TWINLAB CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

[X] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
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)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (631) 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. [X]

The aggregate market value of shares of Common Stock of the registrant held
by non-affiliates based on the last reported sales price for the Common Stock on
March 24, 2003, as reported on the OTC Bulletin Board, was approximately
$1,731,000.

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of shares of Common Stock of the registrant held
by non-affiliates based on the last reported sales price for the Common Stock on
June 28, 2002, as reported on the Nasdaq National Market, was approximately
$6,800,000.

As of March 24, 2003, the registrant had 29,222,106 shares of Common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the 2003 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report.
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NOTE

Twinlab Corporation's Annual Report on Form 10-K filed with the Securities and
Exchange Commission includes all exhibits required to be filed with the Annual
Report. Copies of this Annual Report on Form 10-K, not including any of the
exhibits listed under Item 15(c) of this Annual Report, are available without
charge upon written request. Please contact the office set forth below to
request copies of this Annual Report on Form 10-K and for information as to the
number of pages contained in each of the exhibits and to request copies of such
exhibits:

Corporate Secretary
Twinlab Corporation
150 Motor Parkway
Hauppauge, NY 11788

i

TWINLAB CORPORATION 2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

ii

PART I

Information contained or incorporated by reference in this Annual Report
may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. See, e.g., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Business Strategy."
Forward-looking statements involve substantial risks and uncertainties and
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance, the Company's operations,
performance, financial condition, growth and acquisition strategies, margins and
growth in sales of the Company's products. Such forward looking statements by
their nature involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the Company's control, which may cause actual results,
performance or achievements to differ materially from those projected or implied
in such forward-looking statements. As a result, no assurance can be given that
the future results covered by such forward-looking statements will be achieved.
Factors that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things, those discussed in "Factors Affecting Future
Performance" under the caption "Business" in Item 1 of this Annual Report. Other
important factors and risks that may affect future results include but are not
limited to: (i) the impact of competitive products; (ii) changes in law and
regulations; (iii) adequacy and availability of insurance coverage; (iv)
limitations on future financing; (v) increases in the cost of borrowings and
unavailability of debt or equity capital; (vi) the effect of adverse publicity
regarding nutritional supplements; (vii) uncertainties relating to acquisitions;
(viii) the inability of the Company to gain and/or hold market share; (ix)
exposure to and expense of resolving and defending product liability claims and
other litigation; (x) consumer acceptance of the Company's products; (xi)
managing and maintaining growth; (xii) customer demands; (xiii) the inability to
achieve cost savings and operational efficiencies from the recent consolidation
of the manufacturing and distribution facilities; (xiv) dependence on individual
products; (xv) dependence on individual customers, (xvi) market and industry
conditions including pricing, demand for products, levels of trade inventories
and raw materials availability, (xvii) the success of product development and
new product introductions into the marketplace including the Company's line of
ephedra-free products; (xviii) lack of available product liability insurance for
ephedra-containing products; (xix) slow or negative growth in the nutritional
supplement industry; (xx) the departure of key members of management; (xxi) the
absence of clinical trials for many of the Company's products; (xxii) the
ability of the Company to efficiently manufacture its products; as well as other
risks and uncertainties that are described from time to time in the Company's
filings with the Securities and Exchange Commission. For the purpose of this
Annual Report, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. The Company
accepts no obligation to update any forward-looking statements and does not
intend to do so.

Unless the context otherwise requires, the terms "Company" and "Twinlab"
refer to Twinlab Corporation and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. ("Twin"), Twin Laboratories (U.K.) Ltd.,
Twinlab Mail Order, Inc. (formerly PR*Nutrition, Inc. ("PR*Nutrition")), Twinlab
Catalog Corp. (formerly Bronson Laboratories, Inc. ("Bronson")) and Tempe
Manufacturing Corp. (formerly Health Factors International, Inc. ("Health
Factors")).

ITEM 1. BUSINESS

RECENT DEVELOPMENTS

On February 28, 2003, the U.S. Food and Drug Administration, Department of
Health and Human Services ("HHS") announced a series of actions that will
potentially regulate the manner in which products containing the ingredient
ephedra are marketed, including a thirty-day comment period to create a record
to support potential restrictions that could range from label requirements to a
ban of the ingredient.

On November 11, 2002, the Company announced that it decided to discontinue
the sale of products that contain ephedra effective on or about March 31, 2003.
This decision was reached as a result of increasing costs

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that have been negatively impacting the profitability of these products, coupled
with consumer demand for non-ephedra weight loss products. The Company expects
to experience a reduction in net sales due to the discontinuation of these
products. Based upon anticipated costs savings expected to be achieved, however,
the Company does not believe that the decision to discontinue the sale of
products that contain ephedra should have a material adverse effect on the
profitability of the Company.

On January 17, 2003, the Company sold substantially all of the assets,
including inventory, of Bronson to a privately held dietary supplement
manufacturer for approximately $8 million. The Company anticipates recording an
aggregate pre-tax gain of approximately $1.7 million during the first quarter of
2003 in connection with the sale of these assets. Bronson's results of
operations have been classified as discontinued operations and prior periods
have been reclassified.

In addition, as a result of the sale of Bronson, effective January 17,
2003, the Company completed an amendment to its Revolving Credit Facility. The
amendment, among other things, revised the financial covenants relating to
EBITDA (as defined therein) and reduced the total facility from $50 million to
$45 million.

On July 24, 2002, the Company announced a comprehensive restructuring of
its operations designed to improve the Company's financial performance and
operating results. The restructuring, designed to reduce costs and better align
the Company's operational infrastructure to its sales volume, resulted in the
consolidation of the New York manufacturing and distribution facilities into the
Company's modern FDA-registered facility located in American Fork, Utah. The
Company's corporate offices and certain operational functions remain in New
York. The consolidation of the facilities has been substantially completed
during fiscal 2002 and is anticipated to be completed during the first half of
2003. The Company recorded restructuring charges of $9.6 million and asset
impairment charges of $7.2 million in connection with the consolidation of the
facilities. The Company anticipates recording additional restructuring charges
in connection with this consolidation of up to $1.0 million, substantially all
of which are expected to be recorded during the first half of 2003.

On May 22, 2002, the Company completed the sale of substantially all of the
fixed assets of its Health Factors subsidiary for approximately $2.1 million to
Anabolic Laboratories, Inc. ("Anabolic"). The products manufactured by Health
Factors were, in significant part, transferred to other Twinlab manufacturing
facilities. Other production related to Bronson was outsourced to Anabolic while
the manufacture of certain private label products was discontinued.

GENERAL

The Company is a leading manufacturer and marketer of brand name
nutritional supplements sold through health and natural food stores, national
and regional drug store chains, supermarkets, mass merchandise retailers and
military post exchanges. The Company develops, manufactures and sells vitamins,
minerals and specialty supplements ("VMS"), sports nutrition products and diet
and energy products under the Twinlab, Ironman Triathlon, "Fuel" and other brand
names; an extensive line of herbal supplements and phytonutrients under the
Nature's Herb brand name; and a full line of herbal teas under the Alvita brand
name. The Company emphasizes the development and introduction of high-quality,
unique nutraceutical products. The Company's premium product quality, broad
product line, strong history of new product introductions and innovations have
established Twinlab as a leading and widely-recognized brand in the industry.
The Company targets its products to consumers who utilize nutritional
supplements in their daily diet and who demand premium quality ingredients in a
broad variety of dosages and delivery methods.

As previously disclosed, the Company completed the sale of substantially
all of the assets of Bronson on January 17, 2003 and Bronson's results of
operations have been classified as discontinued operations. As a result of this
transaction, the Company no longer operates in the direct-to-consumer segment.
Accordingly, the Company operates in one segment, the retail segment. Products
sold through this segment are distributed through the health and natural food
store channel and mass market channel.

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- Health and Natural Food Store Channel -- The Company's Twinlab, Nature's
Herbs and Alvita brand products are sold primarily through a network of
distributors to nearly 11,000 health and natural food stores and other
selected retail outlets. The health and natural food store channel of
distribution includes national chains such as General Nutrition
Companies, Inc. ("GNC"), Whole Foods Markets, Inc. ("WFM"), Wild Oats
Markets, Inc. ("Wild Oats") and Vitamin Shoppe Industries, Inc. ("Vitamin
Shoppe") as well as local and regional chains and stores. Sales to the
health and natural food store channel, primarily through distributors,
continue to represent the Company's largest market, totaling
approximately $92.3 million, or 63.0%, of the Company's net sales in
2002.

- Mass Market Channel -- The mass market channel consists of drug store
chains, supermarkets and other mass merchandisers. The Company provides
Twinlab-branded products as well as private label herbal products to
Wal-Mart Stores, Inc. ("Wal-Mart"), which are sold under Wal-Mart's
proprietary Spring Valley brand name. The Company also sells its products
through national and regional drug store and supermarket chains and other
mass merchandisers, such as Rite Aid Corporation, Walgreens, CVS, Kroger,
Albertson's and Target. Approximately $54.3 million, or 37.0%, of the
Company's 2002 net sales were attributable to the mass market channel.

For additional financial information regarding the Company's operating
segments, see Note 15 to the Notes to the Consolidated Financial Statements.

Twinlab was incorporated under the laws of the State of Delaware in 1996
and maintains its principal executive offices at 150 Motor Parkway, Hauppauge,
New York 11788. Its telephone number is 631-467-3140.

BUSINESS STRATEGY

The Company's strategy is to increase sales, profits and market share by
further enhancing its leadership position in the sale of vitamins, sports
nutrition products, weight management and other nutritional supplements to
health and natural food stores and mass market accounts. The Company plans to
implement this strategy by: (i) capitalizing on the strength of its established
brands; (ii) developing and introducing innovative channel-specific products;
(iii) increasing penetration of foreign markets; and (iv) improving
manufacturing and operational efficiencies.

