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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITIONAL REPORTS
PURSUANT TO SECTIONS 13 AND 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|X| For the fiscal year ended December 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _____________
Commission File Number: 0-21003
TWINLAB CORPORATION
(Exact name of Registrant as Specified in Its Charter)
Delaware 11-3317986
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
150 Motor Parkway 11788
Hauppauge, New York (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (516) 467-3140
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.00
par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates based on the closing sale price of the Common Stock on
March 25, 1999, as reported on the Nasdaq National Market, was $166,978,928.
As of March 25, 1999, the registrant had 32,705,049 shares of Common Stock
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 1999
Annual Meeting of Stockholders are incorporated by reference into Part III of
this Report.
NOTE
Twinlab Corporation's Report on Form 10-K filed with the Securities and Exchange
Commission includes all exhibits required to be filed with the Report. Copies of
this Report on Form 10-K, not including any of the exhibits listed under Item
14(c) of this Report, are available without charge upon written request. Please
contact the office set forth below to request copies of this Report on Form 10-K
and for information as to the number of pages contained in each of the exhibits
and to request copies of such exhibits:
Corporate Secretary
Twinlab Corporation
150 Motor Parkway
Hauppauge, NY 11788
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TWINLAB CORPORATION 1998 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I
Page
Item 1. Business.................................................. 4
Item 2. Properties................................................ 18
Item 3. Legal Proceedings......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders....... 20
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 20
Item 6. Selected Financial Data................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 23
Item 8. Financial Statements and Supplementary Data............... 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 29
PART III
Item 10. Directors and Executive Officers of the Registrant........ 30
Item 11. Executive Compensation.................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 30
Item 13. Certain Relationships and Related Party Transactions...... 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 30
SIGNATURES........................................................ 34
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PART I
Information contained or incorporated by reference in this annual report
may contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. See, e.g., "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Business Strategy."
Forward-looking statements involve substantial risks and uncertainties and
represent the Company's expectations or beliefs, including, but not limited to,
statements concerning industry performance, the Company's operations,
performance, financial condition, growth and acquisition strategies, margins and
growth in sales of the Company's products. Such forward looking statements by
their nature involve known and unknown risks, uncertainties and contingencies,
many of which are beyond the Company's control, which may cause actual results,
performance or achievements to differ materially from those projected or implied
in such forward-looking statements. As a result, no assurance can be given that
the future results covered by such forward-looking statements will be achieved.
Factors that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things, those discussed in "Factors Affecting Future
Performance" under the caption "Business" in Item 1 of this annual report. Other
factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. For the purpose of this
annual report, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. The Company
accepts no obligation to update any forward-looking statements and does not
intend to do so.
Unless the context otherwise requires, the terms "Company" and "Twinlab"
refer to Twinlab Corporation and, as applicable, its direct and indirect
subsidiaries, Twin Laboratories Inc. ("Twin"), Advanced Research Press, Inc.
("ARP"), Changes International of Fort Walton Beach, Inc. ("Changes
International"), Bronson Laboratories, Inc. ("Bronson"), Health Factors
International, Inc. ("Health Factors") and PR*Nutrition, Inc. ("PR*Nutrition").
Item 1. BUSINESS
General
The Company is one of the leading manufacturers and marketers of brand
name nutritional supplements sold through domestic health and natural food
stores and various direct sales channels, including network and catalog
marketing and is also engaged in the sale of products through national and
regional drug store chains, supermarkets and mass merchandise retailers. The
Company produces a full line of nutritional supplements and offers one of the
broadest product lines in the industry with more than 1,300 products and 2,400
stockkeeping units (SKU's). The Company's product line includes: vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products and
special formulas marketed under the TWINLAB(R) trademark; a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs(R), HealthCare
Naturals(R) and Twinlab TruHerbs(R) trademarks; a line of specially formulated
nutritional supplements marketed under the Changes(R) trademark; herb teas
marketed under the Alvita(R) trademark; vitamins, herbs and nutritional
supplements and health and beauty aids marketed under the Bronson(R) trademark;
and nutritionally enhanced food bars marketed under the PR*Bar(R) and Ironman
Triathlon(R) trademarks. The Company emphasizes the development and introduction
of high-quality, unique nutraceuticals and other products in response to
emerging trends in the nutritional supplement industry. The Company's premium
product quality, broad product line, strong history of new product introductions
and innovations and superior marketing and advertising programs have established
TWINLAB, Nature's Herbs, Bronson, PR*Nutrition, Changes and Alvita as leading
and widely-recognized brands in the nutritional supplement industry.
Under the leadership of the Blechman family, Twinlab has achieved
increased net sales and income from operations every year since 1990. Since
1994, the Company's net sales and income from operations have grown at compound
annual growth rates of 29.1% and 25.8%, respectively. For the year ended
December 31, 1998, the Company generated net sales, net income and basic and
diluted net income per share of $333.4 million, $29.7 million and $.94,
respectively.
The Company's products target consumers who utilize nutritional
supplements in their daily diet and who demand premium quality ingredients in a
broad variety of dosages and delivery methods. To reach the broadest possible
consumer market, the Company has developed a multi-branded and multi-channel
distribution strategy, consisting of the following categories:
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o Health and Natural Food Store Channel -- The Company's TWINLAB, Nature's
Herbs, Ironman Triathlon and Alvita brand products are sold primarily
through a network of approximately 80 distributors to nearly 11,000 health
and natural food stores and other selected retail outlets. The health and
natural food store channel of distribution has grown in recent years as
national chains, including those which sell the Company's products, such
as General Nutrition Companies, Inc. ("GNC"), Whole Foods Markets, Inc.
("WFM"), Wild Oats Markets, Inc. ("Wild Oats") and other industry
participants continue to add stores in new and existing markets. The
Company believes that it has a competitive advantage in the health and
natural food store channel due to the high quality of its products, which
is a direct result of its use of premium ingredients, its state of the art
manufacturing facilities and its comprehensive quality control procedures.
Sales to the health and natural food store channel, primarily through
distributors, continue to represent the Company's largest market, totaling
approximately $211.8 million, or approximately 63.5%, of the Company's net
sales in 1998. The Company believes that its products have a presence in
over 95% of the health and natural food stores in the United States, but
that only approximately 20% of such stores carry a comprehensive line of
the Company's products. Management believes that the continued expansion
of health and natural food store retail outlets and the strong demographic
and consumer awareness fundamentals driving the nutritional supplement
industry, combined with health and natural food retailers' success with
the Company's product lines, provide Twinlab with significant
opportunities to increase sales in the health and natural food store
channel. Through its Bronson division, Twinlab markets its MD
Pharmaceutical(R)brand of vitamins, herbs and nutritional supplements
exclusively to United States military commissaries and also manufactures,
through Health Factors, private label vitamins and nutritional supplements
for a number of other companies on a contract manufacturing basis.
o Mass Market Channel -- The Company is actively engaged in efforts to
expand its penetration of the mass market retail channel, which consists
of drug store chains, supermarkets and other mass merchandisers. The
Company is currently a provider of private label herbal products to
Wal-Mart Stores, Inc. ("Wal-Mart"), which are being sold under Wal-Mart's
proprietary Spring Valley brand name. The Company also sells its products
through national and regional drug store and supermarket chains, such as
Rite Aid Corporation, Walgreen, CVS, Kroger, American Stores, Inc. and
Albertson's, Inc., under its TWINLAB, HealthCare Naturals and Alvita brand
names. Approximately $47.0 million or 14.1% of the Company's 1998 net
sales were attributable to mass market retailers compared to $14.1 million
or 6.1% in 1997. Twinlab has recently introduced its nutritionally
enhanced food bars under the Ironman Triathlon brand name in the mass
market channel of distribution. During 1998, the Company introduced the
first line of herbs to be sold under the TWINLAB name to the mass market
under the brand name Twinlab TruHerbs, as well as a line of nutritional
supplements under the Ironman Triathlon trademark.
o Direct Sales Channel -- The Company markets and sells a variety of
products through the direct sales distribution channel, which includes
network marketing, catalog and direct response sales. Through Changes
International, the Company develops, markets and sells vitamins, herbs and
nutritional supplements under the Changes brand name. Changes
International operates through a large sales force of independent
distributors located throughout the United States, Canada and the United
Kingdom who sell directly to consumers. At this time, all of Changes
International's products are specially formulated and packaged for
distribution through a network marketing sales force and are not intended
for sale to retail outlets. The Company more than doubled the size of
Changes International's nutritional supplement line during 1998 and
expects to further expand the Changes line of products in 1999. Changes
International generated net sales of $51.3 million in 1998. Twinlab also
manufactures, markets and distributes a line of over 400 vitamins, herbs
and nutritional supplements and health and beauty aids under the Bronson
brand name which are sold through catalogs and specialty direct mailings
to customers, including healthcare and nutritional professionals. In
August of 1998, the Company acquired PR*Nutrition, a company that markets
and distributes nutritionally enhanced food bars and other nutritional
products. The Company markets products under the PR*Bar brand name
directly to consumers through, direct mailings, and direct response sales.
Approximately $70.5 million or 21.1% of the Company's 1998 net sales were
attributable to the direct sales channel compared to $17.1 million or 5.2%
in 1997.
Operating Divisions
While the Company's products are marketed through the distribution
channels discussed above, the Company's operations are organized around the
following six divisions:
o TWINLAB Division -- The TWINLAB division develops and manufactures
vitamins, minerals, herbs, amino acids and sports nutrition products under
the TWINLAB, TruHerbs, Ironman Triathlon, MaxiLife, "Fuel" and other brand
names for distribution in the health and natural food store and mass
market distribution channels. The TWINLAB division accounted for
approximately $172.7 million, or 51.8%, of the Company's net sales in
1998.
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o Herbal Supplements and Teas Division -- The herbal supplements and teas
division develops and manufactures the Company's products marketed and
sold under the Nature's Herbs, HealthCare Naturals and Alvita brand names
through the health and natural food store and mass market distribution
channels. This division generated approximately $65.8 million, or 19.7%,
of the Company's net sales in 1998.
o Changes International Division -- The Changes International division
develops and markets a line of vitamins, herbs and nutritional supplements
under the Changes brand name for distribution exclusively through a
network marketing sales force of independent distributors. This division
accounted for approximately $51.3 million, or 15.4%, of the Company's net
sales in 1998.
o Bronson Division -- Twinlab's Bronson division manufactures, markets and
distributes products under the Bronson brand name, which are sold through
catalogs and direct mailings to customers, and under the MD Pharmaceutical
brand name exclusively to United States military commissaries. Through
Health Factors, this division also manufactures private label vitamins and
nutritional supplements for a number of other companies on a contract
manufacturing basis. The Bronson division, following its acquisition in
late April 1998, generated net sales of $18.7 million or 5.6% of the
Company net sales in 1998.
o PR*Nutrition Division -- The PR*Nutrition division develops, markets and
sells nutritionally enhanced food bars and other nutritional products
under the PR*Bar and Ironman Triathlon brand names for sale to consumers
through direct and specialty mailings, direct response sales, and the
health and natural food stores and mass market channels. This division
generated net sales of $20.9 million in 1998, or 6.3% of the Company's
1998 net sales.
o Publishing Division - Through Advanced Research Press, the Publishing
division is responsible for the publishing activities of the Company,
including the publication of a monthly fitness magazine, Muscular
Development, a monthly newsletter and select books concerning nutritional
supplements and related subjects. ARP generated net sales of $4.0 million,
or 1.2% of the Company's 1998 net sales.
