10-K/A 1 y40688e10-ka.txt AMENDMENT #1 TO FORM 10-K 1 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MAY 31, 2000 COMMISSION FILE NUMBER: 1-14608 WEIDER NUTRITION INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 87-0563574 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2002 SOUTH 5070 WEST SALT LAKE CITY, UTAH 84104-4726 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (801) 975-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: CLASS A COMMON STOCK, PAR VALUE $.01 PER SHARE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. The number of shares outstanding of the Registrant's common stock is 26,231,165 (as of September 11, 2000). The aggregate market value of the voting stock held by non-affiliates of the Registrant is approximately $49,419,000 (as of September 11, 2000). DOCUMENTS INCORPORATED BY REFERENCE None. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 2 PART I NOTE ON FORWARD LOOKING STATEMENTS Certain statements made in this Annual Report on Form 10-K/A under the captions "Business," "Factors Affecting Future Performance," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere herein are "forward-looking statements" within the meaning of Section 27A of Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates and projections. Statements that are not historical facts, including without limitation statements which are preceded by, followed by or include the words "believes," "anticipates," "plans," "expects," "estimates," "may," "should," or similar expressions, are forward-looking statements. These statements are subject to risks and uncertainties, certain of which are beyond the Company's control, and therefore actual results may differ materially. Important factors that may affect future results include, but are not limited to: the company's ability to implement more sophisticated operating systems and inventory management programs, the impact of competitive products and pricing, the impact of new FDA dietary supplement regulations on the Company's products and marketing plans, including, without limitation, product labeling, product names and product structure/function claims, dependence on individual products, dependence on individual customers, market and industry conditions including pricing, demand for products, level of trade inventories and raw materials availability and pricing, the success of product development and new product introductions into the marketplace, changes in laws and regulations, the company's ability to identify, recruit and integrate key management personnel, including the cost and timing thereof, litigation and government regulatory action, uncertainty of market acceptance of new products, results of management's evaluation of its business operations and strategies, and other factors discussed under "Factors Affecting Future Performance" in Item 1 of this Annual Report. The Company disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. ITEM 1. BUSINESS GENERAL Weider Nutrition International, Inc. (the "Company") develops, manufactures, markets, distributes and sells branded and private label vitamins, nutritional supplements and sports nutrition products in the United States and throughout the world. The Company offers a broad range of capsules and tablets, powdered drink mixes, bottled beverages and nutrition bars consisting of approximately 875 stock keeping units ("SKUs") domestically and internationally. The Company has a portfolio of recognized brands, including Schiff(R), Weider(TM), American Body Building(TM), Tiger's Milk(R), Multipower(R) and Multaben that are primarily marketed through mass market, health food store and health club and gym distribution channels. The Company markets its branded nutritional supplement products, both domestically and internationally, in four principal categories: sports nutrition; vitamins, minerals and herbs; weight management; and nutrition bars. The Company also markets a line of sportswear in Europe, primarily in Germany, under the Venice Beach brand. The Company's principal executive offices are located at 2002 South 5070 West, Salt Lake City, Utah 84104 and its telephone number is (801) 975-5000. As used herein, the "Company" means Weider Nutrition International, Inc. and its subsidiaries, except where indicated otherwise. INDUSTRY OVERVIEW According to Nutrition Business Journal, the principal domestic retail markets in which the Company's products compete totaled approximately $13.9 billion in 1998 and grew at a compound annual growth rate of approximately 12% from 1995 through 1998. The Company believes several factors account for the steady growth of the nutritional supplement market, including increased public awareness of the health benefits of nutritional supplements and favorable demographic trends toward older Americans who are more likely to consume nutritional supplements. 1 3 Over the past several years, public awareness of the positive effects of nutritional supplements on health has been heightened by widely publicized reports and medical research findings indicating a correlation between the consumption of nutrients and the reduced incidence of certain diseases. Reports have indicated that the United States government and universities generally have increased sponsorship of research relating to nutritional supplements. In addition, Congress has established the Office of Alternative Medicine within the National Institutes of Health to foster research into alternative medical treatment modalities, which may include natural remedies. Congress has also recently established the Office of Dietary Supplements in the National Institutes of Health to conduct and coordinate research into the role of dietary supplements in maintaining health and preventing disease. The Company believes that the aging of the United States population, together with a corresponding increased focus on preventative health care measures, will continue to result in increased demand for certain nutritional supplement products. According to the United States Bureau of the Census, the 35-and-older age group of consumers, which represents a large majority of the regular users of vitamin and mineral supplements, is projected to grow significantly faster than the general United States population through 2010. The Company believes these events and trends together with product introductions have supplied the growth of the domestic nutritional supplement market. The international nutritional supplement market is more fragmented than the domestic market. As a result, industry data is not readily available. However, many of the demographic and other trends and events present in the domestic market, are also present in the international market. The primary distribution channels in the vitamin and nutritional supplements industry consist of mass market retailers (including mass merchandisers, drug stores, supermarkets, discount and convenience stores), health and natural food stores and direct sales and mail order organizations. According to Packaged Facts, in 1998 the mass market channel accounted for approximately 49% of the sales of vitamin, mineral and supplement products, health and natural food stores accounted for approximately 39% of sales and direct selling, mail order and the Internet accounted for approximately 12% of sales. SALES AND DISTRIBUTION The Company believes that its continued growth and success in the nutritional supplements industry, in part, is dependent on the consumers' recognition of, satisfaction with and allegiance to the Company's branded products. Accordingly, during fiscal 1999 (and continuing in fiscal 2000), the Company implemented a more focused marketing initiative that provided incremental investment in support of its most recognized brands: Schiff(R), Weider(TM) and American Body Building(TM). The Company believes that this focused marketing strategy will be beneficial to nutritional supplement consumers. The incremental investment in these brands enhances the Company's ability to introduce innovative products that are of premium quality, better tasting and more consumer application friendly, supported by current science and technology. The Company's products are currently sold domestically in over 48,000 retail outlets in all 50 states. The Company's mass market customers include: mass merchandisers such as Wal-Mart, Target and Kmart; drug stores such as Walgreens, CVS, Rite Aid and Eckerd; warehouse clubs such as Costco, Sam's Club and BJ's; and supermarkets such as Albertson's, Giant, Safeway and Fred Meyer. The Company services the health food market by distributing its products to General Nutrition Center ("GNC") and leading health food distributors. The Company also sells through other distribution channels, including its own network of distributors to health clubs and gyms (such as Bally's Health and Fitness and Gold's Gym), international markets, and private label manufacturing for certain retail customers where the Company also distributes its branded products. The Company pursues a multi-channel distribution strategy in order to participate in the growth being experienced in each of these channels. Internationally, the Company sells or distributes its products in approximately 85 countries around the world, all of which are at different levels of development and are affected by different factors. In Europe, where the Company has a substantial majority of its international sales, nutritional supplement distribution varies by country, but in general, product is primarily distributed through gyms and fitness studios, health food 2 4 and specialty stores and pharmacies. Some product is distributed through the mass market channel, but this channel is not as developed internationally as it is in the U.S. Additionally, significant differences exist between the regulatory environment in the U.S. and the regulatory environment in Europe. As a result, many nutritional supplements sold in the U.S. are not able to be sold in Europe due to regulatory restrictions. BRANDS AND DISTRIBUTION CHANNELS. The Company has created a portfolio of recognized brands designed for specific distribution channels. The positioning of the Company's brand names is supported by significant advertising and marketing expenditures as well as the brand names' long-standing consumer relationships. As a result, the Company believes that it has many of the leading brands in the nutritional supplement industry. The following table identifies the Company's leading nutritional supplement brands and illustrates the Company's multi-brand, multi-channel strategy:
BRAND PRIMARY CHANNEL ----- --------------- Schiff(R).......................... Food, drug, mass market & health food stores Weider(TM)......................... Food, drug, mass market American Body Building(R).......... Health clubs and gyms Tiger's Milk(R).................... Food, drug, mass market Multipower(R)...................... Health clubs and gyms Multaben........................... Food, mass market
The Company markets its branded nutritional supplement products both domestically and internationally in four principal categories: sports nutrition; vitamins, minerals and herbs; weight management; and nutrition bars. The Company believes that offering its customers a wide variety of products also provides the Company a competitive advantage in capturing an increasing share of the growing nutritional supplement market. The Company continues to expand its product innovation and branding opportunities through the pursuit of innovative ingredients and proprietary formulas from internal research, as well as outside scientists, experts, formulators and inventors. The Company also markets a line of sportswear in Europe, primarily in Germany, under the Venice Beach brand. Sports Nutrition. The Company's sports nutrition category includes a wide variety of products designed to enhance athletic performance, support the results derived from exercise programs and replenish the body's vital nutrients used up during exercise and training. The Company's sports nutrition products deliver nutritional supplements through a variety of forms, including powdered drink mixes, tablets, capsules, nutrition bars and beverages. Customer focus includes athletes, bodybuilders, fitness enthusiasts, "weekend warriors" and other "on-the-go" consumers. The Company markets its sports nutrition products domestically under the Weider(TM), American Body Building(TM), Science Foods(R) and Tiger's Milk(R) brands. While each of the Company's products offers distinct benefits to the consumer, the Company's sports nutrition products are intended to generally enhance the consumer's ability to control weight, support muscle growth, lose fat and increase energy levels and stamina. The American Body Building(TM) and Science Foods(R) brands are primarily distributed to health clubs and gyms through the Company's network of independent distributors. American Body Building(TM) and Science Foods(R) brand products are primarily bottled and powdered drinks for energy, recovery and weight control, and nutrition bars. The Weider(TM) and Metaform(R) brands are primarily distributed through food, drug and mass market retailers and health food stores such as GNC. Weider(TM) and Metaform(R) brand products are primarily powdered drinks and supplements to support muscle growth, maintain stamina and control weight. The Tiger's Milk(R) product line, which has been marketed for over 30 years, includes several nutrition bars that supply significant amounts of protein, vitamins and other essential nutrients with less fat than a traditional candy bar. Vitamins, Minerals and Herbs. The Company markets a complete line of vitamins, minerals and specialty supplements through the Schiff(R) brand. These products are offered in various forms, including 3 5 liquids, tablets, capsules, softgels and powdered drink mixes. The Schiff(R) brand is distributed primarily though the mass market as well as health food stores. According to IRI data, joint health products represent the fastest growing subcategory within the vitamin, mineral and herb category. The Company markets certain joint products including Schiff(R) Pain Free(TM)/Move Free(TM) and certain chondroitin and glucosamine compounds under the Schiff(R) brand. Schiff's Pain Free(TM)/ Move Free(TM) product realized significant growth in fiscal 2000 and is currently one of the leading joint health products in the mass market channel. In addition, there are a number of other emerging specialty supplement categories which are alternatives or complements to over-the-counter pharmaceutical products for consumers who seek a more natural and preventative approach to their health care. Other products sold under the Company's Schiff(R) brand include vitamins, minerals, herbals and other specialty supplements. The Company's Schiff(R) brand vitamin products are designed to provide consumers with essential vitamins and minerals as supplements to their diet. Schiff(R) vitamins and minerals include multivitamins such as Single Day, individual vitamins and minerals such as Vitamins C, E and Calcium, specialty formulae for women such as Menopause and soy, and other specialty formulae including melatonin, DHEA, beta carotene and B-complex. Schiff(R) vitamins are marketed through health food stores as well as supermarkets and drug stores within the mass market channel. Weight Management. The Company manufactures, markets and distributes natural products that utilize vitamins, herbs and other nutritional supplements designed to promote weight management. The Company's products are intended to support consumers' efforts in a number of weight management functions. The products are specifically formulated, packaged and priced to appeal to a wide variety of consumers with different demographic characteristics and physiological needs. Weight management products under the American Body Building(TM) and Science Foods(R) brands, which are intended to support consumers' efforts to reduce fat and provide a low calorie source of energy, are primarily distributed through the Company's independent distributors to health clubs and gyms. Products under the Weider(TM) brand are intended to aid in weight management, support muscle mass and to support consumers' efforts to reduce fat. This brand is primarily distributed through food, drug, mass, club, convenience and health food retailers. Nutrition Bars. The Company's nutrition bars category includes its Tiger's Milk(R) and Fi-Bar(R) product lines. The Tiger's Milk(R) product line, which has been marketed for over 30 years, includes several nutrition bars that supply significant amounts of protein, vitamins and other essential nutrients with less fat than a traditional candy bar. The Fi-Bar(R) product line is comprised of fat-free granola bars and fruit and nut bars coated with yogurt, chocolate or carob made without hydrogenated fats. The Tiger's Milk(R) and Fi-Bar(R) brands, which are intended to provide consumers with a healthy alternative to traditional snack foods and candy bars, are primarily distributed through mass market retailers, convenience and health food stores. Within sports nutrition categories, the Company also manufactures international and domestic nutrition bars under the following brands: Multipower(R), American Body Building(TM), Multaben and Science Foods(R). International Markets. The Company believes opportunities exist for nutritional supplement products in international markets. The Company has positioned itself to take advantage of such opportunities through new product launches and strategic alliances. The July 1998 acquisition of Haleko provided the Company with several of the premium nutritional supplement brands in Europe as well as significant nutritional supplement manufacturing capabilities in Germany. Haleko's leading sports nutrition brand is Multipower(R), which products include a wide variety of products primarily marketed to health clubs and gyms. Haleko also markets nutrition products under the Multaben brand primarily to health food stores, which includes a variety of beverages, soups and other meal replacement products as well as nutrition bars. Haleko also markets a line of sportswear under the Venice Beach brand. Sportswear is primarily sold in Germany to health clubs and gyms as well as to specialty sportswear retail stores. Sales of sportswear represented approximately 35% and 34% of Haleko's revenues for fiscal 2000 and 1999, respectively. 4 6 The Company also markets its brands such as Weider(TM) and Schiff(R) on an export basis to South America, eastern Europe, the Middle East and the Pacific Rim through a network of distributors managed from the Company's Salt Lake City headquarters. Private Label. Historically, the Company manufactured capsules, tablets, beverages, nutrition bars and powdered drink mixes for other marketers of nutritional supplements and certain retail customers. These independent marketers, or contract manufacturing (private label) customers, market products, manufactured by the Company, under their own brand name. During fiscal 1999 and into fiscal 2000, the Company made the decision to limit contract manufacturing business to select customers that otherwise carry the Company's brands. MARKETING The Company believes its advertising and promotional campaigns, together with its expanded sales force, have been integral to the Company's growth. A key part of the Company's strategy is to help educate consumers about innovative, safe and beneficial nutritional supplement products. The Company's marketing and advertising expenditures were approximately $41.2 million in fiscal 2000, $35.9 million in fiscal 1999 and $16.9 million in fiscal 1998. During fiscal 2000, the Company continued to execute its brand building support for its core brands, particularly relating to its Schiff(R) Pain Free(TM) joint health products. National television and radio commercials featuring Schiff(R) Pain Free(TM) appeared on syndicated radio and television programs, and national and cable television stations. The Company promotes its products in various consumer magazines, such as Ladies Home Journal, Arthritis Today, Maxim, ESPN Magazine; target publications, such as Fitness Runner; and trade magazines, such as Whole Foods, Vitamin Retailer and Mass Market Retailer. In addition to these publications, the Company advertises in several magazines published by Weider Publications Inc. ("Weider Publications"), an affiliate of the Company, including Muscle and Fitness, Flex, Shape, Men's Fitness, Natural Health and Jump. The Company is also developing internet sites to provide additional information to consumers, customers and investors. The Company participates in consumer education by sponsoring and attending various sporting events, including leading professional body building competitions such as The Mr. Olympia, The Arnold Schwarzenegger Classic and numerous local National Physique Committee bodybuilding competitions. The Company also promotes its products at numerous trade and consumer shows representing all current distribution channels. Market research will continue to play a vital role in securing retail space for the Company's branded products in the mass market channel and other relevant distribution channels. The Company is expanding its use of research data, including Gallup, IRI InfoScan, Spectra Data and other information sources to identify key consumer demographics, market trends and category potential to maximize new and existing opportunities with current and potential retail partners. The Company is also taking a more active role in professional trade organizations and lobbying groups. The Company is a founding member of the Corporate Alliance for Integrative Medicine, an industry-based research organization that works with public and private universities to conduct scientifically valid studies on natural health products. COMPANY GROWTH STRATEGY The Company intends to broaden its leadership position in the nutritional supplements and sports nutrition categories. Specifically, the Company's strategy is to: (i) grow core brands through product innovations and consumer marketing programs; (ii) develop and market innovative new products and product line extensions through its commitment to research and development; (iii) enhance customer relationships through the growth of its focused distribution network; (iv) enhance its execution skills through new operations processes and decision support systems; (v) achieve cost superiority through formal productivity benchmarking and continuous improvement programs; (vi) grow international profitability through integration 5 7 of European operations and through expanded export operations outside Europe; and (vii) implement a comprehensive e-commerce plan. The Company believes that its focused distribution channels, broad portfolio of leading brands, state-of-the-art manufacturing and distribution capabilities and strong management team position it to be a long-term competitive leader in the nutritional supplements industry. PRODUCT RESEARCH AND DEVELOPMENT The Company strives to be a leader in nutritional supplement product development and intends to continue its commitment to research and development to create safe and efficacious new products and existing product line extensions. The nutritional supplement industry is influenced by products that become popular due to changing consumer interests in health, appearance and longevity along with media attention to these same interests. The Company believes new product development is important in the nutritional supplement industry in order to capitalize on new market opportunities, to strengthen relationships with customers by meeting demand and to increase market share. In addition, the Company believes that continually introducing new products is important to preserving and enhancing gross margins due to the relatively short life cycle of some products. As a result of the Company's product development history, the Company believes that it has built a reputation in the nutritional supplement industry for innovation in both branded and private label products. The Company has pioneered a number of innovations in the nutritional supplement industry, including: the development of the first domestic source of melatonin with consistent quality, supply and cost; the introduction of garcinia cambogia, a popular weight loss ingredient; through acquisition, the producer of the first high-protein, low carbohydrate beverage; and the retail introduction of the first carotenoid complex product from natural sources. The Company is in various stages of development with respect to new product concepts that the Company anticipates will augment both its existing domestic and international product lines. In order to support its commitment to research and development, the Company hires requisite technical personnel and invests in formulation, processing and packaging development and the testing of efficacy and shelf life stability as well as market research with consumers. The Company's product research and development expenditures were approximately $4.6 million in fiscal 2000, $4.6 million in fiscal 1999 and $4.0 million in fiscal 1998. MANUFACTURING AND PRODUCT QUALITY The Company has invested in manufacturing to meet the growing demand for nutritional supplement products, to ensure continued operating efficiencies and to maintain high product quality standards. The Company manufactures approximately 90% of its domestic branded products and approximately 45% of its international branded products. The Company has significant internal manufacturing competencies in the distinct areas of: sterile liquid beverage processing, bottling and packaging; powder blending, filling and packaging in jugs, canisters, bottles and pouches; processing, extrusion, coating and packaging of nutritionally fortified nutrition bars; and capsule and tablet manufacturing, filling and packaging. The Company has invested in production line flexibility to accommodate various filling sizes, weights or counts of product and final shipped unit configurations to fulfill customer and ultimate consumer needs. The Company currently manufactures its domestic products in four U.S. facilities. In June 1997, the Company completed construction of a state-of-the-art facility that more than tripled the Company's previous capacity for manufacturing capsules and tablets. The facility, located in Salt Lake City, Utah, includes the Company's main distribution center and primary administrative offices. The distribution center features a high-rise racked warehouse and a fully automated "order-pick" system using optical readers that interpret bar coded labels on each shipping container. The Company also currently operates a powders production facility located in Salt Lake City, Utah and beverage facilities located in Walterboro, South Carolina and Las Vegas, Nevada. The Company is continuously upgrading its facilities and enhancing its manufacturing capabilities through new equipment purchases and technological improvements. In order to improve overall beverage manufacturing efficiencies the Company will close its Las Vegas, Nevada facility and transition the operations to the Company's South 6 8 Carolina facility. The Company previously closed (during fiscal 1999) its capsule and tablet manufacturing facility in southern California and transitioned the operations to its Utah facility. Internationally, the Company has two primary manufacturing facilities. The Company has a capsules, tablets and powders facility in Bleckede, Germany that produces products distributed throughout Europe. This facility has received ISO 9002 certification. The Company also has a facility located in Madrid, Spain that primarily produces powders for distribution in Spain, France and Italy. Each of these facilities are continuously upgraded with equipment purchases and technological improvements. The Company is committed to providing the highest quality products. The Company's domestic capsule and tablet facility is designed and operated to meet USP compliance standards. The Company's quality management systems are detailed and rigorous, and include a supplier certification selection process and other analytical processes and procedures. The quality management systems also include thoroughly equipped and professionally staffed analytical laboratories to assure raw material acceptance as well as in-process and finished product evaluation for compliance to specification. The Company's products are also subject to extensive shelf life stability testing through which the Company determines the effects of aging on its products. The Company's product retention program allows the Company the ability to maintain samples from each product batch shipped and, when appropriate, to analyze such samples to insure product quality. Certified outside laboratories are used routinely to evaluate the Company's laboratory performance and to supplement its internal testing procedures and capabilities. Sourcing specialists within the Company's purchasing department focus on maximizing buying power through volume leverage with a smaller select