SUBSEQUENT EVENT
PLANT EXPANSION - In January 1997, the Company entered into a contract
for the purchase of an approximately 110,000 square foot facility near
its currently owned facility in Ronkonkoma, New York, which would be used
to expand the Company's manufacturing and warehousing capabilities and
office-space. The cost to the Company of the facility, including
anticipated renovations, is expected to aggregate approximately $6,500.
The purchase is expected to be consummated in the second quarter of 1997
and is subject to customary conditions, including due diligence review by
the Company.
F-19
SCHEDULE II
TWINLAB CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
-----------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE
BEGINNING COST AND ACCOUNTS DEDUCTIONS AT END OF
DESCRIPTIONS OF PERIOD EXPENSES - DESCRIBE - DESCRIBE PERIOD
------------ --------- -------- ---------- ---------- ------
YEAR ENDED DECEMBER 31, 1996:
Allowance for bad debts $ 177 $125 $-- $ 94[1] $ 208
====== ==== === ==== =======
Reserve for excess and
slow moving inventory $ 515 $625 $-- $515[1] $ 625
====== ==== === ==== =======
YEAR ENDED DECEMBER 31, 1995:
Allowance for bad debts $ 63 $169 $-- $ 55[1] $ 177
====== ==== === ==== =======
Reserve for excess and
slow moving inventory $ 100 $415 $-- $ -- $ 515
====== ==== === ==== =======
YEAR ENDED DECEMBER 31, 1994:
Allowance for bad debts $ 123 $(59) $-- $ 1[1] $ 63
====== ===== === ==== =======
Reserve for excess and
slow moving inventory $ -- $100 $-- $ -- $ 100
====== ===== === ==== =======
(1) Amounts written off.
S-1