Twinlab was incorporated under the laws of the State of Delaware in 1996
and maintains its principal executive offices at 150 Motor Parkway, Suite 210,
Hauppauge, New York 11788. Its telephone number is 516-467-3140.
Business Strategy
The Company's strategy is to continue to increase sales and profits by
furthering its leadership position in the sale of vitamins, herbs, sports
nutrition products and other nutritional supplements to the health and natural
food store channel while continuing to increase sales and market share in the
mass market and direct sales distribution channels. Twinlab plans to implement
this strategy both by capitalizing on the strength of its established brands as
well as through the development and introduction of new brands. In addition, the
Company expects to continue to develop and introduce new products and product
innovations for each of its distribution channels, to increase its penetration
of foreign markets and to provide the advertising, marketing, operational and
personnel support necessary to grow its businesses.
Specifically, the Company seeks to:
Further Develop Portfolio of Brands -- Twinlab has developed a portfolio
of core brands which are among the most recognized in the vitamin and
nutritional supplement industry. The Company intends to continue to nurture and
extend the reach of its TWINLAB, Nature's Herbs and Alvita brands in the health
food distribution channel while furthering the development of its portfolio of
proprietary brands, including the TruHerbs, Ironman Triathlon, Bronson,
PR*Nutrition and Changes brands, targeted to the Company's respective channels
of distribution. As in the past, the Company will promote its brands through
strong marketing and advertising programs. Management believes that Twinlab has
one of the largest marketing and advertising budgets as a percentage of sales in
the nutraceutical industry and that the strong brand name recognition of its
products is, in part, a direct result of this support. In fiscal 1998, the
Company spent $26.4 million, an increase of 30% over fiscal 1997, on marketing
and advertising to promote its products. The Company has budgeted for
significantly greater marketing and advertising expenses in fiscal 1999, as
compared to 1998.
Further Develop Multiple Channels of Distribution -- The Company intends
to continue to increase its penetration of the domestic and international health
and natural food store channel and expand its mass market, retail, network
marketing and catalog businesses. By utilizing a multiple distribution channel
approach, the Company believes it will be well positioned to also reach
customers who historically have not shopped in health and natural food stores.
If appropriate, the Company may seek to acquire selective products or product
lines to distribute through these established channels.
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Continue to Introduce New Products and Product Innovations -- A
cornerstone of the Company's success has been its ability to rapidly utilize
innovative scientific and medical findings in its new product development
efforts. The Company has consistently been among the first in its industry to
introduce new products and product innovations that anticipate and meet customer
demands for newly identified nutritional supplement benefits. As part of its
ongoing research and development effort, the Company maintains an extensive
database and actively researches and monitors a wide variety of publications
containing scientific and medical research. The Company's geographically diverse
network of distributors allows it to achieve immediate and broad distribution
for new product launches. From 1991 through 1998, the Company introduced over
700 products, with over 140 new products introduced in 1998 alone. Net sales
from new products introduced in 1998 were approximately $15.9 million, or
approximately 4.8% of the Company's net sales. The Company expects to introduce
new products in 1999 in the health and natural food store and mass market retail
channels. Eighteen new products have already been introduced in 1999. Additional
products are likewise expected to be introduced through the catalog and network
marketing channels.
Increase Penetration of Foreign Markets -- Management believes that
there are substantial opportunities for the Company to expand its presence in
foreign markets. The Company's international sales force is supported by a
network of approximately 60 overseas distributor organizations, serving over 70
foreign countries. Approximately 6.0%, or $19.9 million, of the Company's net
sales in 1998 were derived from international sales originating from overseas
distributor organizations. The Company presently has distribution agreements
covering many western European countries, including Great Britain, France,
Italy, Belgium, the Netherlands and the Scandinavian countries; eastern European
countries, including Russia; Latin American countries, including Mexico, Brazil,
Chile and Argentina; Middle Eastern countries, including Israel and Saudi
Arabia; several countries in the Far East, including China and Singapore; and
the Caribbean. As part of its continuing efforts to expand its international
presence, the Company recently opened a branch office in the United Kingdom. The
Company also initiated programs in 1998 to qualify distributors in Japan and
Australia.
Supplement Internal Growth Through Strategic Acquisitions -- The Company
actively pursues acquisition opportunities that will complement or extend its
existing product lines or that would be compatible with its business philosophy
and strategic goals. The Company believes that its leading and widely recognized
brand names, broad distribution capabilities and ability to generate sales of
its products through successful marketing programs provide it with a strategic
advantage in pursuing and consummating such opportunities.
Ongoing Investment in Personnel and Infrastructure -- The Company
continues to make significant investments in developing its management team and
building its infrastructure to support the growth of its businesses. As part of
its ongoing efforts to maintain its reputation for providing the highest quality
products and services to its customers, the Company continues to invest in its
manufacturing and distribution facilities and management information systems. In
1998, the Company leased an approximately 106,000 square foot warehouse and
distribution facility in Bohemia, New York and substantially completed the
expansion of its state-of-the-art manufacturing, distribution and warehouse
facility in American Fork, Utah (the "Utah Facility"). The total size of the
Utah Facility will increase from 57,000 square feet to approximately 160,000
square feet and will substantially increase the Company's production capacity.
The total budget for the Utah Facility expansion is approximately $13.3 million.
Approximately 140,000 square feet of construction was complete by the end of
1998, at an approximate cost of $9.1 million in capital expenditures. During
1998, the Company also added significant management and staff to support its
mass market and Changes International operations. Bronson's fulfillment and
telemarketing operations were consolidated in 1998 with the operations of the
herbal supplements and teas division at the Company's expanded Utah Facility
(with the exception of product production which remains with Health Factors in
Tempe, Arizona). The management of Bronson's catalog business is currently
conducted by an independent mail order consulting group.
There can be no assurance that the Company will successfully implement all
or any part of its business strategy.
Industry
Based on estimates in 1998 market reports conducted by Packaged Facts (the
"Packaged Facts Report"), an independent research firm, the retail market for
vitamins, minerals and other supplements (excluding sports nutrition food bars
and diet products; the "VMS Products") has grown at a compounded annual rate of
15.4% from $5.0 billion in 1994 to $8.9 billion in 1998. A large portion of this
growth is attributable to an increase in sales of supplements (primarily herbal
products), which grew from $1.3 billion in 1994 to $3.9 billion in 1998. Growth
in this category has been fueled by the popularity of such herbs as echinacea,
garlic, ginseng, gingko, saw palmetto and St. John's Wort. Packaged Facts
forecasts 13.3% compound annual growth in the market for VMS Products, including
19.8% compound annual growth in the market for supplements, through the year
2003. In addition, according to Packaged Facts, the retail market for sports
nutrition products has grown at a compound annual rate of 15.2% from
approximately $720 million in 1994 to approximately $1.3 billion in 1998.
Management believes that the growth rate in the nutritional supplement
industry has slowed significantly compared to the growth rate experienced in the
first six months of 1998. The Company believes the slow down in growth is in
part due to a decline in sales at the retail level of St. John's Wort and other
herbal products that were in greater demand in the first half
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of 1998 and to a more generalized industry-wide slowing of growth across most
product categories. The Company believes that as a result, inventories at the
retail and distributor level have become excessive and therefore orders to
manufacturers and suppliers have been reduced.
US Retail Sales of VMS Products and Sports Nutrition Products 1994-1998
(in millions of dollars)
- --------------------------------------------------------------------------------
Category 1994 1998 CAGR
================================================================================
Vitamins ............................. $ 3,140 $ 4,160 7.3%
Supplements .......................... 1,250 3,865 32.6
Minerals ............................. 615 855 8.6
------- ------- -------
Total VMS Products ........ 5,005 8,880 15.4
------- ------- -------
Sports Nutrition ..................... 720 1,268 15.2
------- ------- -------
Total ........... $ 5,725 10,148 15.4%
------- ------- -------
- --------------------------------------------------------------------------------
Source: Packaged Facts
Management believes continued industry growth will be fueled by (i)
favorable demographic trends towards older Americans, who are more likely to
consume nutritional supplements; (ii) product introductions in response to new
scientific research findings supporting the positive health effects of certain
nutrients; (iii) the nationwide trend toward preventive medicine in response to
rising health care costs; (iv) increased consumer interest in herbs and
herb-related supplements; and (v) the heightened understanding and awareness of
healthier lifestyles and the connection between diet and health. Moreover,
although the industry has grown dramatically in recent years, there is still a
large untapped domestic market as only an estimated 60% of Americans currently
consume vitamins, herbs and nutritional supplements on a regular basis.
Vitamin and nutritional supplements are sold through several channels of
distribution: health and natural food stores, mass market retailers (drug store
chains, supermarkets and other mass merchandisers), and direct sales channels
(including network marketing and catalog distribution). In 1998, according to
Packaged Facts, the mass market channel accounted for approximately 49% of sales
of VMS Products, health and natural food stores accounted for 39% of sales and
12% of sales were generated through direct selling, mail order and the internet.
The United States health and natural food store market is comprised of
approximately 11,000 stores, which are generally either independently owned or
associated with one of several regional or national chains, including GNC and
WFM. According to the Packaged Facts Report, nutritional supplements account for
over 49% of a typical health and natural food store's sales. The health and
natural food store channel of distribution has continued to experience growth in
recent years as national chains, including those which sell the Company's
products, such as GNC, WFM and other industry participants continue to add
stores in new and existing markets. The growth in the health and natural food
channel of distribution is partially attributable to the general growth in
natural product sales. Natural products are defined as products that are
minimally processed, environmentally friendly, largely or wholly free from
artificial chemicals and, in general, as close to their natural states as
possible.