supplier base. As a result of this effort, material supply savings have been achieved. In addition, key supply relationships have been established with raw material and packaging suppliers who bring significant financial, technical, quality and service resources to the Company. As part of the Company's strategy of achieving cost superiority through formal continuous improvement programs and productivity benchmarking, an integrated supply chain group has been given the accountability to efficiently plan and execute materials flow. This focus on materials flow is expected to continue to improve inventory management as well as compliance with customer requests. COMPETITION The market for the sale of nutritional supplements is highly competitive. Competition is based principally upon price, quality of products, customer service and marketing support. Numerous companies compete with the Company in development, manufacture and marketing of nutritional supplements. In addition, large pharmaceutical companies and packaged food and beverage companies are increasingly competing with the Company in the nutritional supplement market. The majority of competitors in the nutritional supplement industry are privately held and the Company is unable to precisely assess the size of such competitors. The Company believes that by reacting quickly to market changes, scientific discoveries and competitive challenges, the Company will continue to compete effectively in the nutritional supplement industry. As the nutritional supplement industry grows and evolves, the Company believes retailers will rely heavily on suppliers of nutritional supplements, such as the Company, that can respond quickly to new opportunities, support retailers with production capacity and flexibility, and provide innovative and high margin products. In addition, retailers have begun to align themselves with suppliers, such as the Company, who are financially stable, market a broad portfolio of products and offer superior customer service. The Company believes that it competes favorably with other nutritional supplement companies and major pharmaceutical companies because of its competitive pricing, marketing strategies, sales support and the quality and breadth of its product line. GOVERNMENT REGULATION The formulation, manufacturing, packaging, labeling, advertising, distribution and sale of the Company's products are subject to regulation by one or more governmental agencies, including the Food and Drug Administration (the "FDA"), the Federal Trade Commission (the "FTC"), the Consumer Product Safety 7 9 Commission, the United States Department of Agriculture and the Environmental Protection Agency. The Company's activities are also regulated by various agencies of the states, localities and foreign countries in which the Company distributes and sells its products. The FDA regulates dietary supplements under the Federal Food, Drug and Cosmetic Act (the "FDCA"), which was amended in October 1994, by the Dietary Supplement Health and Education Act of 1994 ("DSHEA"). DSHEA establishes a statutory class of dietary supplements, including vitamins, minerals, herbs, amino acids and other dietary substances for human use to supplement the diet, as well as concentrates, metabolites, extracts or combinations of such dietary ingredients. DSHEA also provides a regulatory framework that ensures consumer access to safe, quality dietary supplements, recognizes the need for the dissemination of useful, balanced information regarding dietary supplements, supports continuing scientific research into the health effects of dietary supplements and permits the establishment of good manufacturing practices to improve uniform quality of dietary supplements. Under DSHEA statements of "nutritional support" may describe how particular dietary ingredients, or the mechanism of action by which dietary ingredients, affect the structure, function or general well-being of the body. These statements of nutritional support are permitted in dietary supplement labeling, provided that, among other requirements, the company has scientific substantiation that the statements are truthful and not misleading, discloses that the statements have not been reviewed by the FDA and notifies the FDA within 30 days that the statements are being used in dietary supplement labeling. Statements of nutritional support may not make claims that the dietary supplement is intended to cure, prevent or mitigate a disease or illness, which claims would cause the FDA to consider the dietary supplement as an unapproved new drug. The Company labels its products in a manner that is intended to comply with the provisions of DSHEA; however, no assurance can be given that the FDA will not take the position that a statement of nutritional used by the Company is considered by the FDA to be a disease or illness claim. In September 1997, the FDA issued regulations further defining labeling requirements for dietary supplements and conventional foods effective March 23, 1999. In January 2000, the FDA issued additional regulations defining the types of statements concerning dietary supplements that can be made as structure/function claims under DSHEA. Although a dietary supplement may not bear an express or implied claim that it can prevent, treat, cure, mitigate or diagnose disease (a disease claim) without prior FDA approval as a health claim or a drug, the final rule expanded the scope of acceptable structure/function claims for dietary supplements. According to the FDA, the final ruling precludes express disease claims ("prevents osteoporosis") and implied disease claims ("prevents bone fragility in post-menopausal women") without prior FDA review. The final rule clarifies, however, that express and implied disease claims can be made through the name of a product (e.g., "Carpaltum" or "CircuCure"); through a statement about the formulation of a product (contains aspirin), or through the use of pictures, vignettes, or symbols (electrocardiogram tracings). The rule permits claims that do not relate to disease. These include health maintenance claims ("maintains a healthy circulatory system"), other non-disease claims ("for muscle enhancement" or "helps you relax,") and claims for common, minor symptoms associated with life stages ("for common symptoms of PMS"). In February 1997, the FDA issued a proposed rule entitled, "CGMP in Manufacturing, Packing, or Holding Dietary Supplements," which proposes good manufacturing practices specific to dietary supplements and dietary supplement ingredients. This proposed rule, if finalized, would require at least some of the quality control provisions contained in the GMPs for drugs. Such regulations could, among other things, require the reformulation or discontinuance of certain products, additional record keeping, warnings, notification procedures and expanded documentation of the properties and manufacturing processes of certain products and scientific substantiation regarding ingredients, product claims, safety or efficacy. Failure to comply with applicable FDA requirements can result in sanctions being imposed on the Company or the manufacturers of its products, including warning letters, fines, product recalls and seizures. Certain of the Company's products are classified as foods, which are subject to the Nutrition Labeling and Education Act of 1990 (the "NLEA"). The NLEA prohibits the use of any health claim for foods 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 with notification sent to the FDA. A substantial majority of the Company's products are classified as dietary supplements under DSHEA. 8 10 The FTC exercises jurisdiction over the advertising of nutritional and dietary supplements under the Federal Trade Commission Act. The role of the FTC, which enforces laws outlining "unfair or deceptive acts or practices," is to ensure that consumers get accurate information about dietary supplements so they can make informed decisions about such products. In November 1998, the FTC published an advertising guideline for the dietary supplement industry entitled "Dietary Supplements: An Advertising Guide for Industry." These guidelines reiterate many of the policies regarding dietary supplements the FTC has periodically announced over the years, particularly with respect to the substantiation of claims made in advertising of dietary supplement products. In the past several years, the FTC has instituted enforcement actions against several dietary supplement companies alleging false and misleading advertising of certain products. These enforcement actions have resulted in the agreement to consent decrees and/or the payment of fines by certain of the companies involved. The FTC continues to monitor advertising with respect to dietary supplements and, accordingly, the Company from time to time receives inquiries from the FTC with respect to the Company's advertising. In September 1997, the Company received an access letter from the FTC regarding the Company's advertising with respect to the Company's PhenCal products. The Company and the FTC are continuing discussions regarding the resolution of this matter. No assurance can be given that any imposition of injunctive relief and/or penalties in resolving this matter would not have a material adverse effect on the Company. The Company is also a party to a consent order which was signed by Weider Health and Fitness in 1985. Pursuant to the order, the Company is prohibited from making certain advertising claims relating to the muscle building capabilities of Anabolic Mega Paks(R) and Dynamic Life Essence and any other product of substantially similar composition. In connection with the Company's other food products, the Company is similarly prohibited from making these claims unless the Company is able to substantiate such claims. The Company's international operations are also subject to governmental regulations in each of the countries in which the Company has operations or sales or distributes products. These regulations may differ materially from country to country and from those regulations of the United States, which may result in additional costs and expenses to the Company due to the reformulation or repackaging of certain products to meet different standards or regulations, the imposition of additional record keeping requirements and expanded or different labeling and scientific substantiation regulations. In addition, 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. The Company's distributors for those countries in which the Company does not have direct operations generally control compliance with such foreign governmental regulations. 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 aspects of its sales, marketing and advertising programs. The Company may be subject to additional laws or regulations administered by the federal, state or foreign regulatory authorities, the repeal or amendment of laws or regulations which the Company considers favorable, such as DSHEA, or more stringent interpretations of current laws or regulations. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can it predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on its business in the future. They could, however, require reformulation of certain products to meet new standards, recall or discontinuance of certain products not able to be reformulated, imposition of additional recordkeeping requirements, expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all such requirements could have a material adverse effect on the Company's results of operations and financial condition. PRODUCT LIABILITY INSURANCE Because the Company manufactures products designed to be ingested, it faces the risk that materials used for the final products may be contaminated with substances that may cause sickness or other injury to 9 11 persons who have used the products. Although the Company maintains production and operating standards designed to prevent such events, certain portions of the process of product development, including the production, harvesting, storage and transportation of raw materials, along with the handling, transportation and storage of finished products delivered to consumers, are not within the control of the Company. See "Manufacturing and Product Quality." Also, sickness or injury to persons may occur if the Company's products are ingested in dosages which exceed the dosage recommended on the product label. The Company cannot control misuse of its products by consumers or the marketing, distribution and resale of its products by its customers. With respect to product liability claims in the United States and internationally, the Company has $2.0 million per occurrence domestically ($1.0 million internationally) and $2.0 million ($1.0 million internationally) in aggregate liability insurance subject to self-insurance retention of $10,000. In addition, if claims should exceed $2.0 million, the Company has excess umbrella liability insurance of up to $90.0 million. However, there can be no assurance that such insurance will continue to be available, or if available, will be adequate to cover potential liabilities. The Company generally does not obtain contractual indemnification from parties supplying raw materials or marketing its products; however, any such indemnification is limited by its terms and, as a practical matter, to the creditworthiness of the indemnification party. The Company's product liability insurance does not cover non-safety claims relating to the Company's products, such as noncompliance with label claims or similar matters. TRADEMARKS AND PATENTS The Company owns trademarks registered with the United States Patent and Trademark Office or similar regulatory agencies in certain other countries for its Schiff(R), American Body Building(TM), Science Foods(R), Metaform(R) and Tiger's Milk(R) brands of products. The Company also has obtained trademarks for certain of its products, processes and slogans and has rights to use other names material to its business. The Company vigorously protects its trademark and other intellectual property rights. The Company also pursues patents for its products or processes when appropriate. The Company relies on common law trademark rights to protect its unregistered trademarks. Common law trademark rights do not provide the Company with the same level of protection as afforded by a United States federal registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. The Company registers certain of its trademarks in certain foreign jurisdictions where the Company's products are sold or distributed. However, the protection available in such jurisdictions may not be as extensive as the protection available to the Company in the United States. EMPLOYEES At August 1, 2000, the Company employed approximately 880 persons, of whom approximately 495 were in management, sales, purchasing, logistics and administration and approximately 385 were in manufacturing. Additionally, the Company utilizes temporary employees in some of its manufacturing processes. The Company is not party to any collective bargaining arrangements and believes that its relationship with its employees is good. FACTORS AFFECTING FUTURE PERFORMANCE Dependence on Significant Customers. The Company's largest customers are Costco, Wal-Mart and GNC. These three customers accounted for approximately 44% and 43% respectively, of the Company's net sales for the fiscal years ended May 31, 2000 and 1999. The loss of either Costco, Wal-Mart or GNC as a customer, or a significant reduction in purchase volume by Costco, Wal-Mart or GNC, could have a material adverse effect on the Company's results of operations or financial condition. The Company cannot assure you that Costco, Wal-Mart and/or GNC will continue as major customers of the Company. Dependence on New and Individual Products. The Company believes its ability to grow in its existing market is partially dependent upon its ability to introduce new and innovative products into these markets. Although the Company seeks to introduce additional products each year in its existing markets, the success of 10 12 new products is subject to a number of variables, including developing products that will appeal to customers and obtaining necessary regulatory approvals. The Company cannot assure you that its efforts to develop and introduce innovative new products will be successful, that customers will accept new products or that the Company will obtain required regulatory approvals of such new products. In addition, the Company cannot assure you that individual or groups of similar products currently experiencing strong popularity and rapid growth will maintain sales levels over time. During fiscal year 2000, net sales for the Company's Schiff(R) Pain Free(TM) product were approximately 29% of the Company's total net sales. The Company is currently transitioning the name of its Schiff(R) Pain Free(TM) product to Schiff(R) Move Free(TM) to comply with new regulations published by the FDA in January 2000. See "Impact of Government Regulation on the Company's Operations." Impact of Government Regulation on the Company's Operations. The Company's operations, properties and products are subject to regulation by various foreign, federal, state and local government entities and agencies, particularly the FDA and FTC. See "Government Regulation." Among other matters, such regulation is concerned with statements and claims made in connection with the packaging, labeling, marketing and advertising of the Company's products. The governmental agencies have a variety of processes and remedies available to them, including initiating investigations, issuing warning letters and cease and desist orders, requiring corrective labeling or advertising, requiring consumer redress, seeking injunctive relief or product seizure, imposing civil penalties and commencing criminal prosecution. 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 aspects of its sales, marketing and advertising programs. For example, the Company is transitioning the name of its Schiff(R) Pain Free(TM) product to Schiff(R) Move Free(TM) to comply with new regulations published by the FDA in January 2000. The failure to successfully implement the name transition could have a material adverse effect on the Company's operating results and financial condition. The Company may be subject in the future to additional laws or regulations administered by federal, state or foreign regulatory authorities, the repeal or amendment of laws or regulations which the Company considers favorable, such as DSHEA, or more stringent interpretations of current laws or regulations. The Company is unable to predict the nature of such future laws, regulations, interpretations or applications, nor can the Company predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on the Company's business in the future. Such future laws and regulations could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products that cannot be reformulated, the imposition of additional recordkeeping requirements, expanded documentation of product efficacy, and expanded or modified labeling and scientific substantiation. Any or all of such requirements could have a material adverse effect on the Company's results of operations and financial condition. See "Government Regulation." Ability to Implement Business Strategy. The Company's business and operations have experienced significant growth and increased complexity in recent years. The Company has recently refined its growth and business strategies, designed to focus on and support the Company's core brands, products and customers. The Company's future success depends upon its ability to successfully implement these growth and business strategies. The Company cannot assure you that it will be able to successfully implement these strategies or, if implemented, that the strategies will achieve the anticipated results. The failure to successfully implement these strategies could have a material adverse effect on the Company's results of operations and financial condition. Competition. The nutritional supplement industry is highly competitive. Numerous companies compete with the Company in the development, manufacture and marketing of nutritional supplements. In addition, large pharmaceutical companies and packaged food and beverage companies compete with the Company in the nutritional supplement market. These companies have greater financial and other resources available to them and possess extensive manufacturing, distribution and marketing capabilities far greater than those the Company has available or possess. Increased competition from such companies could have a material adverse effect on the Company's financial results and business. 11 13 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 or limitations on the Company's ability 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. Ability to Attract and Retain Key Management Personnel. The Company's operations have experienced significant growth in recent years. The Company's ability to manage that growth and added business complexity and to implement its business strategies is largely dependent upon the efforts, performance, abilities and continued service of the Company's management personnel. The competition for such personnel is intense, and the Company cannot assure you it will be able to retain key management personnel or attract and retain additional experienced management personnel. The Company's failure to attract and retain such personnel could have a material adverse effect on the Company's results of operations and financial condition. Effect of Unfavorable Publicity. The Company believes that the nutritional supplement market is affected by national media attention regarding the consumption of nutritional supplements. The Company cannot assure you that future scientific research or publicity will not be unfavorable to the nutritional supplement market or any particular product, or inconsistent with previous favorable research or publicity. Future reports of research that are perceived as less favorable or that question such earlier research could have a material adverse effect on the Company's business or financial results. The Company also depends upon consumer perceptions of the safety, quality and efficacy of its products as well as similar products sold or distributed by other companies (which may not adhere to the same quality standards as the Company). Accordingly, negative publicity associated with illness or other adverse effects resulting from the consumption of the Company's products or any similar products distributed by other companies could have a material adverse impact on the Company's business or financial results. Such adverse publicity could arise even if the adverse effects associated with such products resulted from consumers' failure to consume such products as directed. Risks Associated with International Markets. The Company's continued growth is dependent in significant part upon its ability to expand its operations into new markets, including international markets. The Company may experience difficulty entering new international markets due to greater regulatory barriers, the necessity of adapting to new regulatory systems and problems related to entering new markets with different cultural bases and political systems. As a result of the Company's acquisition of Haleko in July 1998, the Company's international sales have increased substantially over historical levels. Approximately 34% of the Company's net sales for fiscal 2000 were generated outside the United States. Operating in international markets exposes the Company to certain risks, including, among other things, changes in or interpretations of foreign regulations that may limit the Company's ability to sell certain products or repatriate products to the United States, foreign currency fluctuations, the potential imposition of trade or foreign exchange restrictions or increased tariffs and political instability. As the Company continues to expand its international operations, these and other risks associated with international operations are likely to increase. Availability of Raw Materials. The Company obtains all of its raw materials for the manufacture of its products from third parties. The Company cannot assure you that suppliers will provide the raw materials the Company needs in the quantities requested, at a price the Company is willing to pay; or that meet the Company's quality standards. Any significant delay in or disruption of the supply of raw materials could, among other things, substantially increase the cost of such materials, require reformulation or repackaging of products, require the qualification of new suppliers; or result in the Company's inability to meet customer demands for certain products. The occurrence of any of the foregoing could have a material adverse effect on the Company's results of operations or financial condition. Intellectual Property Protection. The Company believes that trademarks and other proprietary rights are important to its success and its competitive position. The Company's policy is to pursue registrations for all of 12 14 the trademarks associated with its key products. The Company protects its legal rights concerning its trademarks and the Company is currently enforcing various trademarks against infringement, both in the United States and in foreign countries. The Company relies on common law trademark rights to protect its unregistered trademarks. Common law trademark rights do not provide the Company with the same level of protection as afforded by a United States federal registration of a trademark. In addition, common law trademark rights are limited to the geographic area in which the trademark is actually used. Potential Sales and Earnings Volatility. The Company's sales and earnings continue to be subject to potential volatility based upon, among other things, the Company's inability to implement its business strategies; changes in regulations that may limit or restrict the sale of certain of the Company's products, the expansion of the Company's operations into new markets, or the introduction of the Company's products into new markets; the Company's failure, or its distributors' failure (and allegations of the Company's or their failure), to comply with applicable regulations; the Company's inability to introduce new products; lack of market acceptance of the Company's new products; the introduction of new products by the Company's competitors; consumer perceptions of the Company's products and operations; and general conditions in the nutritional supplement industry. The Company's business is, to some extent, seasonal, with lower sales typically realized during the first and second fiscal quarters and higher sales typically realized during the third and fourth fiscal quarters. The Company believes such fluctuations in sales are the result of greater marketing and promotional activities toward the end of each fiscal year, customer buying patterns and consumer spending patterns related primarily to consumers' interest in achieving personal health and fitness goals after the beginning of each new calendar year and before the summer fashion season. Control by Principal Stockholder. Weider Health and Fitness owns all of the outstanding shares of Class B Common Stock of the Company representing approximately 94% of the aggregate voting power of all outstanding shares of the Company's common stock. Weider Health and Fitness is in a position to exercise control over the Company and to determine the outcome of all matters required to be submitted to stockholders for approval (except as otherwise provided by law or by the Company's amended and restated certificate of incorporation or amended and restated bylaws) and otherwise to direct and control the operations of the Company. Accordingly, the Company cannot engage in any strategic transactions without the approval of Weider Health and Fitness. ITEM 2. PROPERTIES At May 31, 2000, the Company owned or leased the following facilities:
APPROXIMATE LEASE/ DATE OF LEASE LOCATION FUNCTION SQUARE FEET OWN EXPIRATION -------- -------- ----------- ------ ------------- Salt Lake City, UT... Company Headquarters, Manufacturing & 418,000 Lease March 2013 Production, Warehouse & Distribution Salt Lake City, UT... Manufacturing & Production, Warehouse 144,000 Own N/A Walterboro, S.C...... Manufacturing & Production 55,000 Own N/A Las Vegas, NV........ Manufacturing & Production 27,500 Lease November 2000 Montreal, Quebec..... Administrative Offices 24,600 Lease Month to month Madrid, Spain........ Administrative Offices, Manufacturing 20,000 Lease September 2006 & Production Neumarkt, Italy...... Administrative Offices & Warehouse 23,200 Own N/A Hamburg, Germany..... Administrative Offices 25,400 Lease September 2003
13 15
APPROXIMATE LEASE/ DATE OF LEASE LOCATION FUNCTION SQUARE FEET OWN EXPIRATION -------- -------- ----------- ------ ------------- Bleckede, Germany.... Manufacturing & Production, Warehouse 100,000 Own N/A Various, Sales & Administrative Offices Various Lease Various Germany(1).........