Specifically, the Company seeks to:

(i) Further Strengthen Portfolio of Brands -- Twinlab has developed a
portfolio of core brands that is among the most recognized in the vitamin and
nutritional supplement industry. The Company intends to expand on this awareness
and increase loyalty of the Twinlab brand in the health and natural food store
and mass market distribution channel through incremental distribution, customer
specific marketing programs and national advertising.

(ii) Continue to Introduce Innovative Products -- A cornerstone of the
Company's strategy is to utilize innovative scientific and medical findings in
its new product development efforts. The Company has consistently been among the
first in its industry to introduce new products and product innovations that
anticipate and meet customer demands for newly identified nutritional supplement
benefits. Product innovation and distribution will be driven by consumer needs
and purchasing behavior. Specifically, sports nutrition products will be focused
on meeting demands of consumers shopping in specialty sports retailers, diet and
energy products will be focused on consumers of national mass market accounts
and VMS will be focused on national chain and independent health and natural
food store consumers. The Company's geographically diverse network of wholesale
distributors allows it to achieve rapid and broad distribution for new product
launches. Over ten new products have already been introduced in 2003.

(iii) Increase Penetration of Foreign Markets -- Management believes there
are opportunities for the Company to expand its presence in foreign markets. The
Company's international sales force is supported by a

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network of approximately 60 overseas distributor organizations, serving over 70
foreign countries. Approximately $12.9 million or 8.8%, of the Company's net
sales in 2002 were derived from international sales.

(iv) Improve Manufacturing and Operational Efficiencies -- As previously
disclosed, in fiscal 2002, the Company sold several non-strategic businesses and
substantially completed the consolidation of its manufacturing and distribution
facilities. In addition, the Company implemented numerous cost saving
initiatives by reducing headcount and streamlining operations. The Company
believes these decisions will have a positive impact on its operations in fiscal
2003.

There can be no assurance that the Company will successfully implement all
or any part of its business strategy.

INDUSTRY

Based on estimates in recent market reports, management believes the U.S.
nutrition industry for vitamins, minerals and other supplements, including
sports nutrition products and nutritionally enhanced foods and diet products,
was approximately $53 billion in 2001. Of this total, supplement sales,
including vitamin, herbs and minerals, accounted for approximately $18 billion.
The supplements category grew significantly during the late 1990's due in part
to widespread publicity surrounding the purported benefits of herbs such as
echinacea, garlic, ginseng, gingko, saw palmetto and St. John's Wort.

Despite the aforementioned growth, however, industry sources indicate that
the growth rate in the nutritional supplement industry slowed significantly in
1999 through 2001. In 2001, industry sources indicated that vitamin sales grew
less than 1%, minerals grew 3%, herbal supplements grew 1.4%, specialty
supplements grew 7%-10% and sports nutrition and weight management grew 13%. For
2001, total supplement sales grew 4.2% and the overall nutrition industry grew
6.7%. Management believes this slowdown was partially due to a decline in sales
at the retail level of St. John's Wort and other herbal products, largely as a
result of media attention and a more generalized industry-wide slowing of growth
across most product categories.

In addition, while public awareness of the positive effects of vitamins and
nutritional supplements on health was heightened by widely publicized reports of
scientific findings supporting such claims during 1997-1998, management believes
that negative media attention focusing on questions of efficacy, safety and
label claim content have had a significant adverse impact on the supplement
industry during 2000-2002. Management believes that the slowdown in growth in
the nutritional supplement industry has also been caused by the lack of a new
"blockbuster" product and increasing competition, including intense private
label expansion.

Management remains cautiously optimistic about potential growth of certain
segments of the nutritional supplement industry due, in part, to the presence of
the following trends: (i) favorable demographic trends towards older Americans,
who are more likely to be health conscious as they experience middle age and
older age health issues; (ii) product introductions in response to new
scientific research findings supporting the positive health effects of certain
nutrients; (iii) increased consumer interest in specific supplements; and (iv)
the heightened understanding and awareness of healthier lifestyles and a
connection between diet and health.

PRODUCTS

The Company develops, manufactures and markets a highly diversified array
of high quality products in many product categories. The Company's product line
includes: vitamins, minerals and specialty supplements, sports nutrition
products and diet and energy products, marketed under the Twinlab, Ironman
Triathlon, "Fuel" and other brand names, an extensive line of herbal supplements
and phytonutrients under the Nature's Herbs brand name and a full line of herbal
teas under the Alvita brand name. The Company is also engaged in the private
label manufacture of products for a limited number of third parties.

Among the innovative products launched by Twinlab in 2002 were Power Pro
Fuel 50, Xtreme Anabolic Fuel, Diet Fuel Weight Loss Drink, Dia-Balance, Carp-L
Care and Glucosamine Chondroitin MSM with

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Natural Astaxanthin. Additionally, the Company significantly improved the
formulas of its leading products to improve efficacy including Daily One Caps,
Infant Care and Pre-Natal Care. These launches are strategically aligned with
the Company's strategy to develop channel-specific products to optimize sales
and best serve key consumer targets.

The Company's products are generally available in a variety of forms,
including, capsules, tablets, powders and liquids to accommodate a variety of
consumer preferences. The Company targets a broad array of health conscious
consumers, with particular emphasis on consumers who utilize nutritional
supplements in their daily diet and who prefer premium quality ingredients in a
variety of dosages and delivery methods.

VMS products sold include multivitamins such as Daily One Caps and Animal
Friends, single-entity vitamins such as B-1 Caps and Mega E Softgels, minerals
such as Calcium Citrate Caps and Magnesium Caps and amino acids such as
L-Glutamine Caps and Mega L-Carnitine Tabs. Twinlab's specialty supplements
consist of a broad assortment of products formulated to meet the needs of
consumer concerns. Specialty supplements are primarily targeted to sophisticated
users of health related products who primarily purchase their supplements in
health and natural food stores.

Sports nutrition products sold consist of a wide variety of nutritional
supplements designed for and targeted to active lifestyle consumers. Sports
nutrition products include Ultra 3 Growth Fuel, Power Pro Fuel 50 and Xtreme
Anabolic Fuel.

Diet and energy products consist of four distinct brands: Ripped Fuel, Diet
Fuel, Metabolift and Energy Fuel. These brands have unique (ephedra free)
formulas that help individuals achieve their personal physical goals. Ripped
Fuel is targeted toward active males who are trying to lose weight and improve
their appearance, Diet Fuel is for younger active females who want to get toned,
Metabolift is for females who want to lose weight and Energy Fuel is for those
who are seeking to gain positive energy.

The Company believes that its sports nutrition and diet and energy products
serve to increase the Company's brand awareness among customers who, as they
grow older, are likely to shift their buying patterns to include the Company's
vitamins, herbs and other nutraceuticals.

Through its Nature's Herbs brand, the Company produces an extensive line of
herbal supplement and phytonutrient products, many of which offer natural
alternatives to over-the-counter medications. The Company's herbal products
include single herbs, such as saw palmetto, garlic, ginseng and golden seal;
traditional combinations, such as echinacea-golden seal; standardized extracts,
such as St. John's Wort Power, Gingko Power and Bilberry Power sold under the
Nature's Herbs POWER HERBS(R) brand name; and natural health care product
formulations, such as Allerin and Coldrin. The Company manufactures and supplies
herbal supplements to Wal-Mart for its Spring Valley private label line.

Through its Alvita product line, the Company offers herb teas in both
single use bags and bulk. Created in 1922, Alvita is one of the nation's oldest
herbal tea brands. The Company purchases tea in bulk form, formulates blends of
natural herb teas and designs the packaging for its products. Alvita's teas are
currently blended and packaged at the Utah Facility and by an independent
contractor. Alvita teas include Peppermint Leaf, Chamomile, Echinacea, Golden
Seal, Ginger and Senna Leaf, as well as new-age blends such as Chinese Green
Tea, available in a variety of citrus flavors.

PRODUCT DEVELOPMENT

The Company closely monitors consumer trends and scientific research, and
has consistently introduced innovative products and programs in response
thereto. The Company regularly studies scientific, 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. The Company intends to continue developing new products and
programs in the future through internal development, strategic third party
alliances and licensing agreements. Several new products were introduced in
2002, including Power Pro Fuel 50, Xtreme Anabolic Fuel, Diet Fuel Weight Loss
Drink, Dia-Balance, Carp-L Care and Glucosamine Chondroitin MSM with Natural
Astaxanthin. The Company's research and development expenses were approximately
$2.0 million, $2.7 million and $2.5 million in 2002, 2001 and 2000,
respectively.

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SALES AND DISTRIBUTION

The Company sells its products primarily through a network of distributors,
which service approximately 11,000 health and natural food stores throughout the
country and other selected retail outlets. Sales to domestic distributors
represented approximately 54.2% of the Company's net sales in 2002. The
Company's distributor customers include Tree of Life, United Natural Foods,
Inc.("UNFI"), Nature's Best Distributors and other distributors that supply
retailers of vitamins, herbs and other nutritional supplements. Management
believes that it sells its products to every major domestic nutritional
supplement distributor servicing health and natural food stores and is generally
the largest independent supplier of nutritional supplements to such
distributors.

Several of the Company's distributors, such as Tree of Life and UNFI, are
national in scope, but most are regional in nature and operate one or more
localized distribution centers. Health and natural food store 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 or the cessation of distribution activities by a distributor.

Tree of Life, Wal-Mart and UNFI accounted for approximately 18%, 14% and
13%, respectively, of the Company's net sales in 2002. No other single customer
accounted for more than 10% of the Company's net sales in 2002. The largest
retail organization in the health and natural food store channel that sells the
Company's products is GNC, with over 4,200 stores.

The Company's customers among mass market retailers include Wal-Mart,
Albertson's, Rite Aid Corporation, Walgreens, CVS, Kroger and Target.