In the mass market channel, sales of vitamins, herbs and nutritional
supplements have generally grown in line with the growth in all channels due to
the proliferation of retail outlets and the expansion of SKU's offered by these
stores. However, within the mass market channel, mass merchandisers have
captured increasing market share from traditional drug store chains and
supermarkets. According to Packaged Facts, these mass merchandisers accounted
for 18.7% of total retail sales of VMS Products in 1998 compared to 11.5% in
1994. This compares to traditional drug store chains and supermarkets which
accounted for 30.5% and 34.6% of total retail sales of VMS Products in 1998 and
1994, respectively.
Although growing, sales generated via direct selling, mail order and the
internet have not grown as quickly as sales in other channels of distribution.
According to Packaged Facts, sales via direct selling as a percentage of total
retail sales of VMS Products were 9.9% in 1998 compared to 13.1% in 1994. Sales
via mail order and the internet were 2.4% and 4.2% of total retail sales of VMS
Products in 1998 and 1994, respectively. It is expected that the market for
internet sales will increase in the future as consumers become more accustomed
to ordering products online.
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Share of VMS Products Market -- Sales by Retail Outlets, 1994, 1996 and
1998
Outlet 1994 1996 1998
------ ---- ---- ----
Health and Natural Food Stores ....... 36.6% 38.2% 38.5%
Mass Market Drug Store Chains ........ 23.1 20.2 18.4
Mass Merchandisers ................... 11.5 14.8 18.7
Supermarkets ......................... 11.5 10.8 12.1
------ ------ ------
Total Mass Market .................... 46.1 45.8 49.2
------ ------ ------
Direct Selling ....................... 13.1 12.6 9.9
Mail Order and Internet
4.2 3.4 2.4
------ ------ ------
TOTAL ...................... 100.0% 100.0% 100.0%
====== ====== ======
- ----------
Source: Packaged Facts
Products
The Company has a highly diversified array of products and product
categories and manufactures and markets over 1,300 products and over 2,400 SKU's
in several product categories. The Company's product line includes vitamins,
minerals, amino acids, fish and marine oils, sports nutrition products
(including food bars) and special formulas marketed under the TWINLAB trademark,
a full line of herbal supplements, phytonutrients and herb teas marketed under
the Nature's Herbs, HealthCare Naturals, TruHerbs and Alvita trademarks, a line
of nutritional supplements marketed through Changes International under the
Changes trademark, a full line of vitamins, herbal supplements and personal care
items under the Bronson brand name through its catalog division and a line of
food bars under the PR*Bar and Ironman Triathlon trademarks through its
PR*Nutrition division. The Company also sells certain products under private
label arrangements with third parties. Some of these products are manufactured
by Health Factors, which also manufactures the majority of the Bronson catalog
products. The Company also publishes health, fitness and nutrition-related
publications through its Publishing division.
The following table sets forth certain information concerning each of the
Company's product categories:
Five-Year
Number of Percentage of Compound Annual
Product Category SKU's 1998 Gross Sales Gross Sales Growth
---------------- ----- ---------------- ------------------
TWINLAB Products ..................... 1,165 54.6% 18.0%
Herbal Supplement and Teas Products
742 19.3 36.5
Bronson Products ..................... 421 5.1 N/A
Changes Products ..................... 67 14.0 N/A
PR Nutrition Products ................ 57 5.9 90.8
Publishing ........................... N/A 1.1 8.7
------ ------ ------
TOTAL ...................... 2,452 100.0% 28.2%
====== ====== ======
Twinlab Division. The TWINLAB division is responsible for the manufacture
and sale of vitamins, minerals, amino acids, sports nutrition formulas and other
nutritional supplement products marketed under the TWINLAB brand name including
multivitamins, such as Daily One Caps and Animal Friends, single-entity
vitamins, such as B-1 Caps and Mega E Softgels, minerals, such as Calcium
Citrate Caps and Magnesium Caps, and amino acids such as L-Glutamine Caps and
Mega L-Carnitine Tabs. These products are generally available in a variety of
delivery forms, including liquid, powder, capsule and tablet to accommodate a
variety of consumer tastes and preferences. This category targets a broad array
of health conscious consumers, with particular emphasis on consumers who utilize
nutritional supplements in their daily diet and who demand premium quality
ingredients in a broad variety of dosages and delivery methods.
The sports nutrition products sold under the Twinlab brand consist of a
wide variety of nutritional supplements designed for
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and targeted to active lifestyle consumers. These products are specially
formulated to help individuals achieve their personal physical goals and enhance
performance. Sports nutrition products include Hydra Fuel and Ultra Fuel drinks,
which replenish glucose and electrolytes depleted during strenuous exercise;
DietFuel, RxFuel and Ripped Fuel, which are marketed for the preservation of
lean body mass and the building of muscle mass in conjunction with a low fat
diet and exercise program; Creatine Fuel, a university tested supplement
designed to increase body mass and muscular performance; and Metabolift, a
successful thermogenic formula. The Company's sports nutrition products are
utilized by a variety of health conscious consumers including amateur and
professional athletes in a variety of competitive sports. The Company believes
that its sports nutrition business serves to increase the Company's brand
awareness among customers who, as they grow older, are likely to shift their
buying patterns to include the Company's vitamins, herbs and other
nutraceuticals.
Twinlab's special formulas consist of a broad assortment of products
formulated with specific health conditions or objectives in mind. Special
formulas are primarily targeted to sophisticated users of health related
products, including regular customers of health and natural food stores.
Examples include Beyond Cholesterol, which assists with a healthy cholesterol
level, OcuGuard Plus with Lutein, which is formulated for nutritional support
for the eyes, Coenzyme Q10, which is designed for cardiovascular health,
MaxiLIFE Glucosamine and Chondroitin Sulfate Formula, which nutritionally
supports healthy bone and joint function, and the MaxiLIFE Protector Series, a
premium supplement line for the body's most aging-prone areas. In addition, the
Company sells a variety of fish and marine oils in a number of different
delivery forms which offer a number of nutritional benefits, including favorable
effects on cardiovascular health.
In 1998, the Twinlab division introduced the first line of herbs to be
sold under the Twinlab trademark. Twinlab TruHerbs are a full line of
approximately 45 products of which approximately seven are manufactured
utilizing a "Time Release" technology for a sustained herbal activity level.
In 1998, the Twinlab division also introduced a line of six supplements to
the mass market channel under the Ironman Triathlon trademark which is licensed
to the Company. The Company believes this supplement line compliments the
nutritionally enhanced food bar line marketed by the Twinlab division under the
Ironman Triathlon mark
Herbal Supplements and Teas. Herbal supplements and phytonutrients
(produced from nutrients from botanical sources that are considered to have
medicinal properties) have become increasingly important categories across all
distribution channels. Through its Nature's Herbs product line, the Company
produces a full line of herbal supplements and phytonutrients which offer
natural alternatives to over-the-counter medications. The Company manufactures
and markets approximately 575 herbal and botanical supplements which are
produced at the Company's modern FDA registered Utah Facility and sold primarily
under the Nature's Herbs and TruHerbs brand names. Twinlab's herbal products
include single herbs, such as saw palmetto, garlic, ginseng and golden seal;
traditional combinations, such as echinacea-golden seal; standardized extracts,
such as St. John's Wort Power, Gingko Power, Bilberry Power and Milk Thistle
Power sold under the POWER HERBS(R) brand name; and natural health care product
formulations, such as Allerin and Coldrin. The Company supplies herbal
supplements to Wal-Mart for its Spring Valley private label line. Twinlab
introduced the first line of time-release herbs ever developed. This advanced
technology includes a unique micro-encapsulation process that permits the
Company's finely granulated herbal extracts to dissolve gradually and
consistently throughout the day. Nature's Herbs brand products are packaged
using the innovative FRESH CARE System developed by the Company. The FRESH CARE
System is the first all-glass and antioxidant-protected herbal packaging system
that helps remove oxygen while locking out air, moisture and light in order to
maintain potency and to extend freshness.
Through its Alvita product line, the Company offers approximately 144 herb
teas in both single use bags and bulk. Alvita is a leading brand of herb tea and
is one of the most recognizable tea brands sold through health and natural food
stores. Founded in 1922, Alvita is one of the nation's oldest herb tea
companies. Alvita purchases tea in bulk form, formulates blends of natural herb
teas and designs the packaging for its products. Alvita's teas are currently
blended and packaged at the Company's Utah facility and by an independent
contractor. Alvita teas include Peppermint Leaf, Chamomile, Echinacea, Golden
Seal, Ginger and Senna Leaf, as well as new-age blends such as Chinese Green
Tea, available in a choice of citrus flavors. Alvita markets its products with
an environmentally conscious theme by packaging bulk tea and tea bags in paper
and recyclable foil pouches and by not utilizing shrink wrap for either its
outer boxes or tea bags. In the fall of 1998, the Company launched a line of
teas under the trademark Herbal Orchard. Initially, six medicinal teas made with
real fruit and decaffeinated green tea were introduced with names such as Lazy
Lemontime and Blackberry Moon.
Direct Sales Products. Through Changes International, a network marketing
company that was acquired in November 1997, the Company develops, markets and
sells vitamins, herbs and nutritional supplements under the Changes brand name.
Changes International operates through a large sales force of independent
distributors located throughout the United States, Canada and the United
Kingdom. Changes International's products include Thermolift, a thermogenic diet
product, Changes Relief, an advanced supplement that nutritionally supports
healthy bone and joint functions, and Perfor-Max, an antioxidant formula. All of
Changes International's products are specially formulated and packaged and are
manufactured by an independent contractor pursuant to the
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Company's specifications solely for the network marketing sales force and are
not intended for sale to retail outlets at this time. During 1999, the Company
intends to solidify its distribution base through the introduction of new and
innovative products.
Bronson was acquired in April 1998. The Bronson catalog is a leading
source for the direct sale of high quality nutritional supplement products.
Since its acquisition in April, the Bronson catalog and mailing lists have been
significantly updated, and a number of new products have been added to the
catalog, such as 7-Keto DHEA and Bronson Tomato Power (an antioxidant product
containing lycopene). Bronson also recently introduced, via a specialty mailing,
ten innovative products under the Bronson Pro-Complex Formula brand name.
PR*Nutrition. In August of 1998, the Company acquired PR*Nutrition, a
distributor of nutritionally enhanced food bars and related drink powders. The
bars sold by the PR*Nutrition division are generally based upon a dietary ratio
of forty percent carbohydrates, thirty percent protein and thirty percent fat.
PR*Nutrition's products are manufactured by a third party pursuant to the
Company's specifications. The formulations necessary to make such products are
owned by the Company. The Ironman Triathlon bar is sold through retail channels.
The PR*Bar and PR*Powder are sold by PR*Nutrition through direct response sales.