--------------- (1) The Company has several small sales and administrative offices primarily located in Germany. ITEM 3. LEGAL PROCEEDINGS The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements relate to the Company's legal proceedings described below. The Company is involved in various legal proceedings which arise in the ordinary course of its business. Litigation is inherently uncertain and may result in adverse rulings or decisions and the Company is unable to predict the outcome of these proceedings. Additionally, the Company may enter into settlements or be subject to judgments which may, individually or in the aggregate, have a material adverse effect on the Company's results of operations. Accordingly, actual results could differ materially from those projected in the forward-looking statements. In March 1999, the plaintiff's attorney involved in a previously settled California matter regarding certain of the Company's bar products filed a lawsuit on behalf of Michael Morelli and an alleged class in the Supreme Court of the State of New York (New York County) alleging similar unfair competition and false advertising claims under New York law. In May 1999, the plaintiff's attorney also filed a lawsuit on behalf of Lisa Fasig and an alleged class in the Circuit Court of Lee County, Florida alleging similar claims under Florida law. The Company disputes the allegations and is vigorously opposing the lawsuits. The Company has been named as a defendant in two lawsuits alleging that consumption of certain of its products containing ephedrine caused injuries and damages to two individuals. The Company disputes the allegations and is opposing the lawsuits. The Company believes that, after taking into consideration the Company's insurance coverage, such lawsuits, if successful, would not have a material adverse effect on the Company's financial condition. The Company cannot assure you that it will not be subject to further private civil actions with respect to its ephedrine products or that product liability insurance will continue to be available. See "Product Liability Insurance" under Item 1. The Company has been in discussions with the FTC regarding advertising with respect to the Company's PhenCal products. See "Government Regulation" under Item 1. above for further information. The Company is involved in other claims, legal actions and governmental proceedings that arise from the Company business operations. Although ultimate liability cannot be determined at the present time, the Company believes that any liability resulting from these matters, if any, after taking into consideration the Company's insurance coverage, will not have a material adverse effect on the Company's financial position or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to the vote of security holders during the fourth quarter of fiscal 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS In May 1997, the Company completed its initial public equity offering of 6,440,000 shares (includes over-allotment of 840,000 shares) of Class A common stock, $.01 par value per share, which were issued at $11.00 per share (the "IPO"). The Company's Class A common stock is traded on the New York Stock Exchange under the symbol "WNI." 14 16 The high and low closing prices of the Company's Class A common stock for each quarter of fiscal 2000, 1999 and 1998, respectively, are set forth below:
HIGH LOW ------ ------ FISCAL YEAR ENDED MAY 31, 2000: First Quarter.............................................. $ 5.31 $ 3.56 Second Quarter............................................. 4.19 3.06 Third Quarter.............................................. 4.88 3.19 Fourth Quarter............................................. 4.06 3.25 FISCAL YEAR ENDED MAY 31, 1999: First Quarter.............................................. $17.38 $ 8.81 Second Quarter............................................. 10.75 4.25 Third Quarter.............................................. 7.50 5.25 Fourth Quarter............................................. 6.50 4.50 FISCAL YEAR ENDED MAY 31, 1998: First Quarter.............................................. $19.75 $12.25 Second Quarter............................................. 15.25 10.38 Third Quarter.............................................. 15.13 10.75 Fourth Quarter............................................. 16.13 11.00
The Company paid an annual dividend of $0.15 per share (quarterly dividend of $0.0375 per share) for fiscal 2000, 1999 and 1998. In addition, the Company paid a quarterly dividend of $0.0375 per share subsequent to year end. The dividend was declared to be payable on June 20, 2000 to holders of all classes of common stock of record at the close of business on June 12, 2000. The Company's Board of Directors will determine dividend policy in the future based upon, among other things, the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at the time. In addition, the Company's credit agreement entered into with Bankers Trust Company, effective June 30, 2000, contains certain customary financial covenants that may limit the Company's ability to pay dividends on its common stock (See Note 7 to the Consolidated Financial Statements). Accordingly, there can be no assurance that the Company will be able to sustain the payment of dividends in the future. The closing price of the Company's Class A common stock on September 11, 2000 was $4.75. The approximate number of stockholders of record on September 11, 2000 was 344. 15 17 ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following selected consolidated financial data as of, and for the fiscal years ended May 31, 1996 through May 31, 2000 have been derived from the Company's consolidated financial statements, which have been audited by Deloitte & Touche LLP, independent auditors. The financial data should be read in conjunction with the consolidated financial statements and notes thereto, included elsewhere in this Annual Report on Form 10-K/A. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
FISCAL YEAR ENDED MAY 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) INCOME STATEMENT DATA: Net sales......................... $186,405 $218,566 $250,542 $335,488 $364,668 Cost of goods sold................ 116,177 136,875 161,334 221,062 228,573 -------- -------- -------- -------- -------- Gross profit...................... 70,228 81,691 89,208 114,426 136,095 Operating expenses................ 41,068 51,745 60,903 104,834 118,197 Severance, recruiting and reorganization costs........... -- -- -- 3,062 4,116 Management and employee compensation charges........... -- 14,495 401 804 301 Plant consolidation and transition..................... -- -- -- 5,113 -- Other inventory related charges... -- -- -- 4,115 -- Asset impairment costs............ -- 2,095 -- 535 -- -------- -------- -------- -------- -------- Total operating expenses....... 41,068 68,335 61,304 118,463 122,614 -------- -------- -------- -------- -------- Income (loss) from operations..... 29,160 13,356 27,904 (4,037) 13,481 Other income (expense): Interest, net.................. (3,736) (5,791) (4,219) (9,550) (11,086) Other.......................... (253) (557) (671) (430) (177) -------- -------- -------- -------- -------- Total other expense, net....... (3,989) (6,348) (4,890) (9,980) (11,263) -------- -------- -------- -------- -------- Income (loss) before income taxes.......................... 25,171 7,008 23,014 (14,017) 2,218 Income tax expense (benefit)...... 10,207 2,708 9,010 (5,239) 1,145 -------- -------- -------- -------- -------- Net income (loss)................. $ 14,964 $ 4,300 $ 14,004 $ (8,778) $ 1,073 ======== ======== ======== ======== ======== Weighted average shares outstanding, in thousands(1): Basic.......................... 17,245 17,866 24,702 24,930 25,042 ======== ======== ======== ======== ======== Diluted........................ 17,245 17,866 25,001 24,930 25,048 ======== ======== ======== ======== ======== Net income (loss) per share(1): Basic.......................... $ 0.87 $ 0.24 $ 0.57 $ (0.35) $ 0.04 ======== ======== ======== ======== ======== Diluted........................ $ 0.87 $ 0.24 $ 0.56 $ (0.35) $ 0.04 ======== ======== ======== ======== ========
16 18
AT MAY 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents......... $ 1,592 $ 1,259 $ 684 $ 1,926 $ 3,011 Working capital(2)................ 42,605 62,015 85,688 79,001 42,327 Total assets...................... 133,147 168,756 209,740 256,029 227,268 Total debt........................ 68,054 45,094 70,346 115,439 82,880 Total stockholders' equity........ 39,332 92,424 103,136 91,780 86,658
--------------- (1) During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." Earnings per share amounts for fiscal 1996 and 1997 have been restated to conform to the requirements of SFAS No. 128. (2) Working capital at May 31, 1999 excludes $98,654 due in June 2000 under the Company's credit facility (See Note 7 to the Consolidated Financial Statements). Including such amount, working capital (deficit) amounts to $(19,653) at May 31, 1999. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K/A. Except for the historical information contained herein, the matters discussed in this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are based on management's beliefs and assumptions, current expectations, estimates, and projections. Statements that are not historical facts, including without limitation statements which are preceded by, followed by or include the words "believes," "anticipates," "plans," "expects," "may," "should" or similar expressions are forward-looking statements. These statements are subject to risks and uncertainties, certain of which are beyond the Company's control, and, therefore, actual results may differ materially Important factors that may affect future results include, but are not limited to: the company's ability to implement more sophisticated operating systems and inventory management programs, the impact of competitive products and pricing, the impact of new FDA dietary supplement regulations on the Company's products and marketing plans, including, without limitation, product labeling, product names and product structure/function claims, dependence on individual products, dependence on individual customers, market and industry conditions including pricing, demand for products, level of trade inventories and raw materials availability and pricing, the success of product development and new product introductions into the marketplace, changes in laws and regulations, the company's ability to identify, recruit and integrate key management personnel, including the cost and timing thereof, litigation and government regulatory action, uncertainty of market acceptance of new products, results of management's evaluation of its business operations and strategies, and other factors discussed under "Factors Affecting Future Performance" in Item 1 of this Annual Report. The Company disclaims any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise. OVERVIEW The Company develops, manufactures, markets, distributes and sells branded and private label vitamins, nutritional supplements and sports nutrition products in the United States and throughout the world. Net income (loss) for the fiscal years ended May 31, 2000, 1999 and 1998 amounted to $1.1 million, $(8.8) million and $14.0 million, respectively. The Company's operating results for fiscal 2000 and 1999 were affected by several strategic initiatives that were initially and/or primarily implemented during this two-year period. These initiatives included, among others, organizational changes and upgrading management systems (including senior management changes), the decision to reduce domestic SKUs by over two-thirds, the refinement of the Company's growth and business strategies designed to focus on its primary brands and customers, including the introduction of an enhanced marketing plan resulting in significantly increased selling 17 19 and marketing costs, the expansion of the Company's international operations primarily from the acquisition of Haleko, the closing of the Company's capsule and tablet manufacturing facility in California, the limitation of contract manufacturing (private label) business to select customers that otherwise carry the Company's brands and certain other initiatives. The implementation of these initiatives and the refinement of the Company's growth and business strategies is an ongoing process. While the focus of this process is to improve future profitability, no assurance can be given that decisions made by the Company relating to these initiatives will not adversely effect the Company's financial condition and results of operations. The Company experienced growth in sales over the past three fiscal years. Net sales were $364.7 million, $335.5 million and $250.5 million for fiscal years 2000, 1999 and 1998, respectively. The Company's growth has been a result of the Company's acquisition strategy, increased demand for the Company's products, including the growth in Schiff(R) Pain Free(TM)/Move Free(TM) sales and the Company's increased penetration of the mass market distribution channel. In July 1998, the Company acquired 100% of the outstanding shares of Haleko Hanseatisches Lebensmittle Kontor GmbH, ("Haleko"), which is the largest sports nutrition company in Europe and is headquartered in Germany. The Company's acquisition of Haleko resulted in incremental net sales of approximately $105.1 million and $73.4 million (ten months) in fiscal 2000 and 1999, respectively. Haleko had sales of approximately $69.0 million for the twelve months ending May 31, 1998. The following table shows selected items as reported and as a percentage of net sales for the years indicated:
2000 1999 1998 ----------------- ----------------- ----------------- (DOLLARS IN THOUSANDS) Net sales................. $364,668 100.0% $335,488 100.0% $250,542 100.0% Cost of goods sold........ 228,573 62.7 221,062 65.9 161,334 64.4 -------- ----- -------- ----- -------- ----- Gross profit.............. 136,095 37.3 114,426 34.1 89,208 35.6 -------- ----- -------- ----- -------- ----- Operating expenses........ 118,197 32.4 104,834 31.3 60,903 24.3 Severance, recruiting and reorganizational costs................... 4,116 1.1 3,062 .9 -- -- Management and employee compensation charges.... 301 .1 804 .2 401 .2 Plant consolidation and transition.............. -- -- 5,113 1.5 -- -- Other inventory related charges................. -- -- 4,115 1.2 -- -- Asset impairment costs.... -- -- 535 .2 -- -- -------- ----- -------- ----- -------- ----- Total operating expenses................ 122,614 33.6 118,463 35.3 61,304 24.5 -------- ----- -------- ----- -------- ----- Income (loss) from operations.............. 13,481 3.7 (4,037) (1.2) 27,904 11.1 Other expense, net........ 11,263 3.1 9,980 3.0 4,890 2.0 Income tax expense (benefit)............... 1,145 .3 (5,239) (1.6) 9,010 3.5 -------- ----- -------- ----- -------- ----- Net income (loss)......... $ 1,073 .3% $ (8,778) (2.6)% $ 14,004 5.6% ======== ===== ======== ===== ======== =====
RESULTS OF OPERATIONS (Fiscal 2000 Compared to Fiscal 1999) Net Sales. Net sales for the fiscal year ended May 31, 2000 increased $29.2 million, or 8.7%, to $364.7 million from $335.5 million for the fiscal year ended May 31, 1999. The following table shows comparative net 18 20 sales results categorized by distribution channel as reported and as a percentage of net sales for the fiscal years indicated (dollars in thousands):
2000 1999 ----------------- ----------------- Mass market................................... $180,927 49.7% $152,046 45.4% Health food stores............................ 34,642 9.5 56,178 16.7 Health clubs and gyms......................... 22,326 6.1 24,960 7.4 International markets......................... 122,605 33.6 89,189 26.6 Contract manufacturing........................ 378 .1 8,474 2.5 Other......................................... 3,790 1.0 4,641 1.4 -------- ----- -------- ----- Total............................... $364,668 100.0% $335,488 100.0% ======== ===== ======== =====
Sales to mass market customers (including food, drug, mass, club and convenience stores) increased approximately 19.0% to $180.9 million in fiscal 2000 from $152.0 million in fiscal 1999. The increase in sales to mass market customers was primarily the result of increased sales to existing accounts of certain leading branded products, including Schiff(R) Pain Free(TM)/Move Free(TM), offset by reduced volumes of certain other branded products primarily due to the Company's SKU reduction program and a temporary delay in the introduction of new products (primarily during the first nine months of fiscal 2000). Gross sales of the Company's Schiff(R) Pain Free(TM)/Move Free(TM) products amounted to $111.3 million for fiscal 2000 compared to $71.1 million for fiscal 1999. Sales to health food stores decreased approximately 38.3% to $34.6 million for fiscal 2000 from $56.2 million for fiscal 1999. Sales to health clubs and gyms decreased approximately 10.6% to $22.3 million for fiscal 2000 from $25.0 million for fiscal 1999. The decrease in sales resulted primarily from the Company's increased focus on the mass market distribution channel as well as a temporary delay in the introduction of new products into the health food, and health club and gym distribution channels. Gross sales of new products, including line extensions, amounted to approximately $10.4 million for fiscal 2000 compared to approximately $29.8 million for fiscal 1999. Sales to international markets increased 37.5% to $122.6 million for the year ended May 31, 2000 from $89.2 million for the year ended May 31, 1999. The increase in sales to international markets resulted primarily from the Company's acquisition of Haleko in July 1998 and the growth in Haleko's sportswear business. Haleko's net sales amounted to $105.1 million and $73.4 million, respectively, for the years ended May 31, 2000 and May 31, 1999. The Company's financial results for fiscal 2000 included Haleko's operating results for an entire year (compared to ten months included in fiscal 1999). Contract manufacturing (private label) sales volume decreased approximately 95.5% to $0.4 million for fiscal 2000 from $8.5 million for fiscal 1999. The decrease in contract manufacturing sales is consistent with the Company's decision to limit contract manufacturing business to select customers that otherwise carry the Company's brands. Private label business for customers that otherwise carry the Company's brands are included in the net sales amounts for the distribution channel applicable to such customer. The Company's three largest customers accounted for approximately 44% of the Company's aggregate net sales for the year ended May 31, 2000 and 43% for the year ended May 31, 1999. Gross Profit. Gross profit increased approximately 18.9% to $136.1 million for the year ended May 31, 2000 from $114.4 million for the year ended May 31, 1999. Gross profit, as a percentage of net sales, was 37.3% for the year ended May 31, 2000 compared to 34.1% for the year ended May 31, 1999. The increase in the gross profit percentage resulted primarily from a change in domestic sales mix, efficiencies from consolidation of the Company's capsule and tablet manufacturing facilities, increased higher margin international sales, and reduced credits for returned products and decreased inventory related costs. 19 21 Operating Expenses. Operating expenses, including certain severance, recruiting and reorganization costs, increased approximately 3.5% to $122.6 million for fiscal 2000 from $118.5 million for fiscal 1999. During fiscal 2000 the Company continued its initiative for organizational changes and upgrading of management systems (including senior management changes) that resulted in approximately $4.3 million of costs incurred during the year. During fiscal 1999 the Company recognized, in aggregate, approximately $12.8 million in charges relating to the consolidation of capsule and tablet manufacturing to its Utah facility, severance costs related to the departure of a former CEO and the termination of approximately twenty employees and other inventory charges resulting from charitable contributions and excess labels, packaging and discontinuation of certain SKUs to comply with DSHEA product labeling requirements effective March 1999. Excluding these charges for the respective periods, operating expenses increased $12.7 million, or 12.0% during fiscal 2000 in comparison to fiscal 1999 primarily due to increased selling and marketing expenses. Selling and marketing expenses, including sales, marketing, advertising, freight and other costs, increased approximately 16.8% to $81.8 million for fiscal 2000 from $70.1 million for fiscal 1999. The increase in selling and marketing expenses resulted primarily from the acquisition of Haleko, increased advertising and promotion costs associated with the Company's brand building initiatives and personnel costs required to handle higher sales volumes. The Company expects its selling and marketing expenses, as a percentage of sales, to increase in future years. General and administrative expenses increased approximately 5.7% to $28.4 million for the year ended May 31, 2000 compared to $26.9 million for the year ended May 31, 1999. The increase in general and administrative expenses for fiscal 2000 resulted primarily from the acquisition of Haleko and increased employee compensation and other personnel costs, partially offset by a reduction in legal costs. Other Expense. Other expense, net, amounted to $11.3 million for the year ended May 31, 2000 compared to $10.0 million for the year ended May 31, 1999. The net increase of approximately $1.3 million resulted primarily from increased fees and interest costs associated with extending the maturity date of the previous credit facility, together with an overall higher effective borrowing rate. Income Taxes. Provision for income taxes amounted to $1.1 million for the year ended May 31, 2000 compared to a tax benefit of $5.2 million for the year ended May 31, 1999. The income tax expense resulted primarily from realization of pre-tax earnings for fiscal 2000 in comparison to a pre-tax loss for fiscal 1999. Effective tax rate changes result primarily from tax rate differences for the Company's domestic and international operations. RESULTS OF OPERATIONS (Fiscal 1999 Compared to Fiscal 1998) Net Sales. Net sales for the year ended May 31, 1999 increased $85.0 million, or 33.9%, to $335.5 million from $250.5 million for the year ended May 31, 1998. The following table shows comparative net sales results categorized by distribution channel as reported and as a percentage of net sales for the fiscal years indicated (dollars in thousands):
1999 1998 ----------------- ----------------- Mass market................................... $152,046 45.4% $110,388 44.4% Health food stores............................ 56,178 16.7 61,742 24.6 Health clubs and gyms......................... 24,960 7.4 25,853 10.3 International markets......................... 89,189 26.6 17,295 6.6 Contract manufacturing........................ 8,474 2.5 30,341 12.1 Other......................................... 4,641 1.4 4,923 2.0 -------- ----- -------- ----- Total.................................... $335,488 100.0% $250,542 100.0% ======== ===== ======== =====