Approximately $12.9 million, or 8.8%, of the Company's net sales in 2002
were derived from international sales. The Company presently has distribution
agreements covering many western European countries including Great Britain,
France, Belgium, the Netherlands and the Scandinavian countries; Latin American
countries including Mexico, Chile and Argentina; Middle Eastern countries
including Israel and Saudi Arabia; and several other countries in Asia.

ADVERTISING AND MARKETING

The Company's advertising expenditures were approximately $14.1 million in
2002, $14.9 million in 2001, and $16.8 million in 2000. The Company's
advertising strategy is to generate consumer awareness and trial of new products
in addition to increasing loyalty and generating trial of its existing brands.
The communication focuses on building brand equity and demonstrating unique
and/or superior benefits to consumers.

Print advertisements continue to be an integral part of the Company's
advertising efforts. During 2002, the Company advertised in consumer magazines
and newspapers such as Maxim, GQ, Flex, Prevention, Physical, Muscular
Development, Better Nutrition and Cosmopolitan.

Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as the Ironman Triathlon
World Championship in Hawaii, and bodybuilding shows, including The Arnold
Classic, The Olympia and Fitness America. In addition, the Company promotes its
products at major industry trade shows and through in-store point of sale
materials. The Company also, from time to time, 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 internet presence includes various sites on the World Wide
Web, including http://www.twinlab.com, which provides an overview of the
Company. The site also provides a list of retailers carrying the Company's
products and is "linked" to other Company sites, including those of the
Company's herbal supplement and teas business http://www.herbalvillage.com.
Information and other materials contained in any of the Company's World Wide Web
sites shall not be deemed to be a part of or incorporated by reference into this
Annual Report on Form 10-K.

In addition, the Company's products are sold through many third-party
websites including vitaminshoppe.com and drugstore.com. These third-party
websites are not affiliated with the Company in any manner whatsoever.

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CUSTOMER SALES SUPPORT

The Company's customer relationships at the wholesale and retail levels are
based upon the Company's long-standing commitment to customer service. The
Company's sales force consists of approximately 40 dedicated sales professionals
who work to gain better placement and additional shelf space for Twinlab
products and to stay abreast of customer needs. These sales representatives are
assigned to specific territories located within the continental United States.
These sales people work with distributors and retailers to enhance knowledge of
the Company's products and to maximize shelf exposure for Twinlab products. The
Company services its mass market accounts through a full-time in-house staff of
sales professionals and a nationwide broker network. The Company, through its
in-house creative services team, also designs, produces and supplies a broad
range of marketing literature, including brochures, pamphlets and in-store
display materials to help educate retailers and consumers as to the benefits of
the Company's products.

The Company maintains in-house consumer service and customer sales support
departments to respond to inquiries concerning product applications, background
data, ingredient compositions and the efficacy of products. The consumer service
departments are staffed by full-time nutrition experts and other specially
trained employees.

MANUFACTURING AND PRODUCT QUALITY

Most of the Company's products are manufactured at the Company's 168,000
square foot FDA-registered facility located in American Fork, Utah (the "Utah
Facility") and, through January 2003, at the Company's 72,000 square foot
manufacturing facility located in Ronkonkoma, New York (the "Ronkonkoma
Facility"). The Company's products are packaged at and distributed from the Utah
Facility and, through December 2002, at the Company's 106,515 square foot
warehousing and packaging facility located in Bohemia, New York (the "Bohemia
Facility"). On July 24, 2002, the Company announced a comprehensive
restructuring of its operations that resulted in the consolidation of the
Ronkonkoma and Bohemia Facilities into the Company's Utah Facility. The
consolidation of the facilities has been substantially completed during 2002 and
is anticipated to be completed during the first half of 2003. In January 2003,
the Company agreed with its landlord to an early termination of the Bohemia
Facility lease. The Ronkonkoma Facility is being actively marketed for sale. The
Company's manufacturing facilities provide the Company with a high level of
quality control. The Company actively upgrades its facilities and enhances its
manufacturing capabilities through new equipment purchases and technological
improvements. Management believes that the Company's Utah Facility will be
sufficient to enable the Company to meet sales demand for the foreseeable
future. Management believes that the Utah Facility is among the most advanced in
the nutritional supplement industry. See Item 2 "Properties."

The Company's modern manufacturing operations feature the highest quality
blending, filling and packaging capabilities, which enable the Company to offer
quality and consistency in formulation and dosage forms. The Company operates
flexible manufacturing lines which enable it to efficiently and effectively
shift output among various products as dictated by customer demand. In addition,
the Company utilizes outside contractors for the hydration and bottling of its
single-serving sports drink products and its food bar products and in 2003 has
outsourced the production of many of its powder and liquid products under the
Company's supervision and specifications.

In 2003, the Company was presented with ConsumerLab.com's Consumer
Satisfaction Award for receiving the highest ratings among retail brands in its
"Supplement Users Survey." The results of the survey showed that 83 percent of
Twinlab users rated their overall satisfaction with Twinlab products as
"excellent" or "very high."

In 2000, the National Nutritional Foods Association ("NNFA") provided
Twinlab's manufacturing facilities with an "A" rating. An "A" rating indicates
the Company has excellent compliance with the Good Manufacturing Practices
promulgated by the NNFA, a leading industry trade association.

The Company sources its raw material needs from many different suppliers,
including some of the largest pharmaceutical and chemical companies in the
world. The Company's raw materials and packaging supplies

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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 2002.

The Company believes that it has established a reputation for superior
product quality based on the premium nature of its products. All capsule and
tablet products manufactured by the Company are visually inspected before being
packaged. Moreover, the Company's products undergo 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 in-house laboratories with state-of-the-art
testing and analysis equipment where the Company performs most of its testing,
including stability tests, active component characterization utilizing
thin-layer and high-pressure liquid chromatography, and UV visible and infrared
spectrometry. The Company contracts with independent laboratories to perform the
balance of its testing requirements. A team of full-time quality assurance
professionals regularly conducts a wide variety of visual and scientific tests
on finished products, and samples of raw materials and finished products are
generally retained for quality control purposes.

The Company has a strong commitment to maintaining the quality of the
environment. The Company's plastic and corrugated cardboard containers are
recyclable. In addition, the Company has removed most solvents from its
production processes (using natural, environmentally-safe alternatives). The
Company believes it is in material compliance with all applicable environmental
regulations.

During 2001, the Company completed the implementation of a corporate-wide
Enterprise Resource Planning ("ERP") system which is providing enhanced delivery
of management information and has strengthened the Company's financial
processes.

COMPETITION

Vitamins and nutritional supplements are sold primarily through the
following channels of distribution: health and natural food stores, mass market
retailers (drug store chains, supermarkets and other mass merchandisers) and
direct sales channels (including network marketing, catalog and internet
distribution).

The Company's principal competitors in the health and natural food store
channel include Nutraceutical International Corporation, Weider Nutrition
International, Inc., Nature's Way Products, Inc., Natrol, Inc., Nature's Plus
Inc., and Solgar Vitamin and Herb Company. Private label products of the
Company's retail customers also provide competition to the Company's products.
For example, a substantial portion of GNC's vitamin and mineral supplement
offerings are products offered under GNC's own private label.

The Company believes that it competes favorably with other nutritional
supplement companies because of its comprehensive line of premium products,
premium brand name, commitment to quality, ability to introduce innovative
products, strong and effective sales force and distribution network, and
targeted advertising and promotional support.

In the mass market channel of distribution, the Company competes with major
private label and broadline brand manufacturers, including, Pharmavite Corp.,
Rexall Sundown, Inc., NBTY, Inc. and Leiner Health Products Inc., most of which
are larger and have access to greater resources than the Company. Several major
pharmaceutical companies including Wyeth, Warner-Lambert and Bayer, all of whom
have substantially greater financial and personnel resources than the Company,
have also introduced proprietary branded lines of supplements into the mass
market channel. The Company believes it competes on the basis of customer
service, product quality and marketing support. The Company believes that it
competes favorably with other companies because of its (i) sales and marketing
support, (ii) customer service and (iii) reputation as being a supplier of
premium quality products.

8

REGULATORY MATTERS

GOVERNMENT REGULATION

The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by several
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency. These activities are
also regulated by various agencies of the states, localities and foreign
countries in which the Company's products are manufactured, distributed and
sold. The FDA, in particular, regulates the formulation, manufacture and
labeling of vitamin and other nutritional supplements in the United States while
the FTC governs marketing and advertising claims.

On October 25, 1994, the President of the United States of America signed
into law the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). This
law revised the provisions of the Federal Food, Drug, and Cosmetic Act (the
"FFDC Act") concerning the composition and labeling of dietary supplements. The
legislation created a statutory class of "dietary supplements." This class
includes vitamins, minerals, herbs, amino acids and other dietary substances for
human use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients on the market before October 15, 1994. A
dietary supplement which contains a new dietary ingredient, one not on the
market before October 15, 1994, requires evidence of a history of use or other
evidence of safety establishing that it will reasonably be expected to be safe.
The substantial majority of the products marketed by the Company are classified
as dietary supplements under the FFDC Act.

Both foods and dietary supplements are subject to the Nutrition Labeling
and Education Act of 1990 (the "NLEA"), which prohibits the use of any health
claim for foods, including dietary supplements, unless the health claim is
supported by significant scientific agreement and is either pre-approved by the
FDA or the subject of substantial government scientific publications and a
notification to the FDA. To date, the FDA has approved the use of only a limited
number of health claims for dietary supplements. However, among other things,
the DSHEA amends, for dietary supplements, the NLEA by providing that
"statements of nutritional support" may be used in labeling for dietary
supplements without FDA preapproval if certain requirements, including prominent
disclosure on the label of the lack of FDA review of the relevant statement,
possession by the marketer of substantiating evidence for the statement and
post-use notification to the FDA, are met. Such statements, commonly referred to
as "structure function" claims, may describe how particular nutritional
supplements affect the structure, function or general well-being of the body
(e.g. "promotes your cardiovascular health").