Publications. Through ARP, the Company publishes Muscular Development, a
high-quality fitness magazine featuring a scientific advisory board and
contributors considered to be among the most accomplished and knowledgeable in
their respective fields. The magazine covers recent developments and provides
innovative information in the fields of training and nutrition research,
supplements, health, sports, fitness and diet. This publication serves as a
vehicle to increase public awareness of the Company's products and as an outlet
for a portion of the Company's advertising program. Muscular Development
currently has a monthly paid circulation of approximately 100,000 readers. The
Company also publishes a monthly newsletter and select books concerning
nutritional supplements and related subjects.
Product Development
The Company is recognized as an industry leader in new product
development. The Company closely monitors consumer trends and scientific
research, and has consistently introduced innovative products and programs in
response thereto. The Company's product development staff regularly studies
numerous health and nutrition periodicals, including the New England Journal of
Medicine and the Journal of the American Medical Association, in order to
generate ideas for new product formulations. Management believes that the
Company's introduction of new products has increased market share for both the
Company and its retail customers, and the Company intends to continue developing
new products and programs in the future. The Company was the first major
nutritional supplement manufacturer to introduce such industry-wide innovations
as: an all-capsule vitamin and mineral line that is well tolerated by
allergy-prone individuals; a complete line of amino acids and fish and marine
oils; the most advanced and complete array of antioxidants, including beta
carotene, lutein, lycopene, L-glutathione, N-acetyl cysteine (NAC), lipoic acid
and an entirely new class of antioxidants, including polyphenols, flavonoids and
isoflavones; concentrated Coenzyme Q10; chondroitin sulfate; thermogenic
products; standardized herbal extracts guaranteeing potency (Certified Potency);
the FRESH CARE packaging system, designed to preserve potency and freshness; a
full line of Ayurvedic Indian herbal products; and a complete line of herb teas
in single use bag and bulk form. From 1991 through 1998, the Company introduced
over 700 products, with over 140 new products introduced in 1998, including
Twinlab TruHerbs. In 1999, the Company expects to introduce many new products in
the health and natural food and mass market channels, 18 of which have already
been introduced. Representative products introduced in 1999 include Cell Boost
with IP6 and Diet Fuel/Chitosan Formula. The Company more than doubled the
number of products offered through Changes International's distribution network
during 1998. Bronson introduced its Pro-Complex Formula line in a special 1998
mailing and PR*Nutrition introduced several new products, including its Kona
Krunch and Cookies-n-Cream Ironman Triathlon bars. The Company's research and
development expenses were $1.7 million in 1998, compared to $1.1 million in
1997.
Sales and Distribution
The Company believes that its TWINLAB products have a presence in over 95%
of the health and natural food stores in the United States, but that only
approximately 20% of such stores carry a comprehensive line of the Company's
products. The Company sells its products primarily through a network of
approximately 80 distributors, which service approximately 11,000 health and
natural food stores throughout the country and selected retail outlets. Sales to
domestic distributors represented approximately 54.1% of the Company's net sales
in 1998. The Company's distributor customers include GNC, Tree of Life, Super
Nutrition, United Natural Foods, Inc. ("United Naturals"), Nature's Best, Inc.
and other distributors that supply retailers of vitamins, herbs, food bars and
other nutritional supplements. Management believes that it sells its products to
every major domestic nutritional supplement distributor servicing health and
natural food stores and is generally the largest independent supplier of
nutritional supplements to such distributors.
Several of the Company's distributors, such as GNC, Tree of Life and
United Naturals, are national in scope, but most are
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regional in nature and operate one or more localized distribution centers.
Generally, the Company enters into nonexclusive area rights agreements with its
domestic distributors, who are also responsible for new account development.
Retailers typically place orders with and are supplied directly by the Company's
distributors. In the past ten years, the Company has not lost a major
distributor customer other than through consolidation with an existing customer
of the Company. The breadth and depth of the products manufactured and the
ability to manufacture with minimal throughput times enables the Company to
maintain extremely high order fill rates, which management believes are among
the highest in the industry, with its customer base.
Tree of Life and GNC accounted for approximately 12% and 14%,
respectively, of the Company's net sales in 1998. Net sales to Wal-Mart
accounted for approximately 12% of the Company's 1998 net sales. No other single
customer accounted for more than 10% of the Company's net sales in 1998. The
largest retail organization in the health and natural food store channel which
sells the Company's products is GNC, with approximately 3,400 stores.
The Company believes that substantial long-term growth opportunities exist
within the mass market distribution channel. The Company's customers among mass
market retailers include Wal-Mart, Albertson's, Inc., American Stores, Inc.,
Rite Aid Corporation, Walgreen, CVS, Kroger and Target. Management is continuing
its efforts to expand its presence in mass market retail outlets and in 1998
hired a President of Mass Market Sales to oversee the Company's efforts in this
distribution channel, as well as additional management and staff to focus on
this market.
Changes International currently markets and distributes over 20 products
through a network of over 60,000 independent distributors in the United States,
Canada and the United Kingdom. The distributor network markets Changes
International's products directly to consumers.
Approximately 6.0%, or $19.9 million, of the Company's net sales in 1998
were derived from international sales originating from overseas distributor
organizations. The Company presently has distribution agreements covering many
western European countries including Great Britain, France, Belgium, Italy, the
Netherlands and the Scandinavian countries; eastern European countries including
Russia; Latin American countries including Mexico, Chile, Brazil and Argentina;
Middle Eastern countries including Israel and Saudi Arabia; and several other
countries in the Far East, including China and Singapore, and the Caribbean. In
1998, the Company initiated new programs to qualify distributors in Japan and
Australia and established a representative office in the United Kingdom.
Marketing
The Company's marketing strategy, which centers around an extensive
advertising and promotion program, has been a critical component of the
Company's growth, strong brand name recognition and leading position within the
nutritional supplement industry.
The Company's advertising expenditures were approximately $20.7 million in
1998, $15.9 million in 1997 and $12.4 million in 1996. The Company has
significantly increased its budget for marketing and advertising expenditures in
fiscal 1999, compared to fiscal 1998. As the Company's customers align
themselves with fewer vendors of brand name products, the Company believes that
its strong commitment to advertising and promotion will continue to constitute a
significant competitive advantage. The Company's advertising strategy stresses
brand awareness of the Company's various product categories in order to generate
purchases by customers and also communicates the points-of-difference between
the Company's products and those of its competitors.
The Company supports its key product categories through its sponsorship of
television and radio programming on network and cable stations such as ABC, CBS,
Fox, VH-1, USA and ESPN. During 1998, the Company sponsored the CBS television
Wellness Report, and its products were advertised on such popular programs as
Melrose Place, Millennium, America's Funniest Home Videos and coverage of Major
League Baseball and the National Basketball Association.
Print advertisements continue to be an integral part of the Company's
advertising efforts. The Company regularly advertises in consumer magazines such
as Better Nutrition, Delicious, Vegetarian Times, Let's Live, Natural Health,
Nutrition Science Journal, New Age Journal, Muscle & Fitness and Flex.
Other marketing and advertising programs conducted by the Company include
participation in or sponsorship of sporting events such as the Boston Marathon,
the San Diego Marathon, the New York Marathon, the Ironman Triathlon World
Championship in Hawaii, and bodybuilding shows, including Team Universe and
Fitness America. In addition, the Company promotes its products at major
industry trade shows and through in-store point of sale materials. The Company
also engages athletic personalities as well as scientists to communicate on the
Company's behalf with the trade and the public and to promote the Company's
products.
The Company has extended its marketing efforts to include various sites on
the World Wide Web, including http://www.twinlab.com, which provides an overview
of the Company in addition to a product catalog. The site also provides a list
of
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retailers carrying the Company's products and is linked to other Company sites,
including those of the Company's herbal supplement and teas division
(http://www.herbalvillage.com); the PR*Nutrition division
(http://www.prbar.com); the Bronson division
(http://www.bronson-nutritional.com) and the publishing division
(http://www.musculardevelopment.com). Changes International's web site can be
reached at http://www.changesinternational.com. Information contained in any of
the Company's World Wide Web sites shall not be deemed to be a part of or
incorporated by reference into this Annual Report on Form 10-K.
Customer Sales Support
The Company's established customer relationships are based upon the
Company's long-standing commitment to a high level of customer service. The
Company's sales force currently consists of approximately 40 dedicated sales
professionals who work to gain better placement and additional shelf space for
TWINLAB, Nature's Herbs, Alvita and PR*Nutrition products and to stay abreast of
customer needs. These sales representatives are assigned to specific territories
covering the entire continental United States, Hawaii and Alaska. These
personnel work with direct accounts, distributors and individual retailers to
enhance knowledge of the Company's products and to maximize exposure for
TWINLAB, Nature's Herbs, Alvita and PR*Nutrition products. An additional sales
and marketing staff supports Nature's Herbs products and the servicing of
customer needs. During 1998, the Company expanded its administrative and sales
infrastructure to service sales in the mass market channel, particularly its
sales of Twinlab, TruHerbs and Ironman Triathlon supplements. The Company also
designs and supplies a broad range of marketing literature, including brochures,
pamphlets and in-store display materials to help educate retailers and consumers
as to the benefits of the Company's products.
The Company maintains in-house customer service and customer sales support
departments to respond to inquiries concerning product applications, background
data, ingredient compositions and the efficacy of products. The customer service
departments of each division are staffed by full time nutrition experts and
other specially trained employees.
Changes International provides its independent distributors with a broad
range of informational materials, including product brochures, sales tools,
business and information forms, audio materials and initial distributor startup
kits. Changes International maintains a 24-hour toll-free phone line for
receiving distributors' orders and a separate customer service line to answer
product questions.