Sales to mass market customers and international markets increased during 1999 compared to 1998. Sales to mass market customers increased approximately 37.7% to $152.0 million in 1999 from $110.4 million in 1998. The increase in sales to mass market customers resulted primarily from increased penetration of the 20 22 market and the sale of new products offset by the effects of the Company's fiscal 1999 strategic initiatives. Gross sales of Schiff(R) Pain Free(TM)/Move Free(TM) amounted to approximately $71.1 million for the year ended May 31, 1999 compared to $17.9 million for the year ended May 31, 1998. Sales to international markets increased $71.9 million to $89.2 million for the year ended May 31, 1999 from $17.3 million for the year ended May 31, 1998. The increase in sales to international markets resulted primarily from the Company's acquisition of Haleko offset by a relatively small decrease in other international sales volume (resulting primarily from a change in year end for international operations). Haleko's sales for fiscal 1999 (ten months) amounted to approximately $73.4 million. Overall sales to health food stores decreased approximately 9.0% to $56.2 million for fiscal 1999 compared to $61.7 million for fiscal 1998. The decrease in sales resulted primarily from the Company's increased focus on the mass market distribution channel together with certain individual retailers in the health food distribution channel. Sales to GNC, the Company's most significant health food retailer, remained relatively constant in fiscal 1999 compared to fiscal 1998, whereas sales to other health food stores decreased in fiscal 1999 compared to fiscal 1998. Sales to health clubs and gyms decreased approximately 3.5% to $25.0 million for fiscal 1999 from $25.9 million for fiscal 1998. The decrease resulted primarily from reduced volumes with certain distributors. Contract manufacturing (private label) sales volume decreased approximately 72.1% to $8.5 million for the year ended May 31, 1999 from $30.3 million for the year ended May 31, 1998. The decrease in contract manufacturing sales is consistent with the Company's decision to limit contract manufacturing business to select customers that otherwise carry the Company's brands. The Company's three largest customers accounted for approximately 43% of net sales for the year ended May 31, 1999 and 41% for the year ended May 31, 1998. Gross Profit. Gross profit increased approximately 28.3% to $114.4 million for the year May 31, 1999 from $89.2 million for the year ended May 31, 1998. Gross profit, as a percentage of net sales, was 34.1% for the year ended May 31, 1999 compared to 35.6% for the year ended May 31, 1998. The decrease in the gross profit percentage resulted primarily from inventory charges recognized due to the Company's domestic SKU reduction program together with associated credits for returned goods. Operating Expenses. Operating expenses increased approximately 93.2% to $118.5 million for the year ended May 31, 1999 from $61.3 million for the year ended May 31, 1998. As discussed previously, the Company initiated several strategic decisions during fiscal 1999, including, among others, the closing of its California-based capsule and tablet manufacturing facility, the implementation of a domestic SKU reduction program, organizational changes and upgrading management systems, and the expansion of the Company's international operations. These initiatives, together with the acquisition of Haleko, general sales growth and increased legal costs, resulted in a significant increase in total operating expenses. Selling and marketing expenses increased approximately 78.6% to $70.1 million for the year ended May 31, 1999 from $39.2 million for the year ended May 31, 1998. Selling and marketing expenses as a percentage of net sales were 20.9% for the year ended May 31, 1999 compared to 15.7% for the year ended May 31, 1998. The increase in selling and marketing expense resulted primarily from the Company's acquisition of Haleko and incremental advertising and promotional costs in support of the Company's brand building strategies. Total selling, marketing and advertising costs amounted to $49.8 million in fiscal 1999 compared to $24.2 million in fiscal 1998. Incremental selling and marketing costs resulting from the Haleko acquisition amounted to $18.1 million in fiscal 1999. General and administrative expenses, as a percentage of net sales, were 8.0% for the year ended May 31, 1999 compared to 6.2% for the year ended May 31, 1998. The increase resulted primarily from increased legal costs, "Year 2000" implementation and compliance costs, as well as other costs associated with information system capabilities and the incremental costs associated with the acquisition of Haleko. Other Expense. Other expense, net, amounted to $10.0 million for the year ended May 31, 1999 compared to $4.9 million for the year ended May 31, 1998. The net increase of approximately $5.1 million 21 23 consists primarily of increased interest costs associated with additional indebtedness incurred in connection with the acquisition of Haleko as well as a higher overall effective borrowing rate for fiscal 1999 in comparison to fiscal 1998. Income Taxes. The Company recognized an income tax benefit for the fiscal year ended May 31, 1999 as a result of its pretax loss. The Company's overall effective tax rate is higher in fiscal 1999, in comparison to 1998, primarily as a result of a higher effective tax rate associated with Haleko's operating results. Income taxes (benefit), as a percentage of pre-tax income, amounted to approximately 37.4% for the year ended May 31, 1999 compared to 39.2% for the year ended May 31, 1998. LIQUIDITY AND CAPITAL RESOURCES Effective June 30, 2000, the Company and its domestic subsidiaries entered into a new $90.0 million senior credit facility (the "New Credit Facility") with Bankers Trust Company. The New Credit Facility replaced the Company's previous credit facility, which consisted of a revolving line of credit that expired on June 30, 2000. The New Credit Facility is comprised of a $30.0 million term loan and a $60.0 million revolving loan. Under the revolving loan, the Company may borrow up to the lesser of $60.0 million or the sum of (i) 85% of eligible accounts receivable and (ii) the lesser of $30.0 million or 65% of the eligible inventory. The New Credit Facility contains customary terms and conditions, including, among others, financial covenants regarding minimum cash flows and limitations on indebtedness and the Company's ability to pay dividends under certain circumstances. The obligations of the Company under the New Credit Facility are secured by a first priority lien on all owned or acquired tangible and intangible assets of the Company and its domestic subsidiaries. The New Credit Facility is being used to fund the normal working capital and capital expenditure requirements of the Company. At the inception of the New Credit Facility, the Company borrowed approximately $64.8 million (together with the proceeds from the subordinated loan discussed below) to repay in full its outstanding obligation under the previous credit facility and related financing costs of the New Credit Facility. Concurrently with the New Credit Facility, on June 30, 2000 the Company entered into a $10.0 million senior subordinated loan agreement (the "Subordinated Loan"). The proceeds from the Subordinated Loan were used to repay outstanding obligations under the Company's previous credit facility. The Subordinated Loan contains customary terms and conditions, including, among others, financial covenants regarding minimum cash flows and limitations on indebtedness and the Company's ability to pay dividends under certain circumstances. The Company had working capital of approximately $42.3 million at May 31, 2000 compared to $79.0 million at May 31, 1999 (excluding $98.7 million outstanding at May 31, 1999 under the previous credit agreement; See Note 7 to the Consolidated Financial Statements). The decrease in working capital resulted primarily from reduced receivables and inventories. Current receivables and inventories decreased $7.0 million and $16.5 million, respectively, during the year ended May 31, 2000. The decrease in receivables was primarily attributable to a change in customer sales mix. The decrease in inventories was primarily attributable to improved inventory management, including the Company's SKU reduction program. During fiscal 2000, the Company's aggregate current and long-term debt decreased approximately $32.6 million to $82.9 million at May 31, 2000, primarily as a result of the decrease in receivables and inventories. The Company expects to fund its long-term capital requirements for the next twelve months through the use of operating cash flow supplemented as necessary by borrowings under both the New Credit Agreement and Haleko's approximate $18.6 million secured credit facility (see Note 7 to the Consolidated Financial Statements). The Company also from time to time may evaluate strategic acquisitions as the nutritional supplements industry continues to consolidate. The funding of future acquisitions, if any, may require other debt financing or the issuance of additional equity. The Company paid an annual dividend of $0.15 per share (quarterly dividend of $0.0375 per share) for fiscal 2000. In addition, the Company paid a quarterly dividend of $0.0375 per share subsequent to year end. 22 24 The dividend was declared to be payable on June 20, 2000 to holders of all classes of common stock of record at the close of business on June 12, 2000. The Company's Board of Directors will determine dividend policy in the future based upon, among other things, the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant at the time. In addition, the New Credit Agreement contains certain customary financial covenants that may limit the Company's ability to pay dividends on its common stock. Accordingly, there can be no assurance that the Company will be able to sustain the payment of dividends in the future. IMPACT OF INFLATION The Company has historically been able to pass inflationary increases for raw materials and other costs onto its customers through price increases and anticipates that it will be able to continue to do so in the future. SEASONALITY The Company's business is seasonal, with lower sales typically realized during the first and second fiscal quarters and higher sales typically realized during the third and fourth fiscal quarters. The Company believes such fluctuations in sales are the result of greater marketing and promotional activities toward the end of each fiscal year, customer buying patterns, and consumer spending patterns related primarily to the consumers' interest in achieving personal health and fitness goals after the beginning of each new calendar year and before the summer fashion season. Furthermore, as a result of changes in product sales mix and other factors, as discussed above, the Company experiences fluctuations in gross profit and operating margins on a quarter-to-quarter basis. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which supersedes SFAS No. 80, "Accounting for Futures Contracts," SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk," and SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments," and also amends certain aspects of other SFAS's previously issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company's financial statements for the year ending May 31, 2001. The Company does not expect the impact of adopting SFAS No. 133 to be material in relation to its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 establishes accounting and reporting standards for the recognition of revenue. It states that revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and (4) collectibility is reasonably assured. SAB 101 is effective for the Company's financial statements in the fiscal quarter beginning March 1, 2001. The Company has not determined the impact of adopting SAB 101 to the Company's financial statements. YEAR 2000 As of August 29, 2000, the Company is not aware of any material year 2000 problems in any of its critical systems and services. In addition, the Company has not received any notification from any supplier of critical systems or services of any material year 2000 related problems in their businesses. In the event that any year 2000 related problems arise in the future, the Company formulated a year 2000 plan to address such issues. However, although the Company has a year 2000 plan, no assurance can be given that such plan will be able to solve all year 2000 issues that might still arise or that the failure to solve any such year 2000 issue will not have a material adverse effect on the Company. 23 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion involves forward-looking statements of market risk which assume for analytical purposes that certain adverse market conditions may occur. Actual future market conditions may differ materially from such assumptions. Accordingly, the forward-looking statements should not be considered projections by the Company of future events or losses. The Company's cash flows and net earnings are subject to fluctuations resulting from changes in interest rates and foreign exchange rates. The Company currently is not party to any significant derivative instruments and its current policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposure. The Company does not use financial instruments for trading purposes. The Company measures its market risk, related to its holdings of financial instruments, based on changes in interest rates utilizing a sensitivity analysis. The Company does not believe that a hypothetical 10% change in interest rates would nave a material effect on the Company's pretax earnings or cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data for the Company are on the following pages F-1 through F-21. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The following persons serve as the directors and executive officers of the Company:
NAME AGE POSITION ---- --- -------- Eric Weider............................... 36 Chairman of the Board George F. Lengvari........................ 58 Vice Chairman of the Board Bruce J. Wood............................. 50 Chief Executive Officer, President and Director Ronald L. Corey........................... 61 Director Donald G. Drapkin......................... 52 Director David J. Gustin........................... 49 Director Roger H. Kimmel........................... 54 Director H. F. Powell.............................. 67 Director Jerome J. Bock............................ 60 Executive Vice President -- Operations Stephen D. Young.......................... 46 Executive Vice President -- International Joseph W. Baty............................ 43 Executive Vice President and Chief Financial Officer James P. Lacey............................ 40 Executive Vice President -- Sales and Marketing Daniel A. Thomson......................... 36 Senior Vice President -- Legal Affairs, General Counsel and Secretary
24 26 Eric Weider has been a director of the Company since June 1989, Chairman of the Board of Directors since August 1996 and since June 1, 1997 has been President and Chief Executive Officer of Weider Health and Fitness, a major stockholder of the Company. Mr. Weider also serves as a member of the board of directors of a number of public and private companies in the United States and Canada, including Weider Health and Fitness, Nutripeak, Inc. and Weider Publications, a publisher of health and fitness magazines. Mr. Weider is also the President of the Joe Weider Foundation. George F. Lengvari has been a director of the Company since August 1996 and serves as Vice Chairman of the Board of Directors. Mr. Lengvari has been Vice Chairman of Weider Health and Fitness since June 1995 and Chairman of Weider Publications U.K. since September 1994. Prior to joining Weider Health and Fitness, Mr. Lengvari was a partner for 22 years in the law firm Lengvari Braman and is currently of counsel to the law firm LaPointe Rosenstein. Bruce J. Wood has been Chief Executive Officer, President and a director of the Company since June 1999. From January 1998 to December 1998, Mr. Wood was the President and a founder of All Stock Label LLC. From 1973 to December 1997, Mr. Wood held various management positions with divisions of Nabisco, Inc., a manufacturer and marketer of packaged food, including President and Chief Executive Officer of Nabisco, Ltd., President of Planters Lifesavers Company, and Senior Vice President, Marketing of both Nabisco Biscuit Company and Del Monte USA. Mr. Wood also serves as a director of Payge International Ltd., Montreal, a private company which manufactures injection molded plastic industrial and advertising products. Ronald L. Corey has been a director of the Company since August 1996. Mr. Corey served as President of the Club de Hockey Canadien Inc. (the Montreal Canadiens) and the Molson Center Inc. from 1982 through July 1999. In addition, between 1985 and 1989, Mr. Corey held the position of Chairman of the Board and director of the Montreal Port Corporation. Mr. Corey has previously served as director of numerous companies, including Banque Laurentienne, Reno-Depot Inc. and Transamerica Life Companies, an insurance and financial services company. Donald G. Drapkin has been a director of the Company since October 1997. Mr. Drapkin has been a Director and Vice Chairman of MacAndrews & Forbes Holdings, Inc. and various of its affiliates since March 1987. Prior to joining MacAndrews & Forbes, Mr. Drapkin was a Partner in the law firm of Skadden, Arps, Slate, Meagher & Flom in New York for more than five years. Mr. Drapkin also is a director of the following corporations which file reports pursuant to the Securities Exchange Act of 1934: Anthracite Capital, Inc., BlackRock Asset Investors, The Molson Companies Limited, Nexell Therapeutics Inc., Playboy.com Inc., Playboy Enterprises, Inc., ProxyMed, Inc., Revlon Consumer Products Corporation, Revlon, Inc., The Warnaco Group, Inc., and Weider Nutrition International, Inc. (On December 27, 1996, Marvel Entertainment Group, Inc., Marvel Holdings Inc., Marvel (Parent) Holdings Inc. and Marvel III Holdings Inc., each of which Mr. Drapkin was a director of at such time, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code.) David J. Gustin has been a director of the Company since March 1999. From March 1999 until June 1999, Mr. Gustin served as Chief Executive Officer and President of the Company. From 1992 to June 1998, Mr. Gustin held various senior management positions within ConAgra, Inc., including President of ConAgra Grocery Products Companies, Hunt-Wesson Grocery Products Companies, LaChoy/Rosarita Company and Orville Redenbacher/ Swiss Miss Company. Prior to joining ConAgra, Inc., Mr. Gustin held various management positions with Frito-Lay, Inc. and General Foods Corporation. Roger H. Kimmel has been a director of the Company since August 1996. Mr. Kimmel has been a partner at the law firm of Latham & Watkins for more than five years. Mr. Kimmel is also a director of Algos Pharmaceutical Corporation, TSR Wireless, LLC, a provider of wireless messaging products and services, and U.S. Dermatologics, Inc., a pharmaceutical research company. H.F. Powell has been a director of the Company since January 2000. Since 1997, Mr. Powell has been an independent consultant to various corporations. Prior to his retirement in 1996, Mr. Powell served as Executive Vice President and Chief Financial Officer of Nabisco, Inc. from 1994 through 1996 and President 25 27 of Nabisco International from 1989 through 1994. Throughout his career, Mr. Powell served in various senior level finance and operating positions including Executive Vice President of Nabisco International, Senior Vice President and Chief Financial Officer of Nabisco Brands, President of Nabisco Brands Canada and Senior Vice President and Chief Financial Officer of Standard Brands. Mr. Bock has served as Executive Vice President -- Operations of the Company since July 1999. Prior to joining the Company, Mr. Bock served as Vice President of Operations for the Hunt-Wesson Division of ConAgra, Inc. from 1993 to February 1999. From 1990 to 1993, Mr. Bock was the President of the Rolling Pin Business Unit of Shato Holdings, Inc. Prior to joining Shato Holdings, Mr. Bock held various operations and management positions with The Pillsbury Company from 1962 to 1989. Mr. Young has served as an Executive Vice President of the Company since January 1997. From January 1994 to July 1999, Mr. Young served as the Chief Financial Officer of the Company. Prior to joining the Company in 1993, Mr. Young served as Vice President Finance at First Health Strategies, which he joined in 1983. Mr. Young is a certified public accountant. Mr. Baty has served as Executive Vice President and Chief Financial Officer of the Company since November 1999. From January 1997 to October 1999, Mr. Baty served as Senior Vice President -- Finance of the Company. Prior to joining the Company, Mr. Baty was a partner at KPMG LLP, which he joined in 1984. Mr. Baty is a certified public accountant. Mr. Lacey has served as Executive Vice President -- Sales and Marketing of the Company since March 2000. From July 1999 to February 2000 Mr. Lacey served as Senior Vice President -- Sales of the Company. From January 1998 to July 1999, Mr. Lacey served as Chief Operating Officer of Everlast Nutritional Products. From July 1996 to December 1997, Mr. Lacey was Vice President of Sales at Powerbar, Inc. Prior to joining Powerbar, Mr. Lacey held various sales, marketing and management positions from 1982 to 1996 with Gillette-Oral-B Laboratories, Nestle Food Corporation, and Smith Kline-Beecham. Mr. Thomson has served as Senior Vice President -- Legal Affairs and General Counsel of the Company since July 1998 and Secretary since July 1999. Prior to joining the Company, Mr. Thomson was in private law practice in the corporate and securities departments of Latham & Watkins and LeBoeuf, Lamb, Greene & MacRae. Mr. Thomson, a certified public accountant, was an accountant and consultant with the firm of Price Waterhouse prior to practicing law. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Exchange Act requires directors, officers and persons who beneficially own more than 10% of a registered class of stock of the Company to file initial reports of ownership (Form 3) and reports of changes in beneficial ownership (Forms 4 and 5) with the Securities Exchange Commission ("Commission") and The New York Stock Exchange. Such persons are also required under the rules and regulations promulgated by the Commission to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the Company, the Company believes that during the fiscal year ended May 31, 2000 the Company's directors, officers and greater than 10% beneficial owners complied with all applicable Section 16(a) filing requirements, except that Mr. Powell failed to timely file his Form 3 upon his appointment as a director of the Company, and Messrs. Corey and Schaeffer (a former director of the Company) failed to timely file Forms 5 reporting exempt grants of stock options. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the annual and long-term compensation for services in all capacities to the Company for the fiscal years ended May 31, 2000, 1999 and 1998 of those persons who were either: (a) the chief executive officer during the last completed fiscal year; or (b) each of 26 28 the Company's other most highly compensated executive officers as of the end of the last completed fiscal year whose annual salary and bonuses exceeded $100,000 (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ----------------------------------------- ------------------------------------- AWARDS OF OTHER RESTRICTED STOCK ANNUAL STOCK OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS (SHARES) COMPENSATION --------------------------- ---- -------- -------- ------------ ---------- --------- ------------ Bruce J. Wood(1)(6).......... 2000 $400,000 $408,000 $456,444 $0 600,000 $ 0 Chief Executive Officer and President David J. Gustin(2)........... 2000 0 0 0 0 0 368,651 Chief Executive Officer and 1999 120,000 120,000 0 0 750,000 0 President Jerome J. Bock(3)(6)(7)...... 2000 160,269 81,266 56,280 0 50,000 4,200 Executive Vice President -- Operations Stephen D. Young(4)(7)....... 2000 190,000 96,900 0 0 0 5,100 Executive Vice President -- 1999 185,000 0 0 0 20,000 4,000 International 1998 165,000 45,000 0 0 0 4,000 Joseph W. Baty(7)............ 2000 185,833 107,100 0 0 45,000 5,100 Executive Vice President 1999 155,000 0 0 0 30,000 3,839 and Chief Financial Officer 1998 125,000 30,000 0 0 0 3,625 James P. Lacey(5)(6)(7)...... 2000 170,539 96,566 91,276 0 75,000 4,017 Executive Vice President -- Sales and Marketing