The Company believes it is in material compliance with FDA labeling
regulations. On February 28, 2003, the Company received, along with numerous
other companies in the industry, a "warning letter" from the FDA contending that
certain structure/function claims made on the Company's website with respect to
its Energy Fuel, Diet Fuel and Ultimate Diet Fuel products are not substantiated
by the scientific data available to the FDA. The claims at issue relate to the
promotion and preservation of lean muscle mass. The Company disagrees with the
position of the FDA on this issue and has submitted a response to the FDA
setting forth the scientific substantiation that it believes supports the claims
at issue.

Advertising and label claims for dietary supplements and conventional foods
have been regulated by state and federal authorities under a number of disparate
regulatory schemes. There can be no assurance that a state will not interpret
claims presumptively valid under federal law as illegal under that state's
regulations, or that future FDA regulations or FTC decisions will not restrict
the permissible scope of such claims.

Governmental regulations in foreign countries where the Company plans to
commence or expand manufacturing or sales may prevent or delay entry into the
market or prevent or delay the introduction, or require the reformulation or
relabeling of certain of the Company's products. Compliance with such foreign
governmental regulations is generally the responsibility of the Company and 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 ingredients and revised

9

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 record keeping, expanded
documentation of the properties of certain products, expanded or different
labeling, and/or scientific substantiation. Any or all of such requirements
could have a material adverse effect on the Company's results of operations and
financial condition.

The Company's Utah Facility is registered with the FDA as a manufacturer of
OTC drugs and is subject to periodic inspection by the FDA.

Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company.

On February 28, 2003, the HHS announced a series of actions that will
potentially regulate the manner in which products containing the ingredient
ephedra are marketed, including a thirty-day comment period to create a record
to support potential restrictions that could range from label requirements to a
ban of the ingredient.

See "Factors Affecting Future Performance -- Ma Huang" and Item 3. "Legal
Proceedings."

EMPLOYEES

At February 28, 2003, the Company employed 486 persons, of which 182 were
involved in executive, sales, marketing 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 AND PATENTS

The Company owns well over 200 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 the Fuel family of
trademarks, and has rights to use other marks material to its business. The
Ironman Triathlon trademark is licensed to the Company. Federally registered
trademarks have perpetual life, provided they are renewed on a timely basis and
used properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. The Company regards its trademarks and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products. The Company vigorously protects its
trademarks against infringement. The Company currently owns one patent and is a
licensee of several other patents.

FACTORS AFFECTING FUTURE PERFORMANCE

AVAILABILITY OF FINANCING

The Company's Revolving Credit Facility expires on March 29, 2004. The
Company intends to enter into negotiations to extend the term of the Revolving
Credit Facility or to enter into an alternative borrowing arrangement which
would provide for future borrowings. There can be no assurance, however, that by
March 29, 2004, an extension of the Revolving Credit Facility will be
successfully negotiated or the Company will be able to enter into an alternative
borrowing arrangement on terms favorable to the Company. The absence of an
extension of the Revolving Credit Facility or alternative borrowing arrangement
would have a material adverse effect on the financial condition of the Company.
The Company anticipates that borrowings outstanding under the Revolving Credit
Facility will be classified as a current liability as of March 31, 2003.

The Company was in default of certain financial covenants relating to the
mortgage payable during fiscal 2002 for which a waiver was obtained through
April 3, 2003. The Company will be subject to the financial

10

covenant tests for the quarter ended June 30, 2003 and does not currently
anticipate being in compliance. Accordingly, the mortgage payable has been
classified as a current liability as of December 31, 2002. The Company has
entered into negotiations with the lender to amend the mortgage agreement,
however, there can be no assurance that an amendment will be successfully
negotiated. In the event that the Company is unable to amend the mortgage
agreement, the Company will be required to repay the mortgage in order to avoid
a cross-default under the terms of the Revolving Credit Facility.

RESTRICTIONS IMPOSED BY TERMS OF THE COMPANY'S INDEBTEDNESS

The Company's borrowing arrangements impose upon the Company certain
financial and operating covenants, including, among others, requirements that
the Company maintain certain financial ratios and satisfy certain financial
tests, limitations on capital expenditures and restrictions on the ability of
the Company to incur debt, pay dividends or take certain other corporate
actions, all of which may restrict the Company's ability to expand or to pursue
its business strategies. Changes in economic or business conditions, results of
operations or other factors could in the future cause a violation of one or more
covenants in the Company's debt instruments.

MA HUANG

A number of the Company's products include alkaloids from the herb known as
"Ma Huang," also known as ephedra, which contains naturally-occurring ephedrine
alkaloids. Some of the Company's products also contain caffeine or other central
nervous system stimulants. Products containing Ma Huang accounted for
approximately 21% of the Company's net sales in 2002.

Ma Huang has been the subject of extensive negative publicity in the United
States and other countries relating to alleged harmful or adverse effects. This
publicity has led to recent congressional hearings addressing the safety of Ma
Huang and several state governments have passed legislation regulating the sale
of products that contain Ma Huang. Recently, the Suffolk County (New York)
legislature passed a bill that bans retail sales of ephedra products in Suffolk
County. Other jurisdictions have proposed similar legislation. The current media
and political attention to Ma Huang is likely to lead to further legislation
related to the sale of products containing Ma Huang including the possible ban
of sale of these products.

On February 28, 2003, the HHS announced a series of actions that will
potentially regulate the manner in which products containing the ingredient
ephedra are marketed, including a thirty-day comment period to create a record
to support potential restrictions that could range from label requirements to a
ban of the ingredient. By letter dated March 13, 2003, the Committee on Energy
and Commerce of the U.S. House of Representatives requested certain information
from the Company related to, among other things, the sales history of its
products containing ephedra, any adverse health events associated with such
products, scientific studies related to such products and information related to
certain of the Company's non-ephedra products. The Company has provided a
comprehensive response to the Committee.

The Company has been named as a defendant in a number of pending lawsuits,
alleging that its Ma Huang products caused injury, death and/or damages, as well
as certain proceedings seeking class action certification for consumer fraud
related to the sale of such products. The Company is vigorously defending these
lawsuits. However, the Company is incurring, and expects to incur, significant
costs associated with this litigation activity. These costs are due in part to:
(i) greater costs for insurance premiums; (ii) significant self-insured
retention limits for claims alleging injuries after December 31, 2000; and (iii)
legal fees that are not covered under certain of the Company's insurance
policies. In particular, several of the class actions, as economic injury cases,
are not generally covered by insurance. At least one of the Ma Huang lawsuits
involving a claim of wrongful death is not currently covered by insurance.

The Company believes in the safety and efficacy of its products that
contain Ma Huang based on the scientific evidence. Nevertheless, as a result of
the increasing costs that are negatively impacting the profitability of these
products, coupled with consumer demand for non-ephedra weight loss products, the
Company decided to discontinue the sale of products that contain Ma Huang
effective on or about March 31, 2003. The Company expects to experience a
reduction in net sales due to the discontinuation of its products
11

that contain Ma Huang. Based upon anticipated costs savings expected to be
achieved, however, the Company does not believe that the decision to discontinue
the sale of products that contain Ma Huang should have a material adverse effect
on the profitability of the Company. The Company is committed to the Diet and
Energy category, specifically its Diet Fuel, Ripped Fuel and Metabolift brands,
and has launched a line of patented and clinically tested ephedra-free products.
See Item 3, "Legal Proceedings."

DEPENDENCE ON WHOLESALE DISTRIBUTORS AND CUSTOMERS

The Company's success depends in part upon its ability to attract, retain
and motivate a large base of wholesale distributors and its ability to maintain
a satisfactory relationship with Tree of Life, UNFI and Wal-Mart. The loss of
Tree of Life or UNFI as distributors or Wal-Mart as a customer, or the loss of a
significant number of other distributors or customers, or a significant
reduction in purchase volume by Tree of Life, UNFI, Wal-Mart or such other
distributors or customers, for any reason, could have a material adverse effect
on the Company's results of operations and financial condition.

COMPETITION

The business of developing, manufacturing and selling vitamins, minerals,
herbs, sports nutrition products, nutritional supplements and other
nutraceuticals is highly competitive in all channels of distribution. There are
numerous companies selling products competitive to the Company's products to
mass merchandisers, drug store chains, independent drug stores, supermarkets,
health and natural food stores, as well as through catalogs, the internet and
network marketing. Certain of the Company's competitors are substantially larger
and have greater financial resources than the Company. For example, GNC,
historically one of the Company's largest retail accounts, is owned by Royal
Numico N.V, which also owns Rexall Sundown, Met RX and Worldwide Sport
Nutrition, each of which is a competitor to the Company.

ABSENCE OF CLINICAL STUDIES AND SCIENTIFIC REVIEW; EFFECT OF PUBLICITY

While the Company conducts extensive quality control testing on its
products, the Company does not regularly conduct or sponsor clinical studies on
its products. The Company's products consist of vitamins, minerals, herbs and
other ingredients that the Company regards as safe when taken as suggested by
the Company. However, because the Company is highly dependent upon consumers'
perception of the safety and quality of its products as well as similar products
distributed by other companies (which may not adhere to the same quality
standards as the Company), the Company could be adversely affected in the event
any of the Company's products, or any similar products distributed by other
companies, should prove or be asserted to be harmful to consumers. In addition,
because of the Company's dependence upon consumer perceptions, adverse publicity
associated with illness or other adverse effects resulting from consumers'
failure to consume the Company's products as suggested by the Company or other
misuse or abuse of the Company's products or any similar products distributed by
other companies could have a material adverse effect on the Company's results of
operations and financial condition.