Manufacturing and Product Quality
Most of the Company's TWINLAB products are manufactured at the Company's
72,000 square foot manufacturing facility located in Ronkonkoma, New York (the
"Ronkonkoma Facility"). Most of the Company's TWINLAB products are packaged at
and distributed from the Company's 106,515 square foot warehousing and packaging
facility located in Bohemia, New York (the "Bohemia Facility"). The Bohemia
Facility was leased by the Company commencing in 1998. Herbal supplements and
phytonutrients, including the TruHerbs line, are manufactured at the Company's
FDA registered Utah Facility and at the Ronkonkoma Facility. The Utah Facility
is currently undergoing construction to expand from 57,000 square feet in 1997
to approximately 160,000 square feet during the first half of 1999, of which
approximately 140,000 square feet was completed by the end of 1998. Herb teas
are currently packaged at the Utah Facility and by an independent contractor and
are warehoused at and shipped from the Utah Facility. The products of Changes
International and PR*Nutrition are currently manufactured and packaged by
independent contractors pursuant to the Company's specifications and warehoused
in Florida, and California, respectively. In connection with the Bronson
acquisition, the Company acquired two adjacent, approximately 15,000 square foot
manufacturing and warehouse facilities in Tempe, Arizona (collectively the
"Tempe Facility") that manufacture and store the Bronson brand products and
manufacture certain other products for third parties. The Company's modern
manufacturing facilities provide the Company with the capability to promptly
meet customers' sales demands and to maintain the highest level of quality
control. The Company is continuously upgrading its facilities and enhancing its
manufacturing capabilities through new equipment purchases and technological
improvements. Management believes that the Company's manufacturing facilities
are among the most advanced in the nutritional supplement industry. In March
1998, the Company commenced construction of the addition to the Utah Facility
which will provide additional capacity for the production, warehouse and
distribution operations, as well as additional office space for the herbal
supplement and teas division. The cost of the project, including land,
construction and equipment, will total approximately $13.3 million.
Approximately $9.1 million of this amount was financed with working capital in
1998 of which approximately $8 million will be converted to a ten year mortgage.
Management believes that the Company's Ronkonkoma, Bohemia, Utah and Tempe
Facilities will be sufficient to enable the Company to meet sales demand for the
foreseeable future. If additional space is required, management believes that it
will have the option to lease or purchase additional space or to construct
additional facilities. See Item 2 "Properties."
The Company's modern manufacturing operations feature the highest quality
blending, filling and packaging capabilities, which enable the Company to offer
quality and consistency in formulation and dosage forms. The Company operates
flexible manufacturing lines which enable it to efficiently and effectively
shift output among various products as dictated by customer demand. The Company
is capable of producing over 40 million capsules and tablets, over 100,000
pounds of blended powder and up to 2,500
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gallons of liquid preparations per day. The Company has twelve high-speed
capsule and tablet packaging lines, two high-speed liquid filling lines and two
powder filling lines, which are capable of operating simultaneously, at its
Ronkonkoma, Bohemia, Utah and Tempe Facilities. The Company manufactures the
powders used in its Ultra Fuel, Hydra Fuel and Nitro Fuel single-serving sports
drink products and utilizes a contract bottler for the hydration and bottling of
these products. The Ronkonkoma Facility operates, when necessary, on a 24-hour
work day that includes two production shifts and a third shift primarily for
cleaning, maintenance and equipment set-up.
The Company sources its raw material needs from over 200 different
suppliers, including some of the largest pharmaceutical and chemical companies
in the world. The Company's raw materials and packaging supplies are readily
available from multiple suppliers, and the Company is not dependent on any
single supplier for its needs. No single supplier accounted for more than 10% of
the Company's total purchases in 1998.
The Company's quality standards are a significant factor in consumer
purchase decisions, and the Company believes it has established a competitive
advantage based on the premium quality of its products. All capsule and tablet
products manufactured by the Company are visually inspected before being
packaged. Moreover, each of the Company's products undergoes comprehensive
quality control testing procedures from the receipt of raw materials to the
release of the packaged product. The Company utilizes real-time computerized
monitoring of its manufacturing processes to ensure proper product weights and
measures. In addition, the Company maintains three in-house laboratories with
state-of-the-art testing and analysis equipment where the Company performs most
of its testing, including stability tests, active component characterization
utilizing thin-layer and high-pressure liquid chromatography, and UV visible and
infrared spectrometry. The Company contracts with independent laboratories to
perform the balance of its testing requirements. A team of full-time quality
assurance professionals regularly conducts a wide variety of visual and
scientific tests on all manufactured products, and samples of raw materials and
finished products are generally retained for quality control purposes.
The Company has a strong commitment to maintaining the quality of the
environment. All of the Company's plastic and corrugated cardboard containers
are recyclable and, wherever possible, the Company uses recyclable glass. The
Company was also one of the first companies in the industry to use biodegradable
starch pellets for packing materials. In addition, the Company has removed most
solvents from its production processes (using natural, environmentally-safe
alternatives) and helped develop a special glue, for manufacturing purposes,
that contains virtually no harmful hydrocarbons. The Company believes it is in
material compliance with all applicable environmental regulations.
Competition
Vitamins and nutritional supplements are sold primarily through several
channels of distribution: health and natural food stores, mass market retailers
(drug store chains, supermarkets and other mass merchandisers), and direct sales
channels (including network marketing, catalog and internet distribution).
The Company's principal competitors in the health and natural food store
market include Nutraceutical International Corporation, Weider Nutrition
International, Inc., Nature's Way Products, Inc., Natrol, Inc. and Nature's Plus
Inc. Solgar Vitamin and Herb Company, one of the Company's competitors, was
acquired by American Home Products, Inc. during 1998. Private label products of
the Company's customers also provide competition to the Company's products. For
example, a substantial portion of GNC's vitamin and mineral supplement offerings
are products offered under GNC's own private label.
The Company believes that the growing number of health and natural food
retailers are increasingly likely to align themselves with those companies which
offer a wide variety of high quality products, have a loyal customer base,
support their brands with strong marketing and advertising programs and provide
consistently high levels of customer service. The Company believes that it
competes favorably with other nutritional supplement companies because of its
comprehensive line of premium products, premium brand names, commitment to
quality, ability to rapidly introduce innovative products, , high customer-order
fill rate, strong and effective sales force and distribution network, and
sophisticated advertising and promotional support. The wide variety and
diversity of the forms, potencies and categories of the Company's products are
important points of differentiation between the Company and many of its
competitors.
In the mass market channel of distribution, the Company competes with
major private label and broadline brand manufacturers, including Leiner Health
Products Inc., Pharmavite Corp., Rexall Sundown, Inc. and NBTY, Inc. ("NBTY"),
certain of which are larger and have access to greater resources than the
Company. The Company believes it competes on the basis of customer service,
product quality, pricing and marketing support. The Company believes that it
competes favorably with other companies because of its (i) sales and marketing
strategies, (ii) customer service (including speed of delivery) and (iii)
reputation as being a supplier of premium quality products.
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Many of the Company's competitors in markets other than the health and
natural food store market, including the major pharmaceutical companies, have
substantially greater financial and other resources than the Company. During
1998, several major pharmaceutical companies, including American Home Products,
Warner-Lambert and Bayer, introduced proprietary lines of herbal supplements
into the mass market channel.
Although Changes International competes with other health and nutritional
food companies, the Company believes Changes International's primary competition
stems from other network marketing companies. Changes International competes in
the recruitment of independent distributors with other network marketing
organizations, including Avon, NuSkin, Rexall Showcase International and others,
whose product lines may or may not compete with the products of Changes
International.
In addition to the aforementioned retail competitors, the Bronson catalog
competes with many other nutritional supplement catalogs, including those
distributed by Amrion, NBTY and individual retail stores and chains. Bronson
also competes with the many internet sites that are devoted to the sale of
nutritional supplements. With respect to both the PR*Bar and the Ironman
Triathlon Bar, PR*Nutrition competes against other manufacturers and
distributors of nutritionally enhanced food bar products, including Powerbar,
Clif Bar and MetRx. With respect to bars that are formulated based on a
nutritional concept of forty percent carbohydrates, thirty percent protein and
thirty percent fat, the primary competitor is Balance Bar, marketed by Balance
Bar, Inc.
Regulatory Matters
Government Regulation
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the Federal Trade Commission (the "FTC"), the United States Department
of Agriculture and the Environmental Protection Agency ("EPA"). These activities
are also regulated by various agencies of the states, localities and foreign
countries to which the Company's products are distributed and in which the
Company's products are sold. The FDA, in particular, regulates the formulation,
manufacture and labeling of vitamin and other nutritional supplements.
On October 25, 1994, the President signed into law the Dietary Supplement
Health and Education Act of 1994 ("DSHEA"). This law revised the provisions of
the Federal Food, Drug, and Cosmetic Act (the "FFDC Act") concerning the
composition and labeling of dietary supplements and, in the judgment of the
Company, is favorable to the dietary supplement industry. The legislation
creates a statutory class of "dietary supplements." This class includes
vitamins, minerals, herbs, amino acids and other dietary substances for human
use to supplement the diet, and the legislation grandfathers, with certain
limitations, dietary ingredients on the market before October 15, 1994. A
dietary supplement which contains a new dietary ingredient, one not on the
market before October 15, 1994, requires evidence of a history of use or other
evidence of safety establishing that it will reasonably be expected to be safe.
The substantial majority of the products marketed by the Company are classified
as dietary supplements under the FFDC Act.
Both foods and dietary supplements are subject to the Nutrition Labeling
and Education Act of 1990 (the "NLEA"), which prohibits the use of any health
claim for foods, including dietary supplements, unless the health claim is
supported by significant scientific agreement and is either pre-approved by the
FDA or the subject of substantial government scientific publications and a
notification to the FDA. To date, the FDA has approved the use of only limited
health claims for dietary supplements. However, among other things, the DSHEA
amends, for dietary supplements, the NLEA by providing that "statements of
nutritional support" may be used in labeling for dietary supplements without FDA
preapproval if certain requirements, including prominent disclosure on the label
of the lack of FDA review of the relevant statement, possession by the marketer
of substantiating evidence for the statement and post-use notification to the
FDA, are met. Such statements may describe how particular nutritional
supplements affect the structure, function or general well-being of the body
(e.g. "promotes your cardiovascular health").
The FDA issued final dietary supplement labeling regulations in 1997 that
required the Company to revise, by the end of March 1999, most of its product
labels. The Company believes it is in material compliance with these
regulations.
Advertising and label claims for dietary supplements and conventional
foods have been regulated by state and federal authorities under a number of
disparate regulatory schemes. There can be no assurance that a state will not
interpret claims presumptively valid under federal law as illegal under that
state's regulations, or that future FDA regulations or FTC decisions will not
restrict the permissible scope of such claims.
Governmental regulations in foreign countries where the Company plans to
commence or expand sales may prevent or delay entry into the market or prevent
or delay the introduction, or require the reformulation, of certain of the
Company's products. Compliance with such foreign governmental regulations is
generally the responsibility of the Company's distributors for those countries.
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These distributors are independent contractors over whom the Company has limited
control.
As a result of the Company's efforts to comply with applicable statutes
and regulations, the Company has from time to time reformulated, eliminated or
relabeled certain of its products and revised certain provisions of its sales
and marketing program. The Company cannot predict the nature of any future laws,
regulations, interpretations or applications, nor can it determine what effect
additional governmental regulations or administrative orders, when and if
promulgated, would have on its business in the future. They could, however,
require the reformulation of certain products to meet new standards, the recall
or discontinuance of certain products not capable of reformulation, additional
recordkeeping, expanded documentation of the properties of certain products,
expanded or different labeling, and/or scientific substantiation. Any or all of
such requirements could have a material adverse effect on the Company's results
of operations and financial condition.