--------------- (1) Mr. Wood became President and Chief Executive Officer of the Company effective June 3, 1999. Includes all compensation paid to Mr. Wood for fiscal 2000. (2) Mr. Gustin became President and Chief Executive Officer of the Company effective March 1, 1999 and resigned from the employ of the Company effective June 2, 1999. Fiscal 1999 amounts include all compensation paid to Mr. Gustin from March 1, 1999 through May 31, 1999. In connection with his resignation, Mr. Gustin and the Company entered into an agreement pursuant to which Mr. Gustin was entitled to certain cash payments paid during fiscal 2000. Mr. Gustin remains a member of the Board of Directors of the Company. (3) Mr. Bock joined the Company in July 1999. (4) At May 31, 2000, Mr. Young held 18,272 shares of unvested Class A Restricted Stock, valued at approximately $60,526. The Class A Restricted Stock was issued at the time of the Company's IPO upon conversion of unvested Performance Units pursuant to the Management Incentive Agreements, and vests 20% per year. See "Certain Relationships and Related Party Transactions -- Management Incentive Agreements." (5) Mr. Lacey joined the Company in July 1999. (6) In connection with their employment with the Company, Messrs. Wood and Lacey relocated to Salt Lake City, Utah. Costs associated with the relocation are included in other annual compensation. Mr. Bock's employment arrangement provides for the Company to reimburse him for commuting expenses. (7) Amounts under the heading "All Other Compensation" represent the Company's matching contributions under its 401(k) Plan. 27 29 The following table sets forth certain information with respect to grants of options to purchase shares of Class A Common Stock under the Equity Plan to the Named Officers during fiscal year 2000. OPTION GRANTS IN FISCAL YEAR 2000(1)
PERCENTAGE OF TOTAL POTENTIAL REALIZABLE VALUE OPTIONS AT ASSUMED ANNUAL RATES OF GRANTED TO STOCK PRICE APPRECIATION OPTIONS EMPLOYEES EXERCISE OR FOR OPTION TERM(2) GRANTED IN FISCAL BASE PRICE EXPIRATION --------------------------- NAME (SHARES) YEAR PER SHARE DATE 5% 10% ---- -------- ---------- ----------- ---------- ------------ ------------ Bruce J. Wood................... 600,000 57.8% $4.88 06/02/07 $1,396,557 $3,344,997 Jerome J. Bock.................. 50,000 4.8 4.31 07/11/07 102,951 246,586 Stephen D. Young................ 0 -- 0 -- -- -- Joseph W. Baty.................. 20,000 1.9 4.44 08/12/07 42,374 101,493 25,000 2.4 4.13 12/14/08 49,374 117,933 James P. Lacey.................. 75,000 7.2 4.00 07/05/07 143,237 343,077
--------------- (1) All options were granted under the Equity Plan and become exercisable in five equal annual installments beginning on the first anniversary date of grant, except that Mr. Wood's options become exercisable in three equal annual installments. Under the terms of the Equity Plan, the Compensation Committee retains discretion, subject to certain restrictions, to modify the terms of outstanding options and to reprice outstanding options. Options are granted for a term of eight years, subject to earlier termination in certain events. The exercise price is equal to the closing price of the Common Stock on The New York Stock Exchange on the date of grant. (2) Potential gains are net of the exercise price, but before taxes associated with the exercise. Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent upon the future financial performance of the Company, overall market conditions and the option holders' continued employment through the vesting period. This table does not take into account any appreciation in the price of the Common Stock from the date of grant to the date of this Form 10-K/ A other than the columns reflecting assumed rates of appreciation of 5% and 10%. The table below sets forth certain information with respect to the unexercised options to purchase shares of Common Stock held by the Named Officers as of May 31, 2000. No Named Officer exercised any options during fiscal 2000. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AS OF OPTIONS AS OF MAY 31, 2000 MAY 31, 2000(1) ---------------------------- ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Bruce J. Wood.............................. 0 600,000 $0 $0 Jerome J. Bock............................. 0 50,000 0 0 Stephen D. Young........................... 4,000 96,000 0 0 Joseph W. Baty............................. 24,000 81,000 0 0 James P. Lacey............................. 0 75,000 0 0
--------------- (1) Based on the closing price of the Class A Common Stock on the New York Stock Exchange on May 31, 2000 ($3.3125), the last trading day of the Class A Common Stock in fiscal 2000, minus the exercise price of the option. 28 30 EMPLOYMENT RELATED AGREEMENTS The Company entered into an employment agreement with Mr. Wood as of June 3, 1999. Pursuant to his employment agreement, Mr. Wood is entitled to a base salary of $400,000 per year and annual bonuses in an amount based upon the annual performance and profitability of the Company. In addition, in the event Mr. Wood terminates his employment for "cause" or is terminated without "cause" (as defined in the employment agreement), he is entitled to a severance payment in an amount equal to 100% of his base salary, plus an amount equal to the greater of his base salary and annual bonus for the prior year. In addition, upon such termination, or if Mr. Wood is terminated for incapacity, his options to purchase Common Stock of the Company that would have become exercisable on the next following anniversary of the date of grant will immediately become exercisable. Pursuant to his employment agreement, if Mr. Wood's employment is terminated by him for "cause" or the Company terminates his employment without "cause," he will be prohibited from becoming an employee of certain of the Company's competitors within the territorial United States for a period of six months. If his employment is terminated for any other reason, such prohibition will last for one year. Unless sooner terminated by the parties, the agreement expires on May 31, 2002. The Company also entered into a Change in Control Agreement with Mr. Wood effective as of August 1, 2000. Pursuant to such agreement, upon certain change of control events that are consummated on or before August 1, 2001, if Mr. Wood's employment is terminated by him for "cause" or the Company terminates his employment without "cause" on the closing of a change of control event, he will be entitled to receive an amount equal to his base salary, in addition to any amount he is entitled to receive pursuant to his employment agreement with the Company. If, upon the closing of a change of control event, (a) Mr. Wood terminates his employment for "good reason," (b) the Company terminates his employment without "cause," or (c) he continues his employment with the Company after a change of control, Mr. Wood will be entitled to receive a retention bonus equal to an amount based upon the aggregate fair market value of the Company upon the change of control. The Company entered into an agreement with Mr. Baty as of October 1, 1999. Pursuant to his severance agreement, in the event Mr. Baty terminates his employment for "good reason" or the Company terminates his employment without "cause" (each, as defined in the employment agreement), he is entitled to a severance payment in an amount equal to 100% of his base salary, plus an amount equal to the greater of (a) his prior year's bonus, (b) the average of his bonuses for the past three years, and (c) 30% of his base salary. In addition, upon such termination and upon certain change of control events, Mr. Baty's options to purchase Common Stock of the Company will vest and become exercisable. The Company entered into an agreement with Mr. Bock as of April 1, 2000. Pursuant to such agreement, in the event Mr. Bock terminates his employment for "good reason" or the Company terminates his employment without "cause" (each, as defined in the employment agreement), he is entitled to a severance payment in an amount equal to 100% of his annual base salary, plus an amount equal to the greater of (a) his prior year's bonus and (b) the average of his bonuses for the past three years. Upon certain change of control events, Mr. Bock's options to purchase Common Stock of the Company will vest and become exercisable. Mr. Bock is also prohibited from becoming an employee of certain entities engaged in the manufacture and distribution of nutritional supplements within Canada and the territorial United States for a period of one year following the termination of such agreement. The Company entered into an employment agreement with Mr. Lacey as of March 1, 2000. Pursuant to his employment agreement, Mr. Lacey is entitled to a base salary of 210,000 per year and annual bonus in an amount based upon the annual performance and profitability of the Company. In addition, in the event Mr. Lacey terminates his employment for "good reason" or is terminated by the Company without "cause" (each, as defined in the employment agreement), he is entitled to a severance payment in an amount equal to 100% of his base salary, plus an amount equal to the greater of the bonus he received in the prior fiscal year and the average of his bonuses for the past three fiscal years. In addition, upon certain change of control events, his options to purchase Common Stock of the Company will vest and immediately become exercisable. Pursuant to his employment agreement, Mr. Lacey is also prohibited from becoming an employee of certain entities engaged in the manufacture and distribution of nutritional supplements within Canada and the territorial United States for a period of one year following the termination of such Mr. Lacey's employment agreement. Unless sooner terminated by the parties, the agreement expires on December 31, 2002. 29 31 The Company entered into an employment agreement with Mr. Young in June 1994. Mr. Young is entitled to salary and annual bonuses in an amount based upon the annual performance and profitability of the Company. In addition, in the event Mr. Young is terminated, or his employment ceases, for any reason other than cause, death, incapacity or resignation, he is entitled to a severance payment in an amount equal to a minimum of 100% of the base salary he received during the nine months immediately preceding his termination, and a maximum of 100% of the base salary he received during the 9 months immediately preceding his termination. If Mr. Young is terminated due to incapacity, he is entitled to 50% of the total compensation he received during the nine months immediately preceding his termination. The Company entered into certain additional agreements with Messrs. Baty, Bock, Lacey and Young as of August 1, 2000. Pursuant to such agreements, upon certain change of control events that are consummated on or before August 1, 2001, if, upon the closing of a change of control event, any of Messrs. Baty, Bock, Lacey or Young (a) terminates his employment for "good reason," (b) the Company terminates his employment without "cause," or (c) he continues his employment with the Company after a change of control, then he will be entitled to receive a retention bonus. Such retention bonus will not exceed $150,000, with respect to Mr. Young, $200,000, with respect to Mr. Bock, $300,000, with respect to Mr. Lacey, and $565,000, with respect to Mr. Baty. DIRECTOR COMPENSATION Members of the Board of Directors who are not employees of the Company or any subsidiary or parent corporation of the Company (the "Independent Directors") receive an annual fee of $12,000. In addition to the annual fee each Independent Director is entitled to receive $1,500 for each Board meeting attended and $500 for each committee meeting attended on a day the Board is not otherwise meeting. The Company will also reimburse all directors for their reasonable expenses incurred in connection with their activities as directors of the Company. Each Independent Director receives options to purchase 20,000 shares of Class A Common Stock upon appointment or election to the Board of Directors and options to purchase 7,000 shares of Class A Common Stock upon each annual meeting of the Company's stockholders following the first anniversary of the date of appointment or election to the Board of Directors, provided the Independent Director is still serving as a director of the Company. Messrs. Corey, Drapkin, Gustin, Kimmel and Powell are currently Independent Directors of the Company. Directors who are not Independent Directors receive no compensation for serving on the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION From June 1, 1998 to August 14, 1999, Eric Weider, Roger H. Kimmel and George F. Lengvari were members of the Compensation Committee of the Board of Directors. Effective August 15, 1999, Glenn W. Schaeffer and Ronald L. Corey were appointed members of the Compensation Committee replacing, Messrs. Weider, Kimmel and Lengvari. Effective June 1, 2000, Mr. H. F. Powell replaced Mr. Schaeffer as a member of the Compensation Committee. Messrs. Powell and Corey are not employees of, or otherwise affiliated with (other than in their capacity as director), the Company. Pursuant to a sublicense agreement dated December 1, 1996 with Mariz Gestao E Investimentos Limitada ("Mariz"), the Company obtained the exclusive worldwide right to use the Weider name and trademarks, except in the following countries: the United States, Canada, Mexico, Spain, Australia, New Zealand, Japan and South Africa. Mariz is a company incorporated under the laws of Portugal and owned by a trust of which the family members of George F. Lengvari, a director of the Company, are included among the beneficiaries. Mariz obtained its exclusive international rights to use the Weider name and trademarks pursuant to a license agreement, effective June 1, 1994, among Mariz and Joe Weider, Ben Weider, Weider Sports Equipment and Weider Health and Fitness. Pursuant to the license agreement with Mariz, the Company is required to make annual royalty payments to Mariz commencing on December 1, 1998 on sales of the Company's brands in existence on December 1, 1996 in countries covered by the agreement. In addition, the sublicense agreement with Mariz includes an irrevocable buy-out option exercisable by the Company after May 31, 2002 for a purchase price equal to the greater of $7.0 million or 6.5 times the aggregate royalties paid 30 32 by the Company in the fiscal year immediately preceding the date of the exercise of the option. In fiscal 2000, the Company incurred royalty expense of $390,000 relating to the Mariz licensing agreement. Latham & Watkins, of which Roger H. Kimmel, a director of the Company, is a partner, performed legal services for the Company during the fiscal year ended May 31, 2000. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION From June 1, 1998 to August 14, 1999, the Compensation Committee of the Board of Directors (the "Compensation Committee") was comprised of Eric Weider, Roger H. Kimmel and George F. Lengvari. Effective August 15, 1999, Glenn W. Schaeffer and Ronald L. Corey were appointed as members of the Compensation Committee replacing Messrs. Weider, Kimmel and Lengvari. Effective June 1, 2000, Mr. H. F. Powell replaced Mr. Schaeffer as a member of the Compensation Committee. The Committee provides guidance and overview for all executive compensation and benefit programs, including basic strategies and policies. The Committee evaluates the performance of the executive officers and determines their compensation levels in terms of salary, bonuses, stock options and other benefits, all subject to approval of the Board of Directors. In accordance with rules established by the Commission, the Company is required to provide certain data and information in regard to the compensation provided to the Company's Chief Executive Officer and the Named Officers. The Compensation Committee has prepared the following report for inclusion herein. Compensation Policy and Company Performance. The executive compensation program's overall objective is to reward and retain executives with the level of talent and ability required to prudently guide the Company's growth, maximize the link between executive and stockholder interests through a stock option plan, recognize individual contributions as well as overall business results and maintain the Company's position as a leader in the nutritional supplements market. To achieve these objectives, the Company has developed an overall compensation strategy and specific compensation plans that tie a substantial portion of an executive's compensation to performance. The key elements of the Company's compensation program consist of fixed compensation in the form of base salary and variable compensation in the forms of bonus payments and stock option awards under the Equity Plan. An executive's annual base salary represents the fixed component of such executive's total compensation and variable compensation is intended to comprise a substantial portion of an executive's total annual compensation. The Compensation Committee's policies with respect to each of these elements, including the bases for the compensation awarded to the Company's Chief Executive Officer, are discussed below. In addition, while the elements of compensation described below are considered separately, the Compensation Committee takes into account the full compensation package afforded by the Company to the individual, including pension benefits, insurance and other benefits, as well as the programs described below. Base Salaries. A competitive base salary is necessary to the development and retention of capable management and is consistent with the Company's long-term goals. Base salaries for executives are determined based upon the Compensation Committee's evaluation of the responsibilities of the position held and the experience of the individual, and by reference to historical levels of salary paid by the Company and general economic conditions. Bonus Payments. Targeted cash bonus payments are awarded to executives in recognition of contributions to the business during the prior year. An executive's contributions to the business are measured, in part, by his or her success in meeting certain goals established by such executive and the Compensation Committee in consultation with the Chief Executive Officer. The aggregate amount of the bonuses awarded in any fiscal year is determined by reference to the terms of the executive employment agreements, the Company's competitive position, assessment of progress in attaining long-term goals and business performance considerations. The specific cash bonus an executive receives is dependent on individual performance and level of responsibility. Assessment of an individual's relative performance is made annually based on a number of factors, including initiative, business judgment, knowledge of the industry and management skills. 31 33 Awards under the Equity Plan. The other principal component of executives' compensation is stock options, which are intended as a tool to attract, provide incentive to and retain those executives who make the greatest contribution to the business, and who can have the greatest effect on the long-term profitability of the Company. The exercise price of the stock options is set at a price equal to the market price of the Class A Common Stock at the time of the grant. The options therefore do not have any value to the executive unless the market price of the Class A Common Stock rises. The Compensation Committee believes that these stock options more closely align the executives' interests with those of its stockholders, and focus management on building profitability and long-term stockholder value. Policy on the Deductibility of Compensation. Section 162(m) of the Internal Revenue Code of 1986 as amended (the "Code"), limits a public company's federal income tax deduction for compensation paid in excess of $1,000,000 to any of its five most highly compensated executive officers. However, certain performance-based compensation, including awards of stock options, is excluded from the $1,000,000 limit if specific requirements are met. While the tax impact of any compensation arrangement is one factor which is considered by the Compensation Committee, such impact is evaluated in light of the compensation policies discussed above. The Compensation Committee's compensation determinations have generally been designed to maximize the Company's federal income tax deduction for possible application in future years. However, from time to time compensation may be awarded which is not fully deductible if it is determined that such award is consistent with the overall design of the compensation program and in the best interests of the Company and its stockholders. Chief Executive Officer Compensation. The Company entered into an employment agreement with Bruce J. Wood, its current Chief Executive Officer and President, as of June 3, 1999. Pursuant to his employment agreement, the Company granted Mr. Wood stock options exercisable for 600,000 shares of Class A Common Stock and agreed to pay Mr. Wood an annual base salary of $400,000. For the fiscal year ended May 31, 2000, Mr. Wood was guaranteed a bonus at least equal to his base salary. The minimum base salary and annual increases set forth in Mr. Wood's employment agreement were determined based on the Board of Directors' judgment concerning various factors, including his level of responsibility and career experience. Although none of these factors were given a specific weight, primary consideration was given to his career experience. No particular formulas or measures were used. See the description of Mr. Wood's employment agreement under "Employment Related Agreements" above. Conclusion. The Company has had, and continues to have, an appropriate and competitive compensation program. The balance of a competitive base salary, bonus payments and significant emphasis on long-term incentives is a foundation designed to build stability and to support the Company's continued growth. This report is submitted by the members of the Compensation Committee. The preceding "Report of the Compensation Committee on Executive Compensation" and the "Stock Performance Chart" that appears immediately hereafter shall not be deemed to be soliciting material or to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, or incorporated by reference in any documents so filed. STOCK PERFORMANCE CHART As part of the executive compensation information presented herein, the Commission requires a comparison of stock performance for the Company with stock performance of a broad equity market index and an appropriate industry index. The following chart compares the cumulative total stockholder return on the Class A Common Stock during the period from May 1, 1997 to May 31, 2000 (the Company's fiscal year end) with the cumulative total return on Standard & Poor's 500 Index and a peer group index of nutritional supplement companies. The comparison assumes $100 was invested on May 1, 1997 (the first day of trading in the Class A Common Stock) in the Class A Common Stock or in each of the foregoing indices and assumes reinvestment of dividends, if any. The peer group used in the below stock performance chart consists of the companies included in the Natural Business Composite Index(TM). The stock performance shown on the following chart is not necessarily indicative of future performance. 32 34 Weider Nutrition International, Inc. S&P 500 5/1/97 100.00 100.00 5/31/97 115.00 106.00 5/31/98 142.00 139.00 5/31/99 49.00 168.00 5/31/00 49.00 162.00 Natural Business Composite Index (TM) 5/1/97 100.00 5/31/97 102.00 5/31/98 68.00 5/31/99 31.00 5/31/00 24.00
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of September 22, 2000, the amount and percentage of the outstanding shares of the Common Stock which, according to the information supplied to the Company, are beneficially owned by: - each of the directors of the Company (all of whom are nominees for re-election as directors of the Company); - each of the Named Officers; - all current directors and executive officers of the Company as a group; and - each person or entity who is known to the Company to be the beneficial owner of more than 5% of the outstanding Common Stock. Except to the extent indicated in the footnotes to the following table, each of the persons or entities listed has sole voting and sole investment power with respect to the shares which are deemed beneficially owned by such person or entity.