In addition, while public awareness of the positive effects of vitamins and
nutritional supplements on health was heightened by widely publicized reports of
scientific findings supporting such claims during 1997-1998, management believes
that negative media attention focusing on questions of efficacy, safety and
label claim content have had a significant adverse impact on the nutritional
supplement industry during 2000-2002. The low level of sales growth in the
nutritional supplement industry during 2000-2002 has also been caused by the
lack of new "blockbuster" products and increasing competition, including intense
private label expansion. There can be no assurance that these factors will not
be present in the future.

AVAILABILITY OF RAW MATERIALS

Substantially all of the Company's herbal supplements and herb teas contain
ingredients that are harvested by and obtained from third-party suppliers, and
many of those ingredients are harvested internationally and only once per year
or on a seasonal basis. An unexpected interruption of supply, such as a harvest
failure, could cause the Company's results of operations derived from such
products to be adversely affected.

12

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.

UNCERTAINTY RELATED TO ACQUISITIONS AND DIVESTITURES

Acquisitions and divestitures involve a number of risks that could
adversely affect the Company's operating results, including the diversion of
management's attention, the assimilation of operations and personnel, the
amortization of acquired intangible assets and the potential loss of key
employees. There can be no assurance that any acquired product lines or
businesses will be successfully integrated or that such product lines or
businesses, or the sale or divestiture of any business, will ultimately have a
positive impact on the Company, its financial condition or operations.

ITEM 2. PROPERTIES

The Company owns the Ronkonkoma and Utah facilities. The Company leases
approximately 30,120 square feet of space in a modern office building in
Hauppauge, New York which serves as its executive and administrative offices.
The Company also leases 26,300 square feet of warehouse space and 5,000 square
feet of office space in Ronkonkoma, New York. Effective January 31, 2003, the
Company and its landlord agreed to an early termination of the lease relating to
the Bohemia Facility. The Company believes that its facilities and equipment
generally are well maintained and in good operating condition. Management
believes that the Company's Utah Facility, coupled with its leased space in
Hauppauge will be sufficient to enable the Company to meet administrative,
manufacturing, warehousing, distribution and sales demand for the foreseeable
future. See Item 1 "Manufacturing and Product Quality".

ITEM 3. LEGAL PROCEEDINGS

The Company, like other manufacturers and retailers of products that are
ingested, faces an inherent risk of exposure to product liability claims in the
event that, among other things, an injury occurs during or after the use of its
products. The Company may be subjected to various product liability claims,
including, among others, that its products are unsafe, inadequately researched,
make false or misleading claims, contain contaminants or include inadequate
instructions as to use or inadequate warnings concerning side effects and
interactions with other substances. While such claims to date have not been
material to the Company, there can be no assurance that product liability claims
or the adverse publicity associated with any such claims will not have a
material adverse effect on the Company. The Company carries insurance to cover
the product liability risks associated with substantially all of its products,
however, there can be no assurance that such insurance will be adequate to cover
the risks associated with the business or that such insurance will continue to
be available at a reasonable cost, or if available, will be adequate to cover
liabilities. Indeed, such insurance has become increasingly expensive for any
significant level of coverage.

The Company has been named as a defendant in a number of pending product
liability lawsuits that the Company is vigorously defending. In reviewing its
potential exposure for product liability matters, the Company considers, among
other factors, recent and historical settlements and judgments, if any, the
incidence and trend of recent and historical claims, the nature of any alleged
injuries, the amount and availability of insurance coverage and the status of
litigation proceedings and settlement discussions.

Based on a current analysis prepared by management, with the assistance of
actuarial consultants, the Company has estimated a range of potential liability
in an amount it deems reasonable in connection with certain product liability
matters involving ephedra. Accordingly, the Company has established a reserve of
$3.8 million for product liability indemnity claims that is primarily based on
known claims and an estimate of unasserted claims involving ephedra that are
probable of assertion and can be reasonably estimated as of the balance sheet
date. Management expects that any payments relating to these matters will occur
over a number of years and has not discounted the potential liability as of
December 31, 2002, because the timing of any payments are not fixed or reliably
determinable at the present time. This reserve assumes continuing insurance for
ephedra related personal injury actions, albeit with a significant retention and
limited total coverage.

13

Because of the uncertainties related to the number of potential future
claims, ultimate settlement amounts, dismissal of such claims or any adverse
judgments, it is difficult to obtain precise estimates of the Company's ultimate
liability for such claims. It is possible that the total exposure to product
liability claims may be less than or greater than an amount within the Company's
estimated range of potential liability due to changes in facts or circumstances
after the date of each estimate. As additional experience is gained regarding
the Company's product liability claims, possible settlement discussions,
litigation history and insurance coverage, the Company will reassess its
potential liability and revise the amount of its reserve as appropriate.

There can be no assurance that the impact of the Company's self-insured
retention limits in the event of multiple damage awards or settlements, or any
award of damages in excess of the Company's insurance coverage limits (which
limits are significantly lower than in prior periods) or any materially
increased legal costs, will not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, one or more
large punitive damage awards, which are generally not insurable, could have a
material adverse effect on the financial condition and results of operations of
the Company.

Further, the Company's 2003 comprehensive general liability ("CGL")
insurance policy for non-Ma Huang products has a significantly higher
self-insured retention limit than in 2002 and the herbal product Kava-Kava is
expressly excluded from coverage under the 2003 policy. The Company has received
one Kava-Kava related wrongful death complaint in 2003. The Company plans to
vigorously defend itself against this action and is investigating whether any of
its CGL policies apply to this claim. If a CGL policy is not applicable to this
claim, a finding of liability and damages could have a material adverse effect
on the results of operation and financial condition of the Company. The Company
is unable to predict the outcome of this matter or to estimate a range of
potential loss. Accordingly, the effect, if any, that such action may have on
the Company's consolidated financial position or results of operations cannot be
determined at this time.

SECURITIES LAW LITIGATION

In March 2001, the Company announced that it reached an agreement in
principle to settle a shareholder securities class action lawsuit that was
pending against the Company and certain of its officers and directors before the
United States District Court for the Eastern District of New York (the "Court").
The lawsuit alleged that the Company and the other defendants violated the
securities laws by making material misstatements and failing to state material
facts about the Company's business and financial condition, among other things,
in securities act filings and public statements. The class of plaintiffs
included all buyers of the Company's stock from April 8, 1998 through February
24, 1999, other than the defendants and certain related parties. The Court
approved the settlement in February 2002. Pursuant to the settlement, the
Company paid $26 million, all of which was covered by the Company's insurance.

A series of shareholder securities class action lawsuits were filed in late
2000 and are pending before the Court against the Company and certain of its
officers and directors. The plaintiffs allege that the Company and the other
defendants violated the securities laws by making material misstatements and
failing to state material facts about the Company's business and financial
condition, among other things, in securities act filings and public statements.
The alleged class of plaintiffs includes all buyers of the Company's stock from
April 27, 1999 to November 15, 2000, other than the defendants and certain
related parties. A derivative action against certain of the Company's directors
was filed in June of 2001. The derivative action alleges that the named
directors violated certain fiduciary duties and alleges mismanagement, based
upon the facts alleged in the two securities class actions described above. The
Company believes that the claims are without merit and intends to vigorously
defend against the securities action and the derivative action. The Company has
filed a motion to dismiss the securities action and the derivative action,
however, the Company is unable to predict the outcome of these uncertainties or
to estimate a range of potential losses. Accordingly, the effect, if any, that
such actions may have on the Company's consolidated financial position or
results of operations cannot be determined at this time.

14

OTHER LEGAL ACTIONS

The Company is presently engaged in various other legal actions that arise
in the ordinary course of business, including product liability, breach of
contract claims and employment related matters. Although ultimate liability
cannot be determined at the present time, the Company believes that the amount
of any such liability, if any, from these other actions, after taking into
consideration the Company's insurance coverage, will not have a material adverse
effect on its results of operations or financial condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of fiscal year 2002, no matters were submitted to
a vote of security holders of the Company.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock of the Company was traded on the NASDAQ National Market
until September 19, 2002 and was traded on the NASDAQ Small Cap Market until
December 16, 2002. Effective December 17, 2002, the Common Stock of the Company
is traded on the OTC Bulletin Board. On March 24, 2003, the last reported sales
price of the Company's Common Stock as reported on the OTC Bulletin Board was
$0.11. As of March 24, 2003, there were 233 holders of record of the Company's
Common Stock. The following table shows for the periods indicated the high and
low sale prices for the Common Stock as reported by the NASDAQ National Market,
the NASDAQ Small Cap Market or the OTC Bulletin Board (indicated by an
asterisk).

The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Twinlab conducts its business through
its direct and indirect subsidiaries and has no operations of its own. The
principal assets of Twinlab are the capital stock of its direct and indirect
subsidiaries. Accordingly, Twinlab has no independent means of generating
revenues. As a holding company, Twinlab's internal sources of funds to meet its
cash needs, including payment of expenses, are dividends and other permitted
payments from its direct and indirect subsidiaries. Financing arrangements under
which Twin is the borrower restrict the payment of dividends and the making of
loans, advances or other distributions to Twinlab, except in certain limited
circumstances. The payment of cash dividends in the future will depend upon,
among other things, the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Company's Board of
Directors.

On August 1, 2002 and December 19, 2002, the Company issued 18,750 shares
of common stock (from shares held in treasury) to each of Brian Blechman, Dean
Blechman, Neil Blechman, Ross Blechman and Steve Blechman in consideration for
providing an aggregate letter of credit amounting to $15.0 million with respect
to the Company's obligations under its Revolving Credit Facility. Such common
stock was issued in transactions that were exempt from registration under
Section 4 (2) of the Securities Act.

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data as of December 31, 2002, 2001, 2000, 1999 and
1998 and for each of the years then ended has been derived from the audited
consolidated financial statements of the Company. The consolidated financial
statements as of December 31, 2002 and 2001, and for each of the three years in
the period ended December 31, 2002, is included elsewhere herein. The selected
financial data below also presents pro forma financial data relating to
PR*Nutrition's conversion of tax status from an "S" corporation to a "C"
corporation as a result of its acquisition by the Company. The selected
financial data should be read in conjunction with, and is qualified in its
entirety by, the Consolidated Financial Statements of the Company and the notes
thereto and the other financial information included in Item 15 to this Annual
Report.