The Company's Utah Facility is registered with the FDA as a manufacturer
of OTC drugs and is subject to periodic inspection by the FDA.
Compliance with the provisions of national, state and local environmental
laws and regulations has not had a material adverse effect upon the capital
expenditures, earnings, financial position, liquidity or competitive position of
the Company. See "Legal Proceedings."
Ma Huang
Approximately 15 of the Company's products include an herb known as "Ma
Huang," which contains naturally-occurring ephedrine. Certain of such products
also contain caffeine or other central nervous system stimulants. Such products
accounted for approximately 19% of the Company's net sales in 1998. The
Company's products which contain Ma Huang are generally marketed for
bodybuilding, weight loss, sports nutrition and other purposes, including
increased endurance and energy, generally in conjunction with diet or exercise,
and as natural alternatives to over-the-counter medications.
Ma Huang has been the subject of certain adverse publicity in the United
States and other countries relating to alleged harmful or adverse effects. The
FDA has proposed regulations relating to the sale of dietary supplements
containing Ma Huang which, if promulgated in final form, would require the
Company to substantially reformulate and relabel almost all of its Ma Huang
products and would limit potency, require warnings, prohibit certain combination
products and would preclude the Company from making bodybuilding and weight loss
claims for such products. Comments from industry participants and inquiries from
Committees of the United States Congress have been filed with the FDA
challenging the scientific and legal basis for the proposed regulations. The
Company is not able to predict whether the FDA's proposed regulations will
become final. There can be no assurance as to the effect that any resulting
reformulation, relabeling or change in the marketing of the Company's products
would have on the sales of such products.
A number of state and local governments have proposed or passed
legislation prohibiting or regulating the sale of Ma Huang products. The
Company's products containing Ma Huang may become subject to further federal,
state, local or foreign laws or regulations, which could also require the
Company to reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or relabel its products with different warnings or
revised directions for use. There can be no assurance that the loss of sales of
the Company's Ma Huang products would not have a material adverse effect on the
Company. See Item 3 "Legal Proceedings."
Employees
At December 31, 1998, the Company employed 974 persons, of which 248 were
involved in executive, sales and administrative activities. The balance of the
Company's employees were engaged in production, packaging and shipping
activities. Changes International also subcontracts approximately 80 persons
from an independent personnel agency. None of the Company's employees are
covered by a collective bargaining agreement, and management considers relations
with its employees to be good.
Trademarks and Patents
The Company owns trademarks registered with the United States Patent and
Trademark Office and/or similar regulatory authorities in many other countries
for its TWINLAB, Nature's Herbs, Alvita, and Fuel family of trademarks, and has
rights to use other marks material to its business. In addition, the Company has
obtained over two hundred trademarks for various of its products and has
trademark registrations with the United States Patent and Trademark Office for
the TWINLAB, Nature's Herbs, PR, Alvita and Changes brands. The Ironman
Triathlon trademark is licensed to the Company. Federally registered trademarks
have perpetual life, provided they are renewed on a timely basis and used
properly as trademarks, subject to the rights of third parties to seek
cancellation of the marks. The Company regards its trademarks and other
proprietary rights as valuable assets and believes that they have significant
value in the marketing of its products. The Company vigorously protects its
trademarks against infringement. The
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Company currently has one patent application pending
FACTORS AFFECTING FUTURE PERFORMANCE
Uncertainty Related to Acquisitions
The Company may pursue acquisition opportunities that complement or extend
its existing products or are compatible with its business philosophy and
strategic goals. Acquisitions involve a number of risks that could adversely
affect the Company's operating results, including the diversion of management's
attention, the assimilation of operations and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. There can be no assurance that the
Company will consummate future acquisitions on satisfactory terms, if at all,
that adequate financing will be available on terms acceptable to the Company, if
at all that any acquisition will be permitted under the Company's financing
instruments, that any acquired product lines or businesses will be successfully
integrated or that such product lines or businesses will ultimately have a
positive impact on the Company, its financial condition or operations. In
addition, such acquisitions could result in substantial equity dilution to
existing stockholders.
FTC Inquiry
The Company received an inquiry from the FTC with respect to the Company's
substantiation for certain advertising claims made for its product "Herbal Phen
Fuel". After the Company submitted scientific substantiation to the FTC, the FTC
forwarded a proposed consent order (the "Consent Order") to the Company. The
proposed Consent Order provides for, among other things, injunctive relief
prohibiting the Company from making weight-loss claims for its products without
adequate scientific substantiation. The proposed Consent Order is the subject of
negotiation between the FTC and the Company. The Company is unable to predict
whether it will be able to reach a negotiated settlement of this matter.
Restrictions Imposed by Terms of the Company's Indebtedness
The Company's borrowing arrangements impose upon the Company certain
financial and operating covenants, including, among others, requirements that
the Company maintain certain financial ratios and satisfy certain financial
tests, limitations on capital expenditures and restrictions on the ability of
the Company to incur debt, pay dividends or take certain other corporate
actions, all of which may restrict the Company's ability to expand or to pursue
its business strategies. Changes in economic or business conditions, results of
operations or other factors could in the future cause a violation of one or more
covenants in the Company's debt instruments.
Competition
The business of developing, manufacturing and selling vitamins, herbs,
sports nutrition products, nutritional supplements and other nutraceuticals is
highly competitive in all channels of distribution. There are numerous companies
in the vitamin and nutritional supplement industry selling products to mass
merchandisers, drug store chains, independent drug stores, supermarkets, health
and natural food stores, as well as through catalogs, the internet and network
marketing. Certain of the Company's competitors are substantially larger and
have greater financial resources than the Company. See "Competition."
Absence of Clinical Studies and Scientific Review; Effect of Publicity
While the Company conducts extensive quality control testing on its
products, the Company generally does not conduct or sponsor clinical studies on
its products. The Company's products consist of vitamins, minerals, herbs and
other ingredients that the Company regards as safe when taken as suggested by
the Company. However, because the Company is highly dependent upon consumers'
perception of the safety and quality of its products as well as similar
products distributed by other companies (which may not adhere to the same
quality standards as the Company), the Company could be adversely affected in
the event any of the Company's products, or any similar products distributed by
other companies, should prove or be asserted to be harmful to consumers. In
addition, because of the Company's dependence upon consumer perceptions,
adverse publicity associated with illness or other adverse effects resulting
from consumers' failure to consume the Company's products as suggested by the
Company or other misuse or abuse of the Company's products or any similar
products distributed by other companies could have a material adverse effect on
the Company's results of operations and financial conditions.
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Furthermore, the Company believes that the recent growth experienced by
the nutritional supplement market is based in part on national media attention
regarding recent scientific research suggesting potential health benefits from
regular consumption of certain vitamins and other nutritional products. Such
research has been described in major medical journals, magazines, newspapers and
television programs. The scientific research to date is preliminary, and there
can be no assurance of future favorable scientific results and media attention
or of the absence of unfavorable or inconsistent findings.
Dependence on Distributors and Customers
The Company's success depends in part upon its ability to attract, retain
and motivate a large base of distributors, and its ability to maintain a
satisfactory relationship with Tree of Life, GNC and Wal-Mart. Tree of Life, GNC
and Wal-Mart accounted for approximately 12%, 14% and 12% respectively, of the
Company's net sales in 1998. The loss of Tree of Life or GNC as a distributor or
Wal-Mart as a customer, or the loss of a significant number of other
distributors, or a significant reduction in purchase volume by Tree of Life,
GNC, Wal-Mart or such other distributors or customers, for any reason, would
have a material adverse effect on the Company's results of operations and
financial condition.
Availability of Raw Materials
Substantially all of the Company's herbal supplements and herb teas
contain ingredients that are harvested by and obtained from third-party
suppliers, and many of those ingredients are harvested internationally and only
once per year or on a seasonal basis. An unexpected interruption of supply, such
as a harvest failure, could cause the Company's results of operations derived
from such products to be adversely affected. Although the Company has generally
been able to raise its prices in response to significant increases in the cost
of such ingredients, the Company has not always in the past been, and may not in
the future always be, able to raise prices quickly enough to offset the effects
of such increased raw material costs.
Item 2. PROPERTIES
The Company owns a vitamin, mineral and nutritional supplement
manufacturing facility in Ronkonkoma, New York. The 72,000 square foot
Ronkonkoma Facility is in the process of being redesigned to permit additional
and updated manufacturing capacity. The estimated cost of this project is $5
million, which is expected to be financed with working capital. In April 1998,
the Company moved substantially all of its executive and administrative offices
to approximately 21,000 square feet of leased space in a modern office building
in Hauppauge, New York. The Company also leases 26,300 square feet of warehouse
space in Ronkonkoma, 106,515 square feet of packaging, warehousing and shipping
space in Bohemia, New York and 5,000 square feet of office space in Ronkonkoma.
In addition, the Company owns the modern FDA-registered Utah Facility. The Utah
Facility, which was initially constructed as a 57,000 square foot facility in
1993, houses office, manufacturing and warehousing facilities for the operations
of the herbal supplements and teas division. The Company is in the process of
expanding the Utah Facility to approximately 160,000 square feet, of which
approximately 140,000 square feet were completed by the end of 1998. The Company
also leases 21,500 square feet of warehouse and office space in Destin, Florida
for Changes International. The Company owns approximately 30,000 square feet of
total manufacturing and warehouse space in two separate 15,000 square foot
adjacent properties in Tempe, Arizona and leases an additional 2,200 square feet
of warehouse space in Tempe. The Company leases approximately 14,500 square feet
of office and warehouse space for its PR*Nutrition operations in San Diego,
California.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition. During 1998, the Company
substantially completed construction of an approximately 85,000 square foot
addition to its Utah Facility that provides additional capacity for production,
warehouse and distribution operations, as well as additional office space for
the herbal supplement and teas division. The cost of the Utah Facility expansion
project, including land, construction and equipment, is expected to total
approximately $13.3 million, of which $9.1 million was expended in 1998 and
financed out of working capital. Approximately $8 million of this cost will be
converted to a ten year mortgage. Management believes that the Company's
Ronkonkoma, Utah and Tempe Facilities, coupled with its leased space in Bohemia,
Hauppauge, Destin and San Diego will be sufficient to enable the Company to meet
manufacturing and sales demand for the foreseeable future. If additional space
is required, management believes that it will have the option to lease or
purchase additional space or to construct an additional facility.