SHARES BENEFICIALLY OWNED(1) ---------------------------------------------- PERCENT OF NUMBER OF SHARES PERCENT TOTAL ------------------------ ------------------ VOTING NAME OF BENEFICIAL OWNER CLASS A(2) CLASS B CLASS A CLASS B POWER ------------------------ ---------- ---------- ------- ------- ---------- DIRECTORS AND NAMED OFFICERS: Eric Weider(3)....................... 3,600 0 * 0% * Bruce J. Wood........................ 200,000 0 1.9% 0 * Ronald L. Corey...................... 76,427 0 * 0 * Donald G. Drapkin.................... 23,000 0 * 0 * David J. Gustin...................... 2,333 0 * 0 * Roger H. Kimmel(4)................... 34,000 0 * 0 * George F. Lengvari(5)................ 0 0 0 0 0% H. F. Powell......................... 0 0 0 0 0
33 35
SHARES BENEFICIALLY OWNED(1) ---------------------------------------------- PERCENT OF NUMBER OF SHARES PERCENT TOTAL ------------------------ ------------------ VOTING NAME OF BENEFICIAL OWNER CLASS A(2) CLASS B CLASS A CLASS B POWER ------------------------ ---------- ---------- ------- ------- ---------- Stephen D. Young..................... 90,815 0 * 0 * Joseph W. Baty....................... 34,590 0 * 0 * Jerome J. Bock....................... 10,000 0 * 0 * James P. Lacey....................... 16,000 0 * 0 * Directors and executive officers as a group (13 persons)(3),(4),(5)..... 485,900 0 4.6 0 * OTHER PRINCIPAL STOCKHOLDERS: Weider Health and Fitness(6)......... 0 15,687,432 0 100 93.7 21100 Erwin Street Woodland Hills, CA 91367 Gabelli Asset Management Inc.(7)..... 1,340,000 0 5.36 0 * One Corporate Center Rye, New York 10580 Wynnchurch Capital(8)................ 1,174,955 0 11.2 0 * Two Conway Park 150 Field Dr., Suite 165 Lake Forest, IL 60045 UBS AG(9).............................. 496,200 0 5.4 0 * Bahnofstrasse 45 8021, Zurich, Switzerland
--------------- * Represents less than 1%. (1) Except for information based on Schedules 13G, as indicated in the footnotes hereto, beneficial ownership is stated as of September 22, 2000, and includes shares exercisable within 60 days of September 22, 2000 held by each person, as if such shares were outstanding on September 22, 2000. (2) Includes 200,000, 19,000, 19,000, 2,333, 19,000, 4,000, 34,000, 10,000, 15,000 and 337,333 shares of Class A Common Stock which may be purchased upon the exercise of stock options by Messrs. Wood, Corey, Drapkin, Gustin, Kimmel, Young, Baty, Bock and Lacey and all current directors and executive officers as a group, respectively. (3) Does not include 15,687,432 shares of Class B Common Stock held by Weider Health and Fitness. Mr. Weider is President and Chief Executive Officer of Weider Health and Fitness. Mr. Weider disclaims beneficial ownership of such shares. (4) Does not include 2,000 shares of Class A Common Stock held in two trusts for the benefit of the children of Mr. Kimmel, as to which shares Mr. Kimmel has neither the power of disposition nor the power to vote. Mr. Kimmel disclaims beneficial ownership of such shares. (5) Does not include 232,426 shares of Class A Common Stock held by Bayonne Settlement, a trust organized under the laws of Jersey (U.K.), of which family members of George F. Lengvari are included among the beneficiaries. Bayonne Settlement is administered by an independent trustee and Mr. Lengvari has neither the power of disposition nor the power to vote the shares. Mr. Lengvari disclaims beneficial ownership of such shares. (6) Based on Schedule 13G filed on July 9, 1997 by Weider Health and Fitness. (7) Based on Schedule 13D dated August 21, 2000. (8) Based on Schedule 13D filed on August 8, 2000 by Wynchurch Capital, Ltd. (9) Based on Schedule 13G filed on February 11, 2000 by UBS AG and Brinson Partners, Inc., a wholly owned subsidiary of UBS AG. 34 36 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ADVERTISING AGREEMENT The Company and Weider Publications, Inc., a subsidiary of Weider Health and Fitness, are parties to an Advertising Agreement dated December 1, 1996 (the "Advertising Agreement") under which the Company is obligated (pursuant to an annually updated notification in connection with the Company's budget) to purchase a minimum number of advertising pages in certain of the publications of Weider Publications each month at a price below that charged to unaffiliated third party advertisers. The Advertising Agreement has a ten-year term and is subject to termination by either party if certain specified events occur, including a change of control of Weider Health and Fitness or an initial public offering of Weider Publications. During fiscal 2000, the Company paid Weider Publications a total of approximately $1.65 million for services rendered. Weider Health and Fitness owns all of the Company's Class B Common Stock. Eric Weider, the Chairman of the Board of the Company, is a director of Weider Publications and George Lengvari, a director of the Company, is Chairman of Weider Publications U.K. TRANSFER OF INTELLECTUAL PROPERTY In July 1985, Weider Health and Fitness and Joe Weider entered into an agreement pursuant to which Weider Health and Fitness was granted all rights, title and interest in and to a system of weight training known as "The Weider System" and the exclusive right to use of the name "Joe Weider" within the continental United States. As consideration for such grants, Weider Health and Fitness has agreed to pay Joe Weider approximately $450,000 per year for the rest of his lifetime (of which $250,000 is paid by the Company). Weider Health and Fitness' right to use the "The Weider System" and "Joe Weider" survives the death of Joe Weider. Effective September 1, 1996, Weider Health and Fitness assigned to the Company substantially all such intellectual property. Weider Health and Fitness retained three trademarks used in both the Company's nutritional supplements business and Weider Health and Fitness' body building and exercise equipment divisions; however, Weider Health and Fitness entered into a Trademark and License Agreement granting to the Company a perpetual, royalty-free, fully paid license to use such trademarks for its nutritional supplements business. Weider Health and Fitness owns all of the Company's Class B Common Stock. Mr. Eric Weider, the Chairman of the Board of Directors of the Company, is the President, Chief Executive Officer and a director of Weider Health and Fitness. Mr. Lengvari, a director of the Company, is a director of Weider Health and Fitness. For a discussion of an intellectual property licensing agreement in which Mr. Lengvari has an interest, see "Executive Compensation -- Compensation Committee Interlocks and Insider Participation." MANAGEMENT INCENTIVE AGREEMENTS Prior to the Company's IPO, the Company entered into Management Incentive Agreements pursuant to which key employees were granted Performance Units as incentive compensation. The Company's IPO triggered conversion of the vested Performance Units into cash and shares of Class A Common Stock. The unvested portion of the Performance Units were converted to Class A Restricted Stock that vest, contingent upon continued employment and/or other factors, over a five-year period at 20% per year from May 31, 1998 through May 2002. The number of unvested shares of Class A Restricted Stock at May 31, 2000 were 18,272 shares. To facilitate the payment of individual income taxes incurred in connection with the conversion of the Performance Units, the Company makes loans available to each recipient. These loans bear interest at a rate of 8.0% per annum, are repayable five years from the borrowing date and are secured by the recipient's Class A Common Stock received upon conversion. During fiscal 2000, the Company had a loan outstanding to Mr. Stephen Young. At May 31, 2000, Mr. Young had outstanding principal loan and interest balances of approximately $121,767 and $21,894, respectively, which amounts were the largest amounts owed by Mr. Young during fiscal 2000. 35 37 SPONSORSHIPS Effective June 1, 1998, as part of its marketing strategy, the Company agreed to participate in the sponsorship of certain body builder contracts with Weider Health and Fitness. The Company paid a total of $200,000 in connection with its sponsorship in fiscal 2000. IFBB AGREEMENT On May 1, 2000, the Company entered into an agreement with the International Federation of Bodybuilders ("IFBB"), a Canadian non-profit corporation which supports international bodybuilding events. Pursuant to the agreement, from May 1, 2000 to April 30, 2003, the Company is obligated to pay $250,000 per year with respect to the Company's sponsorship of certain IFBB bodybuilding events. In return for such sponsorship, IFBB provides the Company with preferential advertising, booth placement, inclusion in certain programs/brochures, and other preferential promotional treatment. Ben Weider, the father of Eric Weider, is the president of IFBB. 36 38 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as part of this report (1) Financial Statements See "Item 8. Financial Statements and Supplementary Data" for Financial Statements included with this Annual Report on Form 10-K/A. (2) Financial Statement Schedules Schedule II -- Valuation and Qualifying Accounts All other schedules have been omitted because they are not required, not applicable, or the information is otherwise set forth in the financial statements or notes thereto. (3) Exhibits 2.1 Stock Purchase Agreement, dated July 9, 1998, by and among Weider Nutrition Group, Inc. and Wolfgang Brandt and Eberhardt Schluter.(2) 2.2 Amendment Deed to Stock Purchase Agreement, dated July 24, 1998.(2) 2.3 Share Transfer Deed, dated July 24, 1998 1998.(2) 3.1 Amended and Restated Certificate of Incorporation of Weider Nutrition International, Inc.(1) 3.2 Amended and Restated Bylaws of Weider Nutrition International, Inc.(1) 4.1 Credit Agreement dated as of June 30, 2000 among Weider Nutrition International, Inc. and Bankers Trust Company.(4) 4.2 Senior Subordinated Loan Agreement dated as of June 30, 2000 among Weider Nutrition International, Inc., Wynnchurch Capital Partners, L.P., and Wynnchurch Capital Partners Canada, L.P.(4) 4.3 Warrants to Purchase Shares of Class A Common Stock of Weider Nutrition International, Inc.(4) 4.4 Registration Rights Agreement dated as of June 30, 2000 among Weider Nutrition International, Inc., Wynnchurch Capital Partners, L.P. and Wynnchurch Capital Partners Canada, L.P.(4) 4.5 First Amendment to Credit Agreement dated as of June 30, 2000 among Weider Nutrition International, Inc. and Bankers Trust Company.(5) 10.1 Build-To-Suit Lease Agreement, dated March 20, 1996, between SCI Development Services Incorporated and Weider Nutrition Group, Inc.(1) 10.2 Agreement by and between Joseph Weider and Weider Health and Fitness(1) 10.3 1997 Equity Participation Plan of Weider Nutrition International, Inc.(1) 10.4 Form of Tax Sharing Agreement by and among Weider Nutrition International, Inc. and its subsidiaries and Weider Health and Fitness and its subsidiaries.(1) 10.5 Form of Employment Agreement between Weider Nutrition International, Inc. and Richard B. Bizzaro(1) 10.6 Form of Employment Agreement between Weider Nutrition International, Inc. and Robert K. Reynolds(1) 37 39 10.7 Form of Senior Executive Employment Agreement between Weider Nutrition International, Inc. and certain senior executives of the Company(1) 10.8 Advertising Agreement between Weider Nutrition International, Inc. and Weider Publications, Inc.(1) 10.9 Amended and Restated Shareholders Agreement between Weider Health and Fitness and Hornchurch Investments Limited(1) 10.10 Amended and Restated Shareholders Agreement between Weider Health and Fitness, Bayonne Settlement and Ronald Corey(1) 10.12 License Agreement between Mariz Gestao E Investmentos Limitada and Weider Nutrition Group Limited(1) 10.13 Employment Agreement between Weider Nutrition International, Inc. and Bruce J. Wood.(3) 10.14 Agreement between the Company and Bruce J. Wood(6) 10.15 Form Agreement between the Company and certain executives of the Company(6) 21 Subsidiaries of Weider Nutrition International, Inc.(5) 23.1 Independent Auditors' Consent(6) 27.1 Financial Data Schedule Summary(5) ----------------------------------- (1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 (File No. 333-12929)and incorporated herein by reference. (2) Previously filed in the Company's Current Report on Form 8-K dated as of July 24, 1998 and incorporated herein by reference. (3) Previously filed in the Company's Current Report on Form 10-K dated as of August 30, 1999 and incorporated herein by reference. (4) Previously filed in the Company's Current Report on Form 8-K dated as of June 30, 2000 and incorporated herein by reference. (5) Previously filed in the Company's Form 10-K dated as of August 29, 2000 and incorporated herein by reference. (6) Filed herewith. (b) Reports on Form 8-K No report on Form 8-K was filed during the fourth quarter of fiscal 2000. A Report on Form 8-K was filed subsequent to fiscal year 2000 dated as of June 30, 2000. (c) Item 601 Exhibits The exhibits required by Item 601 of Regulation S-K are set forth in (a)(3) above. (d) Financial Statement Schedules The financial statement schedules required by Regulation S-K are set forth in (a)(2) above. 38 40 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Weider Nutrition International, Inc. By: /s/ BRUCE J. WOOD ------------------------------------ Bruce J. Wood Chief Executive Officer and President Dated: September 27, 2000 Pursuant to the requirements of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---- ----- ---- /s/ ERIC WEIDER Chairman of the Board and September 27, 2000 --------------------------------------------------- Director /s/ BRUCE J. WOOD Chief Executive Officer, September 27, 2000 --------------------------------------------------- President and Director (Principal Executive Officer) /s/ JOSEPH W. BATY Executive Vice President and September 27, 2000 --------------------------------------------------- Chief Financial Officer /s/ RONALD L. COREY Director September 27, 2000 --------------------------------------------------- /s/ DONALD G. DRAPKIN Director September 27, 2000 --------------------------------------------------- /s/ DAVID J. GUSTIN Director September 27, 2000 --------------------------------------------------- /s/ ROGER H. KIMMEL Director September 27, 2000 --------------------------------------------------- /s/ GEORGE F. LENGVARI Vice Chairman of the Board and September 27, 2000 --------------------------------------------------- Director /s/ H. F. POWELL Director September 27, 2000 ---------------------------------------------------
39 41 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (IN THOUSANDS)
BALANCE AT ADDITIONS BEGINNING OF COSTS/ CHARGED TO ADDITIONS VIA BALANCE AT END DESCRIPTION YEAR EXPENSES ACQUISITION DEDUCTIONS OF YEAR ----------- ------------ -------- ----------- ------------- -------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1998........................... $ 212 $ 273 $ -- $ (194) $ 291 1999........................... 291 1,094 977 (134) 2,228 2000........................... 2,228 2,074 32 (1,412) 2,922 ALLOWANCE FOR SALES RETURNS: 1998........................... 988 15,396 -- (14,734) 1,650 1999........................... 1,650 23,048 196 (21,068) 3,826 2000........................... 3,826 19,310 -- (17,467) 5,669
40 42 WEIDER NUTRITION INTERNATIONAL, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................ F-2 Consolidated Balance Sheets at May 31, 2000 and 1999........ F-3 Consolidated Statements of Operations, Years Ended May 31, 2000, 1999 and 1998....................................... F-4 Consolidated Statements of Stockholders' Equity, Years Ended May 31, 2000, 1999 and 1998............................... F-5 Consolidated Statements of Cash Flows, Years Ended May 31, 2000, 1999 and 1998....................................... F-6 Notes to Consolidated Financial Statements.................. F-8
F-1 43 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES: We have audited the accompanying consolidated balance sheets of Weider Nutrition International, Inc. and subsidiaries (collectively, the "Company") as of May 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Weider Nutrition International, Inc. and subsidiaries at May 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended May 31, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Salt Lake City, Utah August 18, 2000 F-2 44 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS MAY 31, 2000 AND 1999 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 3,011 $ 1,926 Receivables, net (Note 3)................................. 53,522 60,524 Inventories (Note 4)...................................... 47,113 63,658 Prepaid expenses and other................................ 4,982 4,712 Deferred taxes (Note 8)................................... 6,560 7,387 -------- -------- Total current assets.............................. 115,188 138,207 -------- -------- Property and equipment, net (Note 5)........................ 47,198 48,872 -------- -------- Other assets: Intangible assets, net (Note 6)........................ 49,412 51,980 Deposits and other assets.............................. 6,745 12,806 Notes receivable related to stock performance units (Note 9).............................................. 4,188 4,164 Deferred taxes (Note 8)................................ 4,537 -- -------- -------- Total other assets................................ 64,882 68,950 -------- -------- Total assets...................................... $227,268 $256,029 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 32,650 $ 25,492 Accrued expenses.......................................... 21,735 18,406 Earnout amounts payable (Note 2).......................... 2,796 3,246 Current portion of long-term debt (Note 7)................ 15,131 110,716 Income taxes payable...................................... 549 -- -------- -------- Total current liabilities......................... 72,861 157,860 -------- -------- Long-term debt (Note 7)..................................... 67,749 4,723 -------- -------- Deferred taxes (Note 8)..................................... -- 1,666 -------- -------- Commitments and contingencies (Notes 2, 7, 9, 10 and 11) Stockholders' equity: Preferred stock, par value $.01 per share; shares authorized -- 10,000,000; no shares issued and outstanding............................................ -- -- Class A common stock, par value $.01 per share; shares authorized -- 50,000,000; shares issued and outstanding -- 9,363,778 (2000) and 9,334,036 (1999)... 94 93 Class B common stock, par value $.01 per share; shares authorized -- 25,000,000; shares issued and outstanding -- 15,687,432 (2000 and 1999).............. 157 157 Additional paid-in capital................................ 83,225 82,985 Other accumulated comprehensive loss...................... (5,003) (2,331) Retained earnings......................................... 8,185 10,876 -------- -------- Total stockholders' equity........................ 86,658 91,780 -------- -------- Total liabilities and stockholders' equity........ $227,268 $256,029 ======== ========
See notes to consolidated financial statements. F-3 45 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