16

- ---------------

(a) On April 17, 2001, the Company sold the assets of its Changes International
subsidiary. Changes International's results of operations have been
classified as discontinued operations and prior periods have been
reclassified. See Note 3 to the Notes to the Consolidated Financial
Statements.

(b) On January 17, 2003, the Company sold substantially all of the assets of
its Bronson subsidiary. Bronson's results of operations have been
classified as discontinued operations and prior periods have been
reclassified. See Note 3 to the Notes to the Consolidated Financial
Statements.

(c) Fiscal 2002 includes an incremental $8.8 million charge for sales returns
and allowances recorded during the quarter ended September 30, 2002
relating to a plan to rationalize product offerings to several key
customers in the retail segment.

(d) Represents costs recorded in connection with the consolidation of the
Company's New York manufacturing and distribution facilities into the
Company's Utah Facility. See Note 2 to the Notes to the Consolidated
Financial Statements.

(e) Represents non-cash impairment charges of $2,887 related to property and
equipment and the goodwill of Health Factors and $940 related to idle
packaging equipment leased under operating leases in fiscal 2001, and
$7,228 related to certain manufacturing and distribution assets as a result
of the consolidation of the facilities in fiscal 2002. See Note 2 to the
Notes to the Consolidated Financial Statements.

(f) Includes restructuring charges of $9,616 in fiscal 2002 discussed in (d)
above, asset impairment charges of $3,827 in fiscal 2001 and $7,228 in
fiscal 2002 discussed in (e) above and a provision for income taxes of
$22,801 in fiscal 2001 to establish a full valuation allowance against the
Company's deferred tax assets.

(g) PR*Nutrition was an "S" corporation prior to its acquisition in August
1998. Upon consummation of its acquisition, PR*Nutrition terminated its "S"
corporation status.

(h) (Loss) income from operations margin equals (loss) income from operations
as a percentage of net sales. Excluding the effect of the restructuring
charges discussed in (d) above and asset impairment charges discussed in
(e) above, the loss from operations margin would have been (10.7)% and
(9.1)% for fiscal 2002 and 2001, respectively.

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report.

RESULTS OF OPERATIONS

The Company conducts its operations through one reportable segment, the
retail segment. Products sold by the retail segment include vitamins, minerals
and specialty supplements, sports nutrition products and diet and energy
products primarily under the Twinlab, Ironman Triathlon, "Fuel" and other brand
names; an extensive line of herbal supplements and phytonutrients under the
Nature's Herbs brand name; and a full line of herbal teas under the Alvita brand
name. In addition, the Company distributed vitamins, herbs, nutritional
supplements and health and beauty aids under the Bronson brand name, through
catalogs and specialty direct mailings to customers, including healthcare and
nutritional professionals, and also manufactured, through Health Factors,
private label vitamins and supplements for a number of other companies on a
contract manufacturing basis. On May 22, 2002, the Company sold its Health
Factors' operations and on January 17, 2003, the Company sold substantially all
of the assets of Bronson. The Company also marketed nutritionally enhanced food
bars and other nutritional products under the PR*Bar trademark through
PR*Nutrition and conducted its publishing activities through ARP. On April 17,
2001, the Company sold the assets of its Changes International, Inc. ("Changes
International") and PR*Nutrition subsidiaries and on June 1, 2001, the Company
sold ARP. Bronson's and Changes International's results of operations have been
classified as discontinued operations and prior periods have been reclassified.

The following table sets forth, for the periods indicated, certain
historical income statement and other data for the Company and also sets forth
certain of such data as a percentage of net sales.

FISCAL 2002 COMPARED TO FISCAL 2001

Net Sales. Net sales for fiscal 2002 were $146.6 million, a decrease of
$40.5 million, or 21.6%, as compared to net sales of $187.1 million for fiscal
2001. In connection with a continuing review of its operations, the Company
committed to a plan to rationalize product offerings to several key customers in
the retail segment. This plan was aimed at reducing the number of active SKUs
and achieving a more appropriate product mix. In connection with this plan, the
Company is allowing these customers to return inventory which resulted in an
incremental charge for sales returns and allowances of approximately $8.8
million (the "Product Rationalization Charge") during the quarter ended
September 30, 2002. In addition, net sales to the retail segment were negatively
impacted by a reduction in sales to a major customer and reduced promotional
allowances to customers in the Health and Natural Food Store Channel as well as
some disruption in customer service as a result of the consolidation of the
facilities.

18

A number of the Company's products include alkaloids from the herb known as
"Ma Huang," also known as ephedra, which contains naturally-occurring ephedrine
alkaloids. Some of the Company's products also contain caffeine or other central
nervous system stimulants. Products containing Ma Huang accounted for
approximately 21% of the Company's net sales in 2002.

Ma Huang has been the subject of extensive negative publicity in the United
States and other countries relating to alleged harmful or adverse effects. This
publicity has led to recent congressional hearings addressing the safety of Ma
Huang and several state governments have passed legislation regulating the sale
of products that contain Ma Huang. Recently, the Suffolk County (New York)
legislature passed a bill that bans retail sales of ephedra products in Suffolk
County. Other jurisdictions have proposed similar legislation. The current media
and political attention to Ma Huang is likely to lead to further legislation
related to the sale of products containing Ma Huang including the possible ban
of sale of these products.

On February 28, 2003, the HHS announced a series of actions that will
potentially regulate the manner in which products containing the ingredient
ephedra are marketed, including a thirty-day comment period to create a record
to support potential restrictions that could range from label requirements to a
ban of the ingredient. By letter dated March 13, 2003, the Committee on Energy
and Commerce of the U.S. House of Representatives requested certain information
from the Company related to, among other things, the sales history of its
products containing ephedra, any adverse health events associated with such
products, scientific studies related to such products and information related to
certain of the Company's non-ephedra products. The Company has provided a
comprehensive response to the Committee.

The Company has been named as a defendant in a number of pending lawsuits,
alleging that its Ma Huang products caused injury, death and/or damages, as well
as certain proceedings seeking class action certification for consumer fraud
related to the sale of such products. The Company is vigorously defending these
lawsuits. However, the Company is incurring, and expects to incur, significant
costs associated with this litigation activity. These costs are due in part to:
(i) greater costs for insurance premiums; (ii) significant self-insured
retention limits for claims alleging injuries after December 31, 2000; and (iii)
legal fees that are not covered under certain of the Company's insurance
policies. In particular, several of the class actions, as economic injury cases,
are not generally covered by insurance. At least one of the Ma Huang lawsuits
involving a claim of wrongful death is not currently covered by insurance.

The Company believes in the safety and efficacy of its products that
contain Ma Huang based on the scientific evidence. Nevertheless, as a result of
the increasing costs that are negatively impacting the profitability of these
products, coupled with consumer demand for non-ephedra weight loss products, the
Company decided to discontinue the sale of products that contain Ma Huang
effective on or about March 31, 2003. The Company expects to experience a
reduction in net sales due to the discontinuation of its products that contain
Ma Huang. Based upon anticipated costs savings expected to be achieved, however,
the Company does not believe that the decision to discontinue the sale of
products that contain Ma Huang should have a material adverse effect on the
profitability of the Company. The Company is committed to the Diet and Energy
category, specifically its Diet Fuel, Ripped Fuel and Metabolift brands, and has
launched a line of patented and clinically tested ephedra-free products.

Gross Profit. Gross profit for fiscal 2002 was $47.1 million. Excluding
the effect of the Product Rationalization Charge, gross profit would have been
approximately $54.3 million, a decrease of $6.0 million, or 9.9% as compared to
$60.3 million for fiscal 2001. Excluding this charge, gross profit margin was
35.0% for fiscal 2002 as compared to 32.2% for fiscal 2001. This overall
decrease in gross profit dollars was primarily attributable to the lower sales
volume and the recording of a provision for excess and slow moving inventories
of $6.7 million. The increase in the gross profit margin was primarily
attributable to a reduction in overhead costs associated with cost reduction
initiatives.

Operating Expenses. Operating expenses were $62.8 million for fiscal 2002,
representing a decrease of $14.5 million, or 18.8%, as compared to $77.3 million
for fiscal 2001. As a percent of net sales, operating expenses decreased from
41.3% for fiscal 2001 to 40.4% for fiscal 2002 (excluding the Product
Rationalization Charge). The decrease in operating expenses was primarily
attributable to the elimination of ERP implementation costs, a reduction in
personnel related costs associated with cost reduction initiatives and the
elimination

19

of operating costs related to sold and discontinued businesses, partially offset
by increasing insurance costs and additional costs related to the consolidation
of the manufacturing and distribution facilities.

Included in operating expenses for fiscal 2002 is a net expense of
approximately $0.6 million relating to litigation matters. Such expense relates
to the recording of reserves for litigation matters and related costs offset by
proceeds of $5.4 million received from litigation settlements.

Restructuring and Asset Impairment Charges: On July 24, 2002, the Company
announced a comprehensive restructuring of its operations designed to further
improve the Company's financial performance and operating results. The
restructuring, designed to reduce costs and better align the Company's
operational infrastructure to its sales volume, resulted in the consolidation of
the New York manufacturing and distribution facilities into the Company's modern
FDA-registered facility located in American Fork, Utah. The Company's corporate
offices and certain operational functions remain in New York. The consolidation
of the facilities has been substantially completed during fiscal 2002 and is
anticipated to be completed during the first half of 2003.