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Item 3. LEGAL PROCEEDINGS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. The Company may be subjected to various product liability
claims, including, among others, that its products contain contaminants or
include inadequate instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. While such claims to date have
not been material to the Company and the Company maintains product liability
insurance, there can be no assurance that product liability claims and the
resulting adverse publicity will not have a material adverse effect on the
Company. The Company carries insurance in the types and amounts that management
considers reasonably adequate to cover the risks associated with its business.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or if available will be adequate to cover liabilities.
The Company has been named as a defendant in five currently pending
lawsuits alleging that its Ma Huang containing products caused injuries and/or
damages, as well as two proceedings seeking class action certification for
alleged deceptive advertising claims related to its Ma Huang products. The
Company intends to vigorously defend these lawsuits. The Company believes that
such claims, if successful, would not have a material adverse effect on the
financial condition or results of operations of the Company. There can be no
assurance that the Company will not be subject to further private civil actions
with respect to its Ma Huang products.
The State of California and the NRDC filed lawsuits against the Company
and a large number of manufacturers of dietary supplements containing calcium,
claiming that naturally-occurring lead levels in these supplements exceed
acceptable levels under California law ("Proposition 65"). The NRDC and State of
California have settled these suits with the manufacturers, including the
Company. The Company also received notice of a possible State of California
legal claim relating to alleged toxic impurities in fish oil products. No action
has been filed. There can be no assurance that the Company will not be the
subject of future Proposition 65 claims asserted by the State of California or
private parties.
Securities Law Litigation
In December 1998, two shareholder class action lawsuits were filed in the
United States District Court for the Eastern District of New York against the
Company and certain of its officers and directors. The plaintiffs allege that
the Company and the other defendants violated the securities laws by making
material misstatements and failing to state material facts about the Company's
business and financial condition, among other things, in securities act filings
and public statements. Plaintiffs have moved to consolidate these lawsuits and
all subsequent lawsuits relating to the same issues. On February 25, 1999,
proposed plaintiffs' co-lead counsel announced that it would amend the
complaints to enlarge the class of plaintiffs suing the Company to include all
buyers of the Company's stock from March 17, 1998 through February 24, 1999.
On February 11, 1999, William Logue, Sheri Sears and Barry Nussbaum, the
former owners of PR*Nutrition, commenced a lawsuit in the United States District
Court for the Southern District of New York against the Company, Twin and
certain of its officers and directors. The plaintiffs' claims include alleged
violations of the securities laws, breach of contract, fraud and negligent
misrepresentation in connection with the Company's purchase of 100% of the stock
of PR*Nutrition. More specifically, the plaintiffs allege that the Company and
the other defendants made material misstatements or failed to disclose material
facts about the Company's business and financial condition, among other things,
in securities act filings and other statements.
In the first quarter of 1999, a series of separate shareholder class
action lawsuits were filed in the United States District Court for the Eastern
District of New York against the Company, and certain of its officers and
directors. These lawsuits have not yet been served on the Company. The
plaintiffs generally allege that the Company and the other defendants violated
the securities laws by making material misstatements and failing to state
material facts about the Company's business and financial condition, among other
things, in securities act filings and public statements. The class of plaintiffs
suing the Company in these actions is generally all buyers of the Company's
stock from April 28, 1998 through February 24, 1999.
The Company intends to vigorously defend itself against these securities
law litigations. It is premature, however, to determine the effect, if any,
such actions may have on the Company's consolidated financial position, results
of operations or liquidity.
Other Legal Actions
The Company is presently engaged in various other legal actions that arise
in the ordinary course of business. Although ultimate liability cannot be
determined at the present time, the Company believes that the amount of any such
liability, if any, from these other actions, after taking into consideration the
Company's insurance coverage, will not have a material adverse effect on its
results of operations or financial condition.
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Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal year 1998, no matters were submitted
to a vote of security holders of the Company.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has traded on the Nasdaq National Market
since the Company's initial public offering (the "IPO") of its common stock, par
value $1.00 per share (the "Common Stock"), in November 1996, in which 8,500,000
shares of Common Stock were issued by the Company. Prior to the IPO, there was
no public market for the Common Stock. On March 25, 1999, the last reported
sales price of the Company's Common Stock as reported on the Nasdaq National
Market was $8.563. As of March 25, 1999, there were 194 holders of record of the
Company's Common Stock. The high and low sale prices for the Common Stock as
reported by the Nasdaq National Market for 1997 and 1998 are summarized below.
High Low
---- ---
1997
First Quarter............................... $15.250 $12.000
Second Quarter.............................. 24.000 12.125
Third Quarter............................... 24.750 19.000
Fourth Quarter.............................. 25.375 17.750
1998
$33.875 $22.58
Second Quarter.............................. 45.750 35.250
Third Quarter............................... 47.875 24.375
Fourth Quarter.............................. 26.438 11.500
From 1993 until May 7, 1996, the Company consisted solely of "S"
corporations. While maintaining such status, the Company periodically declared
and paid dividends to its shareholders, including amounts sufficient for its
shareholders to pay their income taxes on the earnings of the Company that were
treated as having been earned by the Company's shareholders. The Company
terminated its "S" corporation status on May 7, 1996.
The Company currently intends to retain earnings to finance its operations
and future growth and does not anticipate paying any cash dividends on its
Common Stock in the foreseeable future. Twinlab conducts its business through
its direct and indirect subsidiaries and has no operations of its own. The
principal assets of Twinlab are the capital stock of its direct and indirect
subsidiaries, Twin, ARP, Changes International, Bronson, Health Factors and
PR*Nutrition. Accordingly, Twinlab has no independent means of generating
revenues. As a holding company, Twinlab's internal sources of funds to meet its
cash needs, including payment of expenses, are dividends and other permitted
payments from its direct and indirect subsidiaries. Financing arrangements under
which Twin is the borrower restrict the payment of dividends and the making of
loans, advances or other distributions to Twinlab, except in certain limited
circumstances. The payment of cash dividends in the future will depend upon,
among other things, the Company's results of operations, financial condition,
cash requirements and other factors deemed relevant by the Company's Board of
Directors.
On May 7, 1996, Twin sold $100,000,000 aggregate principal amount of its
10 1/4% Senior Subordinated Notes due 2006 (the "Old Notes") to Donaldson,
Lufkin & Jenrette Securities Corporation and Chase Securities Inc.
(collectively, the "Initial Notes Purchasers") for $100,000,000 in cash (less
the Initial Notes Purchasers' discount of $3,000,000) (the "Note Offering").
Such securities were sold in a transaction that was exempt from registration
under Section 4(2) of the Securities Act. Subsequently, pursuant to a
Registration Statement on Form S-4, on October 28, 1996, the Company consummated
a fully-subscribed registered exchange offer under the Securities Act for the
Old Notes and issued in exchange therefor $100,000,000 aggregate principal
amount of its registered 10 1/4% Senior Subordinated Notes due 2006
(collectively with the Old Notes, the "Notes").
On May 7, 1996, Twinlab sold (i) an aggregate of 30,000 shares of its 14%
Non-Voting Senior Cumulative Preferred Stock (the "Senior Preferred Stock") to
five investors (the "Senior Preferred Stock Purchasers") for $30,000,000 in
cash, (ii) 37,000 shares of its 11 1/4% Non-Voting Junior Cumulative Preferred
Stock (the "Junior Preferred Stock") to Green Equity Investors II, L.P. ("GEI")
for $37,000,000 in cash, (iii) 1,295,000 shares of Common Stock to the Senior
Preferred Stock Purchasers for an aggregate of
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$700,000 in cash, (iv) 8,880,000 shares of Common Stock to GEI for an aggregate
of $4,800,000 in cash, and (v) an aggregate of 8,325,000 shares of Common Stock
valued at $4,500,000 to certain members of its senior management in exchange for
certain of their shares of common stock of Natur-Pharma Inc. Such securities
were sold in transactions that were exempt from registration under Section 4(2)
of the Securities Act. In connection with the consummation of the IPO, in
November 1996, the Company redeemed all of the outstanding shares of Senior
Preferred Stock and Junior Preferred Stock, which together had an aggregate
liquidation preference of $67.0 million, plus accrued and unpaid dividends
thereon.
On November 12, 1997, Twinlab issued an aggregate of 312,500 shares of
Common Stock to the shareholders of Changes International as the stock portion
of the purchase price for all of the outstanding common stock of Changes
International; the cash portion of such purchase price was $7.9 million,
including acquisition costs. Such Common Stock was issued in a transaction that
was exempt from registration under Section 4(2) of the Securities Act.
On August 20, 1998, Twinlab issued an aggregate of 1,150,000 shares of
Common Stock to the shareholders of PR*Nutrition as the purchase price for all
of the outstanding common stock of PR*Nutrition. Such Common Stock was issued in
a transaction that was exempt from registration under Section 4(2) of the
Securities Act.
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Item 6. SELECTED FINANCIAL DATA
The selected historical financial data as of December 31, 1998, 1997, 1996, 1995
and 1994 and for each of the years then ended has been derived from the audited
consolidated financial statements of the Company. The report of Deloitte &
Touche LLP, independent auditors, on the consolidated financial statements as of
December 31, 1998 and 1997, and for each of the three years in the period ended
December 31, 1998 is included elsewhere herein. The selected financial data
below also presents pro forma financial data relating to (i) the Company's
conversion of tax status from an "S" corporation to a "C" corporation as a
result of the Transactions (as hereinafter defined), (ii) the Transactions and
the IPO and (iii) PR*Nutrition's conversion of tax status from an "S"
corporation to a "C" corporation as a result of its acquisition by the Company.
The selected historical financial data should be read in conjunction with, and
is qualified in its entirety by, the Consolidated Financial Statements of the
Company and the notes thereto and the other financial information included in
Item 14 to this Annual Report.