2000 1999 1998 ----------- ----------- ----------- Net sales........................................... $ 364,668 $ 335,488 $ 250,542 Cost of goods sold.................................. 228,573 221,062 161,334 ----------- ----------- ----------- Gross profit........................................ 136,095 114,426 89,208 ----------- ----------- ----------- Operating expenses: Selling and marketing............................. 81,843 70,072 39,230 General and administrative........................ 28,429 26,895 15,515 Research and development.......................... 4,599 4,629 3,983 Amortization of intangible assets................. 3,326 3,238 2,175 Severance, recruiting and reorganization costs.... 4,116 3,062 -- Management and employee compensation charges...... 301 804 401 Plant consolidation and transition................ -- 5,113 -- Other inventory related charges................... -- 4,115 -- Asset impairment costs............................ -- 535 -- ----------- ----------- ----------- Total operating expenses.................. 122,614 118,463 61,304 ----------- ----------- ----------- Income (loss) from operations....................... 13,481 (4,037) 27,904 ----------- ----------- ----------- Other income (expense): Interest income................................... 697 629 599 Interest expense.................................. (11,783) (10,179) (4,818) Other............................................. (177) (430) (671) ----------- ----------- ----------- Total other expense, net.................. (11,263) (9,980) (4,890) ----------- ----------- ----------- Income (loss) before income taxes................... 2,218 (14,017) 23,014 Income tax expense (benefit)........................ 1,145 (5,239) 9,010 ----------- ----------- ----------- Net income (loss)................................... $ 1,073 $ (8,778) $ 14,004 =========== =========== =========== Weighted average shares outstanding: Basic............................................. 25,042,073 24,930,272 24,702,283 =========== =========== =========== Diluted........................................... 25,048,106 24,930,272 25,000,616 =========== =========== =========== Net income (loss) per share: Basic............................................. $ 0.04 $ (0.35) $ 0.57 =========== =========== =========== Diluted........................................... $ 0.04 $ (0.35) $ 0.56 =========== =========== ===========
See notes to consolidated financial statements. F-4 46 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED MAY 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
OTHER CLASS A CLASS B ADDITIONAL ACCUMULATED COMMON COMMON PAID-IN COMPREHENSIVE RETAINED STOCK STOCK CAPITAL LOSS EARNINGS TOTAL ------- ------- ---------- ------------- -------- ------- Balance at June 1, 1997............ $90 $157 $79,271 $ (177) $13,083 $92,424 Comprehensive income: Net income....................... -- -- -- -- 14,004 14,004 Foreign currency translation adjustments................... -- -- -- 12 -- 12 ------- Total comprehensive income................. 14,016 Issuance of stock in connection with performance units (Note 9)............................ 1 -- 400 -- -- 401 Dividends paid on common stock... -- -- -- -- (3,705) (3,705) --- ---- ------- ------- ------- ------- Balance at May 31, 1998............ 91 157 79,671 (165) 23,382 103,136 Comprehensive loss: Net loss......................... -- -- -- -- (8,778) (8,778) Available-for-sale securities valuation adjustment.......... -- -- -- (1,691) -- (1,691) Foreign currency translation adjustments................... -- -- -- (475) -- (475) ------- Total comprehensive loss................... (10,944) Issuance of stock in connection with acquisition (Note 2)..... 1 -- 2,599 -- -- 2,600 Issuance of stock in connection with performance units (Note 9)............................ 1 -- 803 -- -- 804 Tax loss from performance units......................... -- -- (226) -- -- (226) Stock options exercised.......... -- -- 138 -- -- 138 Dividends paid on common stock... -- -- -- -- (3,728) (3,728) --- ---- ------- ------- ------- ------- Balance at May 31, 1999............ 93 157 82,985 (2,331) 10,876 91,780 Comprehensive loss: Net income....................... -- -- -- -- 1,073 1,073 Available-for-sale securities valuation adjustment.......... -- -- -- (200) -- (200) Foreign currency translation adjustments................... -- -- -- (2,472) -- (2,472) ------- Total comprehensive loss................... (1,599) Issuance of stock in connection with performance units (Note 9)............................ 1 -- 300 -- -- 301 Tax loss from performance units......................... -- -- (72) -- -- (72) Stock options exercised.......... -- -- 12 -- -- 12 Dividends paid on common stock... -- -- -- -- (3,764) (3,764) --- ---- ------- ------- ------- ------- Balance at May 31, 2000............ $94 $157 $83,225 $(5,003) $ 8,185 $86,658 === ==== ======= ======= ======= =======
See notes to consolidated financial statements. F-5 47 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS)
2000 1999 1998 -------- -------- -------- Cash flows from operating activities: Net income (loss)........................................ $ 1,073 $ (8,778) $ 14,004 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Provision for bad debts............................... 2,074 1,094 273 Deferred taxes........................................ (1,289) (211) 860 Depreciation, amortization and asset impairment....... 10,959 14,135 7,996 Management and employee stock compensation charges.... 301 804 401 Tax loss from performance units....................... (72) (226) -- Changes in operating assets and liabilities-net of assets acquired: Receivables........................................... 6,512 5,362 (8,805) Inventories........................................... 17,683 6,531 (19,741) Prepaid expenses and other............................ (254) (694) (564) Deposits and other assets............................. 5,354 6,878 (4,804) Accounts payable...................................... 3,325 (3,971) 3,632 Other current liabilities............................. 3,200 (3,386) 1,388 -------- -------- -------- Net cash provided by (used in) operating activities... 48,866 17,538 (5,360) -------- -------- -------- Cash flows from investing activities: Purchase of property and equipment....................... (5,877) (11,409) (11,870) Proceeds from disposition of property and equipment...... 148 1,040 -- Increase in notes receivable............................. (24) (177) (3,987) Purchase of intangible assets............................ (267) (1,050) -- Purchase of companies, net of cash acquired.............. (1,164) (24,326) -- Purchase of available-for-sale securities................ -- (4,998) -- -------- -------- -------- Net cash used in investing activities................. (7,184) (40,920) (15,857) -------- -------- -------- Cash flows from financing activities: Issuance of common stock................................. 12 138 -- Dividends paid........................................... (3,764) (3,728) (3,705) Proceeds from long-term debt............................. 4,143 33,757 27,438 Payments on long-term debt............................... (34,628) (3,174) (2,186) -------- -------- -------- Net cash provided by (used in) financing activities... (34,237) 26,993 21,547 -------- -------- -------- Effect of exchange rate changes on cash.................... (6,360) (2,369) (905) Increase (decrease) in cash and cash equivalents........... 1,085 1,242 (575) -------- -------- -------- Cash and cash equivalents, beginning of year............... 1,926 684 1,259 -------- -------- -------- Cash and cash equivalents, end of year..................... $ 3,011 $ 1,926 $ 684 ======== ======== ========
F-6 48 SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
2000 1999 1998 ------- ------ ------ Cash paid during the year for: Interest.............................................. $12,741 $8,238 $4,930 Income taxes (net of refunds)......................... (597) 276 4,792
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: In connection with the acquisitions of net assets from other companies (see Note 2), the Company assumed liabilities as follows for the years ended May 31:
2000 1999 ------- -------- Fair value of assets acquired............................... $ 4,573 $ 39,393 Cost in excess of fair value of net assets acquired......... 1,113 20,440 Cash paid, net of cash acquired............................. (1,164) (24,326) Stock issued................................................ -- (2,600) Debt and liabilities issued................................. (54) (4,900) ------- -------- Liabilities assumed......................................... $ 4,468 $ 28,007 ======= ========
Note: There were no acquisitions consummated during fiscal 1998. (concluded) See notes to consolidated financial statements. F-7 49 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED MAY 31, 2000, 1999 AND 1998 (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 1. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of Weider Nutrition International, Inc. and its wholly-owned subsidiaries (collectively, the "Company"). The Company is a majority-owned subsidiary of Weider Health and Fitness ("WHF"). All significant intercompany accounts and transactions have been eliminated. Initial Public Offering -- Effective May 1, 1997, the Company consummated an initial public offering of its Class A common stock (the "IPO"). A total of 6,440,000 shares were sold to the public at $11 per share. The net proceeds to the Company from the IPO amounted to approximately $63.9 million (after underwriters' discounts of $5.0 million and offering costs of $2.0 million). Prior to the IPO, the Board of Directors (the "Board") authorized the Company to issue shares of Class B common stock to WHF in exchange for its Class A holdings. A total of 15,687,432 shares of Class B common stock were issued to WHF. Each holder of Class B common stock is entitled to ten votes per share on all matters presented to a vote of stockholders, including the election of directors. Description of Business -- The Company develops, manufactures, markets, distributes and sells branded and private label vitamins, nutritional supplements and sports nutrition products in the United States and throughout the world. The Company offers a broad range of capsules and tablets, powdered drink mixes, bottled beverages and nutrition bars. The Company markets its branded nutritional supplement products, both domestically and internationally, through mass market, health foods store and health club and gym distribution channels. The Company also markets a line of sportswear in Europe, primarily in Germany. Use of Estimates and Assumptions in Preparing Financial Statements -- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Such estimates include, among others, the allowance for doubtful accounts, the allowance for sales returns and the accrual for pending litigation costs. Actual results could differ from the estimates. Cash Equivalents -- Cash equivalents include highly liquid investments with an original maturity of three months or less. Inventories -- Inventories are stated at the lower of cost (on a first-in, first-out basis) or market. Barter Transactions -- During fiscal 1998, the Company entered into a barter transaction whereby inventories in the amount of $4.5 million, at cost, were exchanged for cash of $0.4 million and advertising credits of $4.1 million. The Company expenses the capitalized barter credits over a three-year period. Capitalized barter credits amounted to approximately $1.3 million at May 31, 2000. The advertising credits do not have an expiration date. The Company accounts for such transactions at the lower of the net realizable value of the inventory or the barter credits. Investment in Available-for-Sale Securities -- During fiscal 1999, the Company invested in certain "available-for-sale" equity securities with an original cost of $4,998. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, these securities are recorded at fair value with the accompanying unrealized holding gains (losses), net of income tax effects, included as a separate component of stockholders' equity. At May 31, 2000, unrealized losses of $3,152, net of income tax benefits of $1,261, were included in other accumulated comprehensive loss in the accompanying financial statements. F-8 50 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Property and Equipment -- Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization expense was $7,633 (2000), $7,708 (1999) and $5,667 (1998), computed primarily using the straight-line method over the estimated useful lives of 31 to 50 years for buildings, 2 to 10 years for furniture and equipment and 3 to 16 years for leasehold improvements. Intangible Assets -- Intangible assets are stated at cost and amortized using the straight-line method over the estimated useful lives of the assets as follows: Cost in excess of fair value of net assets acquired......... 10-35 years Patents and trademarks...................................... 10-20 years Noncompete agreements....................................... 5 years
The Company evaluates the economic factors for determining requisite recovery periods for certain intangible assets on a case-by-case basis. Long-Lived Assets -- Impairment of long-lived assets is determined in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of." The Company evaluates the carrying value of long-term assets based upon current and anticipated undiscounted cash flows, and recognizes an impairment when such estimated cash flows will be less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between carrying value and fair value. The Company recognized an asset impairment in the amount of $535 in fiscal 1999. Income Taxes -- The Company records in its balance sheet deferred income tax liabilities and assets for temporary differences in the basis of assets and liabilities as reported for financial statement purposes and income tax purposes. Net Sales -- The Company recognizes sales upon shipment of a product to a customer. Allowances are made for uncollectible accounts and future sales returns. The Company's three largest customers accounted for approximately 44%, 43% and 41%, respectively, of net sales in fiscal 2000, 1999 and 1998. At May 31, 2000 and 1999, amounts due from these customers represented approximately 43% and 41%, respectively, of total trade accounts receivable. The Company's Schiff(R) Pain Free(TM)/Move Free(TM) product accounted for 29%, 20% and 8% of net sales for fiscal 2000, 1999 and 1998, respectively. Stock-Based Compensation -- In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation", which became effective for the Company beginning June 1, 1997. SFAS No. 123 requires expanded disclosures of stock-based compensation arrangements with employees. The Company decided to disclose the effect of SFAS No. 123 on a proforma basis and to continue to follow Accounting Principles Board ("APB") Opinion No. 25 (as permitted by SFAS No. 123) as it relates to stock based compensation. Accordingly, the appropriate required disclosure of the effects of SFAS No. 123 are included in Note 9. Other Accumulated Comprehensive Income (Loss) -- During fiscal 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of other accumulated comprehensive income (loss) and its components (revenues, expenses, gains, and losses) in a full set of general purpose financial statements. SFAS No. 130 requires that an enterprise (a) classify items of other accumulated comprehensive income (loss) by their nature in a financial statement and (b) display the balance of other accumulated comprehensive income (loss) separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet. Net Income (Loss) Per Share -- During fiscal 1998, the Company adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128 establishes new standards for computing and presenting net income (loss) per share. Net income (loss) per share is computed by both the basic and diluted methods. Basic net income F-9 51 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) (loss) per share is computed using the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed using the weighted average number of common shares and potentially diluted common shares outstanding during the period. Potentially dilutive common shares consist of common stock options and performance units (Note 9) as well as warrants (Note 7). Common stock options and performance units were antidilutive during fiscal 1999 and, accordingly, were not included in the computation of diluted net loss per share. Financial Instruments -- The Company's financial instruments, when valued using market interest rates, would not be materially different from the amounts presented in the consolidated financial statements. Foreign Currency Translation -- The Company considers local currency as the functional currency for its foreign operations. All assets and liabilities are translated at period-end exchange rates and all income statement amounts are translated at an average of month-end rates. At May 31, 2000, unrealized foreign currency translation losses of $7,363, net of income tax benefits of $4,251, were included in other acccmulated comprehensive loss in the accompanying financial statements. Recently Issued Accounting Standards -- In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which supersedes SFAS No. 80, "Accounting for Futures Contracts," SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit Risk," and SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments," and also amends certain aspects of other SFAS's previously issued. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133, as amended by SFAS No. 137, is effective for the Company's financial statements for the year ending May 31, 2001. The Company does not expect the impact of adopting SFAS No. 133 to be material in relation to its financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements." SAB 101 establishes accounting and reporting standards for the recognition of revenue. It states that revenue generally is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller's price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured. SAB 101 is effective for the Company's financial statements in the fiscal quarter beginning March 1, 2001. The Company has not determined the impact of adopting SAB 101 to the Company's financial statements. Reclassifications -- Certain amounts in prior year financial statements have been reclassified to conform with the current year presentation. 2. ACQUISITIONS In August 1999, the Company acquired the remaining 50% of the outstanding shares of Sy-Fra Sportalimenti di Frank Sambo & Company SrL and Haleko Italia SrL, previously 50% owned corporations, organized under the laws of Italy. The Company accounted for this acquisition as a purchase. The purchase price, net of cash acquired, consisted of $1.2 million in cash and the recognition of $1.1 million in goodwill, subject to final allocation of the purchase price. The goodwill is being amortized over 35 years. Proforma information is not provided as the effects are not material. In July 1998, the Company acquired 100% of the outstanding shares of Haleko Hanseatisches Lebensmittel Kontor GmbH, a corporation organized under the laws of Germany ("Haleko"). The initial F-10 52 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) purchase price was comprised of $25.6 million in cash, 200,000 shares of Class A common stock, and up to an $8.4 million contingent earnout agreement tied to future financial performance for the subsequent three-year period. In addition, $14.8 million in debt was assumed and $4.9 million in acquisition-related capital costs were recognized. The acquisition was accounted for as a purchase transaction. The initial excess of the purchase price over the estimated fair value of the acquired net assets (approximately $20.4 million) was recorded as goodwill which is being amortized over 35 years. The Company has recognized approximately $2.8 million and $3.2 million, respectively, of the earnout agreement based on Haleko's financial performance for fiscal 2000 and 1999. These amounts were recorded as additional goodwill and are being amortized over approximately 33 to 34 years. The earnout payments for fiscal 2000 and 1999 are included as current liabilities in the accompanying balance sheets at May 31, 2000 and 1999. The following unaudited proforma results of operations of the Company give the approximate effect to the acquisition of Haleko as though the transaction occurred on June 1, 1997.