Restructuring charges recorded during the year ended December 31, 2002
totaled $9.6 million and primarily represented facility and employee costs,
professional fees and other incremental costs. Facility costs represent
remaining lease payments for New York leased properties and equipment, and
holding and shutdown costs related to the New York manufacturing and
distribution facilities. Employee costs primarily represent severance and
related benefits associated with the separation of approximately 300 New York
employees. The majority of the employees left during the fourth quarter of 2002,
and it is anticipated that the balance will be leaving during the first half of
2003.

In addition, as a result of the consolidation of the facilities, certain
manufacturing and distribution assets were determined to be impaired resulting
in asset impairment charges of $7.2 million. The Company anticipates selling
these assets during fiscal 2003.

The consolidation of the manufacturing and distribution facilities is
expected to generate additional annualized cost reductions in excess of $6.0
million, commencing in the first quarter of 2003. The Company anticipates
recording additional restructuring charges of up to $1.0 million in connection
with this consolidation, substantially all of which are expected to be recorded
during the first half of 2003.

The Company recorded non-cash impairment charges totaling $33.8 million
during the year ended December 31, 2001. These charges consisted of $30.0
million related to the tradename, customer lists and goodwill of Bronson
(included in income (loss) from discontinued operations) and $2.9 million
related to property and equipment and the goodwill of Health Factors. The
impairment charges resulted from projected changes in the operating plans of
Bronson and Health Factors. The Company calculated the present value of expected
cash flows of these companies to determine the fair value of these assets. In
addition, the Company recorded an impairment charge of $0.9 million related to
idle packaging equipment leased under operating leases.

Loss from Operations. The Company recorded a loss from operations of
$(32.5) million for fiscal 2002, as compared to $(20.8) million for fiscal 2001.

Other (Expense) Income. Other (expense) income was a net expense of $8.0
million for fiscal 2002, as compared to $9.1 million for fiscal 2001. The net
decrease of $1.1 million was primarily attributable to a decrease in interest
expense as a result of reduced borrowings and lower interest rates.

Income Taxes. The Company recorded a federal benefit from income taxes of
$6.9 million for fiscal 2002. The benefit recorded represented a refund received
by the Company as a result of the Job Creation and Worker Assistance Act of
2002. The Company did not record a benefit from income taxes for losses incurred
during fiscal 2002 as it is more likely than not that such benefit will not be
realized.

The Company recorded a provision for income taxes of $22.8 million during
fiscal 2001 to establish a full valuation allowance against its deferred tax
assets. The Company did not record a benefit from income taxes for losses
incurred during fiscal 2001 as it is more likely than not that such benefit will
not be realized.

20

Sale of Businesses. On January 17, 2003, the Company sold substantially
all of the assets, including inventory, of Bronson to a privately held dietary
supplement manufacturer for approximately $8 million. The Company anticipates
recording an aggregate pre-tax gain of approximately $1.7 million during the
first quarter of 2003 in connection with the sale of these assets. Bronson's
results of operations have been classified as discontinued operations and prior
periods have been reclassified. Net sales for Bronson were $10.1 million, $11.1
million and $12.9 million and income (loss) from operations was $1.1 million,
$(30.3) million and $(0.9) million for fiscal 2002, fiscal 2001 and fiscal 2000,
respectively.

On May 22, 2002, the Company completed the sale of substantially all of the
fixed assets of Health Factors for approximately $2.1 million to Anabolic. The
products manufactured by Health Factors were, in significant part, transferred
to other Twinlab manufacturing facilities. Other production related to Bronson
was outsourced to Anabolic while the manufacture of certain private label
products was discontinued.

On June 1, 2001, the Company sold its publishing subsidiary, Advanced
Research Press, Inc. ("ARP"), to Steve Blechman, Executive Vice President and a
Director of Twinlab and President/CEO of ARP, for $1.0 million. Concurrent with
the sale of ARP, Steve Blechman elected to resign as an Executive Vice President
and employee of Twinlab. The Company recorded a pre-tax gain of approximately
$0.7 million in connection with the sale, which has been included as a reduction
of operating expenses.

On April 17, 2001, the Company sold the assets of its Changes International
subsidiary to Goldshield Group plc for approximately $4.4 million. The Company
received $3.5 million upon closing the transaction, $0.4 million in October 2001
and $0.5 million in April 2002. The loss on the sale of the assets was $8.7
million. Changes International's results of operations have been classified as
discontinued operations and prior periods have been reclassified. Net sales for
Changes International were $8.4 million and $38.1 million and income (loss) from
operations was $0.4 million and $(1.6) million for fiscal 2001 and fiscal 2000,
respectively.

On April 17, 2001, the Company sold the assets of PR*Nutrition, Inc. to
Goldshield Group plc for approximately $0.6 million. The Company received $0.5
million upon closing the transaction and $0.1 in October 2001 and April 2002.
The Company recorded a pre-tax gain of approximately $0.3 million in connection
with the sale, which has been included as a reduction of operating expenses.

FISCAL 2001 COMPARED TO FISCAL 2000

Net Sales. Net sales for fiscal 2001 were $187.1 million, a decrease of
$41.4 million, or 18.1%, as compared to net sales of $228.5 million for fiscal
2000. Net sales for fiscal 2001 were significantly impacted by a reduction in
sales to a major customer. This customer also purchased significantly less
product from the Company during fiscal 2002. In addition, the decrease in net
sales was attributable to a decrease in sales to the health and natural food
store channel, partially offset by an increase in sales to the mass market
channel.

Gross Profit. Gross profit for fiscal 2001 was $60.3 million, which
represented an increase of $3.7 million, or 6.5%, as compared to $56.6 million
($72.6 million before $16.0 million of herbal inventory adjustments recorded in
fiscal 2000 (the "2000 herbal inventory adjustments")) for fiscal 2000. Gross
profit margin was 32.2% for fiscal 2001 as compared to 24.8% (31.8% before the
2000 herbal inventory adjustments) for fiscal 2000. The overall decrease in
gross profit dollars (as compared to adjusted 2000) was attributable primarily
to the Company's lower sales volume. The overall gross profit margin (as
compared to adjusted 2000) remained relatively consistent.

Operating Expenses. Operating expenses were $77.3 million for fiscal 2001,
representing a decrease of $9.8 million, or 11.3%, as compared to $87.1 million
for fiscal 2000. As a percent of net sales, operating expenses increased from
38.1% for fiscal 2000 to 41.3% for fiscal 2001. The decrease in operating
expenses was primarily attributable to a reduction in the Company's advertising
and trade marketing expenses, a reduction in bad debt expense and the sale of
ARP and PR*Nutrition, Inc. Included in operating expenses for fiscal 2001 are
$3.6 million of costs incurred in connection with the implementation of the new
ERP system and approximately $1.6 million of charges related to reductions in
personnel costs.

Asset Impairment Charges. The Company recorded non-cash impairment charges
totaling $33.8 million during the year ended December 31, 2001. These charges
consisted of $30.0 million related to the tradename,
21

customer lists and goodwill of Bronson (included in income (loss) from
discontinued operations) and $2.9 million related to property and equipment and
the goodwill of Health Factors. The impairment charges resulted from projected
changes in the operating plans of Bronson and Health Factors. The Company
calculated the present value of expected cash flows of these companies to
determine the fair value of these assets. In addition, the Company recorded an
impairment charge of $0.9 million related to idle packaging equipment leased
under operating leases.

Loss from Operations. The Company recorded a loss from operations of
$(20.8) million for fiscal 2001, as compared to $(30.5) million for fiscal 2000.

Other (Expense) Income. Other (expense) income was a net expense of $9.1
million for fiscal 2001, as compared to $8.6 million for fiscal 2000. The
increase was attributable to an increase in interest expense.

Income Taxes. The Company recorded a provision for income taxes of $22.8
million during fiscal 2001 to establish a full valuation allowance against its
deferred tax assets. The Company did not record a benefit from income taxes for
losses incurred during fiscal 2001 as it is more likely than not that such
benefit will not be realized.

The Company recorded a deferred tax valuation allowance of $26.0 million
during fiscal 2000. This valuation allowance reduced the Company's deferred tax
assets to a net amount which the Company believed to be more likely than not to
be realized through future taxable earnings.

Sales of Businesses. On June 1, 2001, the Company sold its publishing
subsidiary, ARP, to Steve Blechman, Executive Vice President and a Director of
Twinlab and President/CEO of ARP, for $1.0 million. Concurrent with the sale of
ARP, Steve Blechman elected to resign as an Executive Vice President and
employee of Twinlab. The Company recorded a pre-tax gain of approximately $0.7
million in connection with the sale, which has been included as a reduction of
operating expenses.

On April 17, 2001, the Company sold the assets of its Changes International
subsidiary to Goldshield Group plc for approximately $4.4 million. The Company
received $3.5 million upon closing the transaction, $0.4 million in October 2001
and $0.5 million in April 2002. The loss on the sale of the assets was $8.7
million. Changes International's results of operations have been classified as
discontinued operations and prior periods have been reclassified. Net sales for
Changes International were $8.4 million and $38.1 million and income (loss) from
operations was $0.4 million and $(1.6) million for fiscal 2001 and fiscal 2000,
respectively.

On April 17, 2001, the Company sold the assets of PR*Nutrition, Inc. to
Goldshield Group plc for approximately $0.6 million. The Company received $0.5
million upon closing the transaction and $0.1 in October 2001 and April 2002.
The Company recorded a pre-tax gain of approximately $0.3 million in connection
with the sale, which has been included as a reduction of operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by (used in) operating activities was $8.0 million, $14.2
million and $(22.5) million for fiscal 2002, 2001 and 2000, respectively. Cash
provided by operating activities for fiscal 2002 was primarily attributable to
the collection of an income tax refund of $6.9 million in addition to reductions
in accounts receivable and inventories. Cash provided by operating activities
for fiscal 2001 was primarily attributable to the collection of an income tax
refund of $11.7 million in addition to reductions in accounts receivable and
inventories partially offset by the timing of payments of accounts payable and
accrued expenses. Cash used in operating activities for fiscal 2000 was
primarily attributable to the timing of payments of accounts payable and accrued
expenses.