Year Ended December 31,
-----------------------
1998 1997(1) 1996(1)(a)(e) 1995(1) 1994(1)
---- ------- ------------- ------- -------
(in thousands, except per share data and percentages)
Operating Data:
Net sales .............................................. $ 333,375 $ 229,614 $ 182,010 $ 154,805 $ 120,095
Gross profit ........................................... 169,942 104,188 79,792 63,888 49,436
Operating expenses ..................................... 106,755 52,072 37,108 30,607 24,757
Merger expenses ........................................ 1,462 -- -- -- --
Income from operations ................................. 61,725 52,116 42,684 33,281 24,679
Interest expense ....................................... 8,119 12,336 10,012 875 761
Nonrecurring and transaction expenses .................. -- -- 15,700(b) 656 --
Net income ............................................. 29,691 25,876 14,970(b) 31,857 22,302
========= ========= ========= ========= =========
Basic and diluted net income per share(c) .............. $ 0.94 $ 0.92 $0..36(b) $ 1.13 $ 0.79
========= ========= ========= ========= =========
Basic weighted average shares outstanding(d) ........... 31,492 28,192 28,150 28,150 28,150
========= ========= ========= ========= =========
Diluted weighted average shares outstanding (d) ........ 31,607 28,228 28,150 28,150 28,150
========= ========= ========= ========= =========
Pro forma relating to change in tax status:(e)
Historical income before provision for income
Taxes and extraordinary item ........................... $ 54,989 $ 40,022 $ 17,608 $ 32,127 $ 22,547
Pro forma provision for income taxes ................... 21,524 15,429 6,788 12,742 9,337
--------- --------- --------- --------- ---------
Pro forma income before extraordinary item ............. 33,465 24,593 10,820 19,385 12,310
Extraordinary item ..................................... (4,941)(f) -- (1,792)(g) -- --
--------- --------- --------- --------- ---------
Pro forma net income ................................... $ 28,524 $ 24,593 $ 9,028 $ 19,385 $ 12,310
========= ========= ========= ========= =========
Basic income before extraordinary item per share (c) ... $ 1.06 $ 0.87 $ 0.21 $ 0.69
========= ========= ========= =========
Diluted income before extraordinary item per share (c) . $ 1.06 $ 0.87 $ 0.21 $ 0.69
========= ========= ========= =========
Basic net income per share (c) ......................... $ 0.91 $ 0.87 $ 0.15 $ 0.69
========= ========= ========= =========
Diluted net income per share (c) ....................... $ 0.90 $ 0.87 $ 0.15 $ 0.69
========= ========= ========= =========
Pro forma for the Transactions and the IPO:(h)
Net income ............................................. $ 18,631 $ 12,410
--------- ---------
Basic and diluted net income per share ................. $ 0.66 $ 0.44
========= =========
Other Data:
Income from operations margin (i) ...................... 18.5% 22.7% 23.5% 21.5% 20.5%
Capital expenditures ................................... $ 13,407 $ 4,022 $ 2,480 $ 2,740 $ 1,839
Balance Sheet Data: 1998 1997 1996(a) 1995 1994
---- ---- ------- ---- ----
Net working capital (excluding cash and cash
equivalents, marketable securities and current debt) $ 96,443 $ 57,604 $ 43,871 $ 39,205 $ 34,878
Property, plant and equipment, net 29,551 14,263 14,424 13,153 12,109
Total assets 290,018 173,010 142,978 75,857 64,882
Total debt (including current debt) 43,531 114,379 120,728 8,792 9,291
Shareholders' equity 205,485 30,881 2,367 55,673 48,616
(1) Amounts restated to include the acquisition of PR Nutrition which was
accounted for as a pooling of interests.
(a) The Blechman Brothers, their parents, David and Jean Blechman, Stephen L.
Welling, the President of the Nature's Herbs division of the Company
(collectively, the "Stockholders"), GEI and certain other parties entered
into a Stock Purchase and Sale Agreement, dated as of March 5, 1996, as
amended (the "Acquisition Agreement"), pursuant to which, among other
things, on May 7, 1996 (i) GEI acquired 48% of the Common Stock of Twinlab
for aggregate consideration of $4.8 million and shares of Junior Preferred
Stock for aggregate consideration of $37.0 million, (ii) certain other
investors acquired 7% of the Common Stock of Twinlab for aggregate
consideration of $0.7 million and shares of Senior Preferred Stock
(together with
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the Junior Preferred Stock, the "Preferred Stock") for aggregate
consideration of $30.0 million, (iii) the Senior Executive Officers
exchanged certain of their shares of common stock of Twin (formerly known
as Natur-Pharma Inc.) for 45% of the outstanding shares of Common Stock of
Twinlab valued at $4.5 million and, (iv) Twinlab purchased all of the
remaining shares of common stock of Twin from the Stockholders for cash,
resulting in Twin becoming a wholly owned subsidiary of Twinlab. The total
cash consideration that the Stockholders received was approximately $212.5
million, the majority of which was paid to David and Jean Blechman. The
transactions described above are hereinafter referred to as the
"Acquisition." Concurrently with the consummation of the Acquisition, the
Company entered into a credit facility (the "Original Credit Facility")
(which provided for a term loan facility in the amount of $53.0 million
and a revolving credit facility in the amount of $15.0 million) and issued
$100.0 million principal amount of its Old Notes in the Note Offering
(collectively with the Acquisition and the Original Credit Facility, the
"Transactions"). The net cash proceeds of the Note Offering were used,
together with borrowings under the Original Credit Facility, the proceeds
from the issuance of the Common Stock and Preferred Stock of Twinlab and
available cash of the Company, to finance the Acquisition, to refinance
approximately $7.0 million aggregate principal amount of debt of the
Company and to pay related fees and expenses. The net proceeds of the IPO
of approximately $93.7 million, together with available cash resources of
the Company and approximately $20.0 million of borrowings under the
Amended and Restated Credit and Guarantee Agreement, dated November 15,
1996 (the "Revolving Credit Facility"), were used to repay all of the
Company's outstanding indebtedness under the Original Credit Facility and
to redeem all of the outstanding shares of Preferred Stock. See Note 1 to
the Consolidated Financial Statements of the Company included under Item
14 of this Annual Report.
(b) Reflects $15.3 million of nonrecurring non-competition agreement expense
and $0.4 million of Transaction expenses.
(c) Basic and diluted income per share has been computed by dividing net
income (and pro forma income before extraordinary item and pro forma net
income for 1995 and 1996), after reduction for Preferred Stock dividends,
by the applicable weighted average shares outstanding.
(d) Diluted weighted average shares outstanding for 1994 through 1996
represents the number of equivalent shares outstanding after giving
retroactive effect to Twinlab's 18.5 for 1 stock split (effected in the
form of a stock dividend) and assumes that the 10,175,000 shares of Common
Stock issued in connection with the Acquisition and the 8,500,000 shares
of Common Stock issued in connection with the Company's IPO were
outstanding. See Notes to the Consolidated Financial Statements of the
Company included under Item 14 of this Annual Report.
(e) Prior to May 1996, the Company consisted of "S" corporations and,
accordingly, federal and state taxes were generally paid at the
shareholder level only. Upon consummation of the Transactions, the Company
eliminated its "S" corporation status and, accordingly, became subject to
federal and state income taxes. In addition, PR*Nutrition was an "S"
corporation prior to its acquisition. Upon consummation of its
acquisition, PR*Nutrition terminated its "S" corporation status.
(f) Represents the write-off of previously deferred finance costs incurred in
connection with the Note offering.
(g) Represents the write-off of previously deferred finance costs incurred in
connection with the Original Credit Facility (the "Extraordinary Item").
(h) The unaudited pro forma results of operations assume the Transactions and
the subsequent IPO occurred on January 1, 1995, and exclude the effect of
(i) the nonrecurring non-competition agreement expense, (ii) the
Transaction expenses, (iii) the Extraordinary Item and (iv) the dividends
paid on the Preferred Stock which was redeemed with a portion of the net
proceeds of the IPO, and reflects the additional interest expense relating
to the financing of the Acquisition and the change in tax status described
in Note (e) above. This data has been prepared for comparative purposes
only and does not purport to represent what the Company's actual results
of operations would have been had the Transactions and the subsequent IPO
in fact occurred on January 1, 1995.
(i) Income from operations margin equals income from operations as a
percentage of net sales.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the audited Consolidated Financial Statements of
the Company and the notes thereto included elsewhere in this Annual Report.
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Results of Operations
The Company operates primarily in one business segment, the manufacture
and marketing of brand name nutritional supplements. Within this segment, the
Company operates through six primary business divisions: the TWINLAB division,
the herbal supplements and teas division, the Changes International division,
the Bronson division and the PR*Nutrition division. Products sold by the TWINLAB
division include vitamins, minerals, amino acids, herbs, sports nutrition
products and special formulas primarily under the TWINLAB brand name. The herbal
supplements and teas division produces and markets a full line of herbal
supplements and phytonutrients marketed under the Nature's Herbs and HealthCare
Naturals brands and a full line of herb teas marketed under the Alvita brand.
The Company's network marketing activities are conducted through Changes
International, which was acquired by the Company in November 1997. The Bronson
division, acquired effective April 30, 1998, markets vitamins, herbs,
nutritional supplements and health and beauty aids through its Bronson catalog,
and produces and markets a line of vitamins and supplements for sale exclusively
to United States military commissaries and also manufactures, through Health
Factors, private label vitamins and supplements for a number of other companies
on a contract marketing basis. The PR*Nutrition division markets nutritionally
enhanced food bars marketed under the PR*Bar and Ironman Triathlon trademarks.
The Company's publishing activities are conducted through ARP.
The following table sets forth, for the periods indicated certain
historical income statement and other data for the Company and also sets forth
certain of such data as a percentage of net sales.
Year Ended December 31,
-----------------------
1996(1) 1997(1) 1998
------- ------- ----
Net Sales: (dollars in millions)
TWINLAB Division .......................... $136.2 74.8% $156.0 67.9% $172.7 51.8%
Herbal Supplements &
Herbal Teas Division ...................... 28.7 15.7 45.2 19.7 65.8 19.7
Changes International Division ............ NA NA 7.0 3.1 51.3 15.4
Bronson Division .......................... NA NA NA NA 18.7 5.6
PR*Nutrition Division ..................... 11.9 6.6 16.4 7.1 20.9 6.3
Publishing Division ....................... 5.2 2.9 5.0 2.2 4.0 1.2
====== ====== ====== ====== ====== ======
Net Sales ................................. 182.0 100.0 229.6 100.0 333.4 100.0
Gross Profit .............................. 79.8 43.8 104.2 45.4 169.9 51.0
Operating Expenses ........................ 37.1 20.4 52.1 22.7 106.8 32.0
Merger Expenses ........................... NA NA NA NA 1.4 .4
------ ------ ------ ----- ------ ------
Income From Operations .................... $42.7 23.5% $52.1 22.7% $61.7 18.5%
(1) Amounts restated to include the acquisition of PR*Nutrition which was
accounted for as a pooling-of-interests.
Fiscal 1998 Compared to Fiscal 1997
Net Sales. Net sales in 1998 were $333.4 million compared to $229.6
million in 1997, an increase of $103.8 million or 45.2%. Sales at the TWINLAB
division increased from $156.0 million in 1997 to $172.7 million in 1998, an
increase of $16.7 million or 10.7%. This increase was primarily the result of
increased demand in each of the vitamin, mineral and nutritional s