Capital expenditures were $1.9 million in fiscal 2002, as compared to $3.3
million in fiscal 2001 and $6.0 million in fiscal 2000. Capital expenditures in
fiscal 2002 were primarily for the purchase of machinery and equipment. Capital
expenditures are expected to be approximately $2.0 million during fiscal 2003.
The Company estimates that its maintenance capital expenditures will be
approximately $0.5 million per fiscal year.

22

Net cash used in financing activities was $8.8 million in 2002 and $20.7
million in 2001 and represented the repayment of outstanding debt and the
payment of debt issuance costs. Net cash provided by financing activities was
$29.7 million in 2000 and represented borrowings under the Company's revolving
credit facility offset by the payment of other debt.

Effective March 29, 2001, the Company replaced its revolving credit
facility and entered into a new revolving line of credit inclusive of a term
loan (the "Revolving Credit Facility") with a group of financial institutions.
The Revolving Credit Facility, as amended, provides for maximum borrowings of
$45 million through March 29, 2004 with a termination fee of 2% for early
cancellation. The term loan portion of the Revolving Credit Facility totals $4.2
million and is payable at the expiration of the agreement. Borrowings are
subject to certain limitations based on a percentage of eligible accounts
receivable and inventories, as defined in the agreement. Interest is payable
monthly at the Prime Rate (4.25% at February 28, 2003), plus 1.75% per annum.
The Company is required to pay a commitment fee of 0.5% per annum on any unused
portion of the Revolving Credit Facility. Borrowings under the Revolving Credit
Facility are secured by substantially all of the Company's assets. The Revolving
Credit Facility, among other things, requires the Company to maintain specified
levels of EBITDA (as defined therein), places limitations on capital
expenditures and restrictions on the ability to incur debt and prohibits the
payments of dividends. As a result of the sale of Bronson, effective January 17,
2003, the Company completed an amendment to the Revolving Credit Facility, which
among other things, revised the financial covenants relating to EBITDA and
reduced the total facility from $50 million to $45 million. Borrowings
outstanding under the Revolving Credit Facility as of February 28, 2003 were
approximately $21 million. As of February 28, 2003, approximately $6 million of
borrowings were available under the Revolving Credit Facility.

In connection with the Revolving Credit Facility, certain current and
former members of senior management of the Company provided a letter of credit
amounting to $15.0 million with respect to the Company's obligations under the
Revolving Credit Facility. In consideration for providing this letter of credit,
effective April 1, 2002, the Company agreed to pay an aggregate annual fee of
$0.4 million and 375,000 shares of common stock (to be issued from shares held
in treasury), payable in quarterly installments for the duration of the period
that the letter of credit remains outstanding. As of December 31, 2002, $0.2
million has been paid and 187,500 shares of common stock have been issued. The
fair value of the compensation for providing the letter of credit, $1.6 million,
has been recorded as deferred financing costs and is being amortized over the
remaining term of the Revolving Credit Facility.

The Company's Revolving Credit Facility expires on March 29, 2004. The
Company intends to enter into negotiations to extend the term of the Revolving
Credit Facility or to enter into an alternative borrowing arrangement which
would provide for future borrowings. There can be no assurance, however, that by
March 29, 2004, an extension of the Revolving Credit Facility will be
successfully negotiated or the Company will be able to enter into an alternative
borrowing arrangement on terms favorable to the Company. The absence of an
extension of the Revolving Credit Facility or alternative borrowing arrangement
would have a material adverse effect on the financial condition of the Company.
The Company anticipates that borrowings outstanding under the Revolving Credit
Facility will be classified as a current liability as of March 31, 2003.

The Company was in compliance with the covenants relating to the Revolving
Credit Facility and the Senior Subordinated Notes as of December 31, 2002.

The Company was in default of certain financial covenants relating to the
mortgage payable during fiscal 2002 for which a waiver was obtained through
April 3, 2003. The Company will be subject to the financial covenant tests for
the quarter ended June 30, 2003 and does not currently anticipate being in
compliance. Accordingly, the mortgage payable has been classified as a current
liability as of December 31, 2002. The Company has entered into negotiations
with the lender to amend the mortgage agreement, however, there can be no
assurance that an amendment will be successfully negotiated. In the event that
the Company is unable to amend the mortgage agreement, the Company will be
required to repay the mortgage in order to avoid a cross-default under the terms
of the Revolving Credit Facility.

The Company has been named as a defendant in a number of pending product
liability lawsuits that the Company is vigorously defending. In reviewing its
potential exposure for product liability matters, the Company considers, among
other factors, recent and historical settlements and judgments, if any, the

23

incidence and trend of recent and historical claims, the nature of any alleged
injuries, the amount and availability of insurance coverage and the status of
litigation proceedings and settlement discussions.

Based on a current analysis prepared by management, with the assistance of
actuarial consultants, the Company has estimated a range of potential liability
in an amount it deems reasonable in connection with certain product liability
matters involving ephedra. Accordingly, the Company has established a reserve of
$3.8 million for product liability indemnity claims that is primarily based on
known claims and an estimate of unasserted claims involving ephedra that are
probable of assertion and can be reasonably estimated as of the balance sheet
date. Management expects that any payments relating to these matters will occur
over a number of years and has not discounted the potential liability as of
December 31, 2002, because the timing of any payments are not fixed or reliably
determinable at the present time. This reserve assumes continuing insurance for
ephedra related personal injury actions, albeit with a significant retention and
limited total coverage.

Because of the uncertainties related to the number of potential future
claims, ultimate settlement amounts, dismissal of such claims or any adverse
judgments, it is difficult to obtain precise estimates of the Company's ultimate
liability for such claims. It is possible that the total exposure to product
liability claims may be less than or greater than an amount within the Company's
estimated range of potential liability due to changes in facts or circumstances
after the date of each estimate. As additional experience is gained regarding
the Company's product liability claims, possible settlement discussions,
litigation history and insurance coverage, the Company will reassess its
potential liability and revise the amount of its reserve as appropriate.

There can be no assurance that the impact of the Company's self-insured
retention limits in the event of multiple damage awards or settlements, or any
award of damages in excess of the Company's insurance coverage limits (which
limits are significantly lower than in prior periods) or any materially
increased legal costs, will not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, one or more
large punitive damage awards, which are generally not insurable, could have a
material adverse effect on the financial condition and results of operations of
the Company.

Further, the Company's 2003 CGL insurance policy for non-Ma Huang products
has a significantly higher self-insured retention limit than in 2002 and the
herbal product Kava-Kava is expressly excluded from coverage under the 2003
policy. The Company has received one Kava-Kava related wrongful death complaint
in 2003. The Company plans to vigorously defend itself against this action and
is investigating whether any of its CGL policies apply to this claim. If a CGL
policy is not applicable to this claim, a finding of liability and damages could
have a material adverse effect on the results of operation and financial
condition of the Company. The Company is unable to predict the outcome of this
matter or to estimate a range of potential loss. Accordingly, the effect, if
any, that such action may have on the Company's consolidated financial position
or results of operations cannot be determined at this time.

Twinlab Corporation has no operations of its own and accordingly has no
independent means of generating revenue. As a holding company, Twinlab
Corporation's internal sources of funds to meet its cash needs, including
payment of expenses, are dividends and other permitted payments from its direct
and indirect subsidiaries. The Indenture relating to the Company's 10 1/4%
senior subordinated notes and the Revolving Credit Facility impose upon the
Company certain financial and operating covenants, including, among others,
requirements that the Company satisfy certain financial tests, limitations on
capital expenditures and restrictions on the ability of the Company to incur
debt, pay dividends or take certain other corporate actions.

The following table sets forth our contractual obligations and commercial
commitments as of December 31, 2002:

24

Subject to the factors discussed above, management believes that the
Company has adequate capital resources and liquidity to meet its borrowing
obligations, fund all required capital expenditures and pursue its business
strategy for at least the next 12 months. The Company's capital resources and
liquidity are expected to be provided by the Company's cash flow from operations
and borrowings under its Revolving Credit Facility. See Item 1, "Factors
effecting future performance" and Item 3, "Legal Proceedings."

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Company 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. On an on-going
basis, the Company evaluates its estimates and assumptions including those
related to customer returns and allowances, allowance for doubtful accounts,
inventories, long-lived assets, income taxes, contingencies and litigation. The
Company bases its estimates on historical experience and on various other
factors that are believed to be reasonable. Actual results could materially
differ from those estimates.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

- The Company records estimated reductions to sales for customer returns
and allowances. Should the Company's customers return products or claim
allowances greater than estimated by the Company, additional reductions
to sales may be required. As previously discussed, in fiscal 2002, the
Company recorded an incremental $8.8 million charge for sales returns and
allowances during the quarter ended September 30, 2002 relating to a plan
to rationalize product offerings to several key customers in the retail
segment.

- The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.

- The Company identifies slow moving or obsolete inventories and estimates
appropriate loss provisions related thereto. If actual future demand or
market conditions are less favorable than those projected by management,
additional loss provisions may be required.

- The Company reviews its long-lived assets, including its finite-lived
intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be
fully recoverable. The carrying value of these assets would be impaired
if the best estimate of future undiscounted cash flows over their
remaining amortization period is less than their carrying value. If an
asset is impaired, the loss is measured using estimated fair value. As
previously discussed, the Company recorded non-cash impairment charges
totaling $7.2 million during fiscal 2002 and $33.8 million during fiscal
2001.

- The Company records a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized. As a
result of losses incurred, the Company has recorded a full valuation
allowance against its net deferred tax assets of $73.0 million and $64.0
million as of December 31, 2002 and 2001, respectively. Should the
Company be profitable in the future at levels which cause management to
conclude that it is more likely than not that it will realize all or a
portion of the deferred tax ass