YEAR ENDED MAY 31, -------------------- 1999 1998 -------- -------- Net sales.............................................. $347,529 $319,683 Income (loss) from operations.......................... (3,464) 31,264 Net income (loss)...................................... (8,704) 14,329 Diluted income (loss) per share........................ (0.35) 0.57
3. RECEIVABLES, NET Receivables, net, consist of the following at May 31:
2000 1999 ------- ------- Trade accounts........................................... $61,184 $63,215 Income taxes............................................. -- 2,195 Other.................................................... 929 1,168 ------- ------- 62,113 66,578 Less allowance for doubtful accounts and sales returns... (8,591) (6,054) ------- ------- Total.......................................... $53,522 $60,524 ======= =======
4. INVENTORIES Inventories consist of the following at May 31:
2000 1999 ------- ------- Raw materials............................................ $12,493 $24,364 Work in process.......................................... 2,210 3,364 Finished goods........................................... 32,410 35,930 ------- ------- Total.......................................... $47,113 $63,658 ======= =======
Inventory totaling $1,800 ($4,000 in 1999), primarily consisting of two raw materials, is included as a long-term asset in deposits and other assets in the accompanying balance sheets. The Company expects to consume these raw materials subsequent to fiscal 2001. F-11 53 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 5. PROPERTY AND EQUIPMENT Property and equipment consists of the following at May 31:
2000 1999 -------- -------- Land................................................... $ 2,020 $ 1,679 Buildings.............................................. 12,990 12,343 Furniture and equipment................................ 43,837 40,528 Leasehold improvements................................. 11,306 11,005 Construction in progress............................... 596 1,087 -------- -------- 70,749 66,642 Less accumulated depreciation and amortization......... (23,551) (17,770) -------- -------- Total........................................ $ 47,198 $ 48,872 ======== ========
6. INTANGIBLE ASSETS Intangible assets consist of the following at May 31:
2000 1999 -------- -------- Cost in excess of fair value of net assets acquired.... $ 54,134 $ 53,706 Patents and trademarks................................. 10,601 10,452 Noncompete agreements.................................. 187 209 -------- -------- 64,922 64,367 Less accumulated amortization.......................... (15,510) (12,387) -------- -------- Total........................................ $ 49,412 $ 51,980 ======== ========
F-12 54 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 7. LONG-TERM DEBT Long-term debt consists of the following at May 31:
2000 1999 -------- --------- Advances under a $90,000 secured revolving line of credit bearing interest at floating rates (11.78% to 13.50% at May 31, 2000) (see below for discussion of debt refinancing)................................... $ 65,006 $ 98,654 Advances under a $14,000 secured revolving line of credit bearing interest at various rates ranging from 4.00% to 7.25% (see below for discussion of debt refinancing)................................... 13,044 7,604 Mortgage loan, due in monthly installments, bearing interest at 7.63%, due February 2009................ 2,631 2,755 Notes payable arising from the acquisition of Haleko bearing interest at various rates ranging from 5.50% to 7.00%, due 2001 and 2002......................... 1,247 2,556 Short term notes payable to original Haleko stockholders bearing interest at 6.75%.............. -- 2,705 Notes payable arising from other previous acquisitions........................................ 539 707 Other................................................. 413 458 -------- --------- Total....................................... 82,880 115,439 Less current portion........................ (15,131) (110,716) -------- --------- Long-term portion........................... $ 67,749 $ 4,723 ======== =========
Effective June 30, 2000, the Company and its domestic subsidiaries entered into a new $90.0 million senior credit facility (the "New Credit Facility") with Bankers Trust Company. The New Credit Facility replaced the Company's previous credit facility, which consisted of a revolving line of credit that expired on June 30, 2000. The New Credit Facility is comprised of a $30.0 million term loan and a $60.0 million revolving loan. Under the revolving loan, the Company may borrow up to the lesser of $60.0 million or the sum of (i) 85% of eligible accounts receivable and (ii) the lesser of $30.0 million or 65% of the eligible inventory. The New Credit Facility contains customary terms and conditions, including, among others, financial covenants regarding minimum cash flows and limitations on indebtedness and the Company's ability to pay dividends under certain circumstances. The obligations of the Company under the New Credit Facility are secured by a first priority lien on all owned or acquired tangible and intangible assets of the Company and its domestic subsidiaries. Borrowings under the New Credit Facility bear interest at floating rates (10.00% and 11.00% at June 30, 2000) and the New Credit Facility matures on March 31, 2005. The New Credit Facility is being used to fund the normal working capital and capital expenditure requirements of the Company. At the inception of the New Credit Facility, the Company borrowed approximately $64.8 million (together with the proceeds from the subordinated loan discussed below) to repay in full its outstanding obligation under the previous credit facility and related financing costs of the New Credit Facility. Concurrently with the New Credit Facility, on June 30, 2000, the Company entered into a $10.0 million senior subordinated loan agreement (the "Subordinated Loan"). The proceeds from the Subordinated Loan were used to repay outstanding obligations under the Company's previous credit facility. The Subordinated Loan contains customary terms and conditions, including, among others, financial covenants regarding minimum cash flows and limitations on indebtedness and the Company's ability to pay dividends under certain F-13 55 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) circumstances. The Subordinated Loan bears interest at 13% per annum and matures on June 30, 2006. As part of the Subordinated Loan transaction, the Company issued warrants to purchase up to 1,174,955 shares of the Company's Class A common stock at an exercise price of $0.01 per share, subject to certain customary antidilution provisions. The issuance of the warrants, exercised effective August 3, 2000, resulted in the recognition of approximately $3.5 million in "original issue discount" costs that will be recognized as an adjustment to the effective interest rate over the life of the Subordinated Loan. The Company also granted certain registration rights with respect to the common stock issuable under the warrants pursuant to a Registration Rights Agreement dated as of June 30, 2000. Amounts outstanding under the previous credit facility have been reclassified as a long-term obligation at May 31, 2000. Subsequent to May 31, 2000, Haleko entered into a new, approximate $18.6 million secured revolving line of credit (bearing interest at rates from 5.60% to 8.00%)that matures in June 2001. As of May 31, 2000, future payments of long-term debt are presently due as follows: $15,131 (2001), $3,301 (2002), $5,489 (2003), $6,241 (2004), $12,217 (2005), and $40,501 thereafter. 8. INCOME TAXES The components of income tax expense (benefit) consist of the following for the years ended May 31:
2000 1999 1998 ------- ------- ------ Federal: Current.............................................. $ 227 $(3,400) $7,238 Deferred............................................. 241 (1,220) 248 Foreign: Current.............................................. 2,235 (1,037) 38 Deferred............................................. (1,652) 1,422 -- State and local: Current.............................................. (28) (591) 874 Deferred............................................. 122 (413) 612 ------- ------- ------ Total........................................ $ 1,145 $(5,239) $9,010 ======= ======= ======
Income tax expense (benefit) differs from a calculated income tax at the Federal statutory rate as follows:
2000 1999 1998 ------ ------- ------ Computed Federal income tax expense (benefit) at the statutory rate of 34% for fiscal 2000 and 35% for fiscal 1999 and 1998.................................. $ 754 $(4,906) $8,055 Amortization of cost in excess of fair value of net assets acquired....................................... 178 151 153 Meals and entertainment................................. 79 39 34 Foreign Service Corporation benefit..................... (279) (98) (220) Charitable contributions................................ (287) (499) (10) Foreign income taxes, other............................. 646 370 4 State income tax expense (benefit)...................... 97 (653) 966 Other................................................... (43) 357 28 ------ ------- ------ Total......................................... $1,145 $(5,239) $9,010 ====== ======= ======
F-14 56 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Net deferred income tax assets consist of the following at May 31:
2000 1999 ----------------- ------------------ LONG- LONG- CURRENT TERM CURRENT TERM ------- ------ ------- ------- Assets: Accounts receivable allowances............... $2,507 $ -- $2,021 $ -- Inventories adjustment....................... 1,136 -- 2,528 -- Deferred compensation........................ -- 1,242 -- 1,362 Accrued vacation and bonuses................. 345 -- 327 -- Accrued other................................ 635 256 508 421 Amortization of intangibles.................. -- 482 -- 592 Capitalized inventory costs.................. 530 -- 1,195 -- State and other taxes........................ -- 126 -- 1,158 Basis difference in acquired companies....... -- 844 -- 95 Charitable and net operating loss carryovers................................ -- 2,798 -- 1,782 Basis difference in securities............... 1,279 -- 1,127 -- Foreign currency adjustment.................. -- 4,096 -- 821 Research and development, and other credits................................... 487 -- -- -- ------ ------ ------ ------- Total................................ 6,919 9,844 7,706 6,231 ------ ------ ------ ------- Liabilities: Basis differences in fixed assets............ -- 3,853 -- 2,853 Basis differences in acquired companies...... -- -- -- 1,615 Inventories adjustment....................... -- 247 -- 1,306 Amortization of intangibles.................. -- 107 -- 110 State taxes.................................. 359 -- 319 -- Other........................................ -- 1,100 -- 2,013 ------ ------ ------ ------- Total................................ 359 5,307 319 7,897 ------ ------ ------ ------- Deferred income taxes, net..................... $6,560 $4,537 $7,387 $(1,666) ====== ====== ====== =======
9. MANAGEMENT INCENTIVE AND STOCK PLANS Management Incentive Plan -- Prior to the Company's IPO, certain employees (the "Recipients") had management incentive agreements (the "Agreements") pursuant to which the employees were granted performance units ("Performance Units") as incentive compensation. Simultaneously with the IPO, which triggered a conversion under the Agreements, the Company paid in cash and shares of Class A Common stock the vested portion of the Performance Units. The unvested portion of the performance units (represented by 182,716 restricted shares of Class A common stock as of the IPO date) generally vest (contingent upon continued employment and/or other factors) over a five-year period at 20% per year through May 2002. During fiscal 2000, 1999 and 1998, 27,409 shares, 73,087 shares and 36,543 shares, respectively, of Class A common stock vested and became issued and outstanding. The Company recognized compensation charges of $301, $804 and $401 in fiscal 2000, 1999 and 1998, respectively, in connection with the additional vested Class A common shares. F-15 57 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) In order to facilitate the payment of individual income taxes, the Company makes available to each Recipient a loan in principal amount up to 30% of the conversion value of the vested Performance Units held by each Recipient. Such loans to the Recipients bear interest at 8.0% per annum, are repayable five years from the borrowing date and are secured by the Recipients' stock. At May 31, 2000 and 1999, aggregate loans outstanding amounted to $4,188 and $4,164, respectively (see Note 11). Equity Plan -- The 1997 Equity Participation Plan (the "Equity Plan") provides for the granting of stock options, stock appreciation rights, restricted or deferred stock and other awards ("Awards") to officers, directors, and key employees responsible for the direction and management of the Company and to nonemployee consultants. Under the Equity Plan, a total of 3,500,000 shares of Class A common stock (or the equivalent in other equity securities) are reserved for issuance. Stock options granted per the Equity Plan primarily become exercisable after three to five years from the date of grant in equal, ratable amounts per each successive anniversary date. Stock options expire no later than eight years after the date of grant. Information relating to stock options issued per the Equity Plan is as follows:
WEIGHTED AVERAGE PER SHARE NUMBER OF OPTION TOTAL SHARES PRICE PRICE ---------- --------- ------- Options outstanding, June 1, 1997.......................... 1,208,000 $ 11.00 $13,288 Granted.................................................. 167,000 12.46 2,082 Exercised................................................ -- -- -- Cancelled................................................ (92,000) (11.00) (1,012) ---------- ------- ------- Options outstanding, May 31, 1998.......................... 1,283,000 11.19 14,358 Granted.................................................. 1,366,500 6.19 8,464 Exercised................................................ (12,600) (11.00) (138) Cancelled................................................ (518,067) (10.78) (5,584) ---------- ------- ------- Options outstanding, May 31, 1999.......................... 2,118,833 8.07 17,100 Granted.................................................. 1,038,000 4.52 4,692 Exercised................................................ (2,333) (5.06) (12) Cancelled................................................ (1,176,200) (7.64) (8,986) ---------- ------- ------- Options outstanding, May 31, 2000.......................... 1,978,300 $ 6.47 $12,794 ========== ======= ======= Exercisable options, May 31, 2000.......................... 377,433 $ 8.41 $ 3,174 ========== ======= =======
The weighted average fair market value of options granted during fiscal 2000, 1999 and 1998 amounted to $1.64, $2.57 and $4.92, respectively. The Company applied APB Opinion No. 25 in accounting for its stock options and, accordingly, no compensation expense has been recognized for stock options in the accompanying financial statements. Proforma information regarding net income (loss) and net income (loss) per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options including the unvested performance units under the fair value method of SFAS No. 123. The fair value for these options F-16 58 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) was estimated at the date of grant using a Binomial Option pricing model with the following weighted average assumptions for 2000, 1999 and 1998, respectively.
2000 1999 1998 ---------- ---------- --------- Risk-free interest rate.......................... 6.18% 4.64% 5.20% Dividend yield................................... 3.32% 2.48% 1.19% Volatility factor................................ 60.95% 69.21% 50.43% Weighted average expected life................... 2.58 years 2.68 years 3.5 years
For the purposes of proforma disclosure, the estimated fair value of the stock options is amortized to expense over the options vesting period. The Company's proforma net income (loss) and net income (loss) per share were as follows:
2000 1999 1998 ---------- ---------- --------- Net income (loss), as reported................... $1,073 $(8,778) $14,004 Net income (loss), proforma...................... 857 (9,194) 13,513 Basic net income (loss) per share, as reported... .04 (.35) .57 Diluted net income (loss) per share, as reported....................................... .04 (.35) .56 Basic net income (loss) per share, proforma...... .03 (.37) .55 Diluted net income (loss) per share, proforma.... .03 (.37) .54
The following table summarizes information about stock options outstanding at May 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------- ------------------------------------------------ WEIGHTED AVERAGE REMAINING WEIGHTED WEIGHTED CONTRACTUAL AVERAGE AVERAGE RANGE OF NUMBER LIFE EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE ------------------ ----------- ----------- --------- ----------- -------- $3.19 to $4.44 418,000 7.3 $ 4.01 -- $ -- $4.50 to $5.75 1,038,000 6.8 5.11 177,133 5.32 $11.00 to $13.00 522,300 5.0 11.13 200,300 11.14
10. COMMITMENTS AND CONTINGENCIES Leases -- The Company leases warehouse and office facilities, manufacturing and production facilities, transportation equipment and other equipment under several operating lease agreements expiring through 2013. As of May 31, 2000, future minimum payments of $36,422 under the noncancelable operating leases are due as follows: $3,955 (2001), $3,666 (2002), $3,588 (2003), $2,915 (2004), $2,865 (2005) and $19,433 thereafter. Rental expense amounted to $4,499 (2000), $4,762 (1999) and $4,064 (1998). Litigation -- The Company was named as a defendant in a lawsuit filed in December 1996 alleging unfair competition and false advertising under California law. A settlement agreement with regard to the matter was agreed to in July 1998. In March 1999, the plaintiff's attorney in the California matter filed a lawsuit on behalf of Michael Morelli and an alleged class in the Supreme Court of the State of New York (New York County) alleging similar claims under New York law. In May 1999, the plaintiffs' attorney also filed a lawsuit on behalf of Lisa Fasig and an alleged class in the Circuit Court of Lee County, Florida alleging similar claims under Florida law. The Company disputes the allegations and will vigorously oppose the lawsuits. The Company is involved in other claims, legal actions and governmental proceedings that arise from the Company business operations. Although ultimate liability cannot be determined at the present time, the F-17 59 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) Company believes that any liability resulting from these matters, if any, after taking into consideration the Company's insurance coverage, will not have a material adverse effect on the Company's financial position or cash flows. Royalties -- The Company obtained the exclusive right to use the Weider name and trademarks outside of specified royalty-free territories (most notably North America) throughout the world, with the exceptions of Australia, New Zealand, Japan and South Africa, pursuant to a sublicense agreement dated December 1, 1996 with Mariz Gestao E Investimentos Limitada ("Mariz"). Mariz is a company incorporated under the laws of Portugal and owned by a trust of which the family members of a director of the Company are included among the beneficiaries. Mariz obtained its exclusive international rights to use the Weider name and trademarks pursuant to a license agreement, effective June 1, 1994, between Mariz and certain affiliates, including WHF (the "Licensors"). Pursuant to the license agreement with Mariz, the Company is required to make annual royalty payments to Mariz commencing on December 1, 1998 on sales of the Company's brands in existence on December 1, 1996 in countries covered by the agreement. The royalty payments are to be equal to (i) 4% of sales up to $33.0 million; (ii) 3.5% of sales greater than $33.0 million and less than $66.0 million; (iii) 3.0% of sales from $66.0 million to $100.0 million; and (iv) 2.5% of sales over $100.0 million. In addition, the sublicense agreement with Mariz includes an irrevocable buy-out option exercisable by the Company after May 31, 2002 for a purchase price equal to the greater of $7.0 million or 6.5 times the aggregate royalties paid by the Company in the fiscal year immediately preceding the date of the exercise of the option. The Company incurred royalty expense of $390 and $203 for fiscal 2000 and 1999, respectively, relating to the Mariz licensing agreement. Retirement Plan -- The Company sponsors a contributory 401(k) savings plan covering all employees who have met minimum age and service requirements. Contributions to this plan were approximately $381, $334 and $271 for fiscal 2000, 1999 and 1998, respectively. 11. RELATED PARTY TRANSACTIONS Significant related party transactions, not otherwise disclosed, are summarized below. Payments to reimburse WHF for Company expenses (including primarily advertising, insurance, endorsements, retirement benefits and royalties) consist of the following for the years ended May 31:
2000 1999 1998 ------ ------ ------ Operating expenses....................................... $2,230 $3,053 $2,193 Other.................................................... 250 400 489 ------ ------ ------ Total.......................................... $2,480 $3,453 $2,682 ====== ====== ======
In connection with the terms of a previous employee's severance agreement, and at such person's option, the Company may be required to repurchase approximately 330,400 shares of common stock at market value. The Company also agreed to adjust such person's obligations to the Company (relating to Performance Units; see Note 9) in the event that the Company's common stock does not achieve a minimum per share price level. In the event that the Company's common stock does not achieve such level by fiscal 2002, amounts due the Company ($1,665 at May 31, 2000) will be reduced by 50%. 12. OPERATING SEGMENTS During fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information", which changes the way the Company reports information about its operating segments. F-18 60 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) The Company has two primary reportable segments. These segments include the Company's U.S. based or domestic operations, and the Company's international operations. The Company has three primary divisions within its domestic operations: Mass Market Division; Health Food Store Division; and the Health Club and Gym Division. The Company manufactures and markets nutritional products, including a full line of vitamins, joint-related and other nutraceuticals, and sports nutrition supplements through its Mass Market Division; a full line of vitamins, nutraceuticals and sports nutrition products primarily through independent distributors and a significant retailer in its Health Food Store Division; and a full line of sports nutrition products in its Health Club and Gym Division. The Company also manufactures and markets nutritional and other products, including a full line of sports nutrition supplements and sportswear, together with certain other nutraceuticals within its international operations. The accounting policies of these segments are the same as those described in Note 1 to the consolidated financial statements. The Company evaluates the performance of its operating segments based on actual and expected operating results of the respective segments and/or divisions. Certain noncash and other expenses, and domestic assets, are not allocated to the divisions within the domestic operating segment. Segment information for fiscal 2000, 1999 and 1998, respectively, are summarized as follows:
INCOME (LOSS) NET FROM INTEREST 2000: SALES OPERATIONS EXPENSE ----- -------- ---------- -------- Domestic Operations: Mass market....................................... $180,927 $20,327 $ 3,616 Health food stores................................ 34,642 (6,446) 2,025 Health clubs and gyms............................. 22,326 (662) 1,302 Other............................................. 4,168 (1,546) 288 Unallocated....................................... -- (4,300) -- -------- ------- ------- 242,063 7,373 7,231 International Operations............................ 122,605 6,108 4,552 -------- ------- ------- $364,668 $13,481 $11,783 ======== ======= =======
INCOME (LOSS) NET FROM INTEREST 1999: SALES OPERATIONS EXPENSE ----- -------- ---------- -------- Domestic Operations: Mass market....................................... $152,046 $ 12,074 $ 3,512 Health food stores................................ 56,178 (3,490) 1,691 Health clubs and gyms............................. 24,960 711 862 Other............................................. 13,115 (4,333) 331 Unallocated....................................... -- (12,825) -- -------- -------- ------- 246,299 (7,863) 6,396 International Operations:........................... 89,189 3,826 3,783 -------- -------- ------- $335,488 $ (4,037) $10,179 ======== ======== =======
F-19 61 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
INCOME NET FROM INTEREST 1998: SALES OPERATIONS EXPENSE ----- -------- ---------- -------- Domestic Operations: Mass market........................................ $110,388 $16,995 $1,839 Health food stores................................. 61,742 6,077 1,400 Health clubs and gyms.............................. 25,853 1,242 600 Other.............................................. 35,264 2,973 330 -------- ------- ------ 233,247 27,287 4,169 International Operations:............................ 17,295 617 649 -------- ------- ------ $250,542 $27,904 $4,818 ======== ======= ======
Reconciliation of assets for the reportable segments is as follows at May 31, 2000: Total domestic assets..................................... $199,829 Total international assets................................ 79,003 Eliminations.............................................. (51,564) -------- Total........................................... $227,268 ========
Capital expenditures for domestic and international operations amounted to $4.1 million and $1.8 million, respectively, for fiscal 2000, $10.1 million and $1.3 million, respectively, for fiscal 1999, and $11.8 million and $.1 million, respectively, for fiscal 1998. 13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly data (unaudited) for the years ended May 31, 2000, 1999 and 1998 is as follows:
QUARTER ENDED ---------------------------------------- 2000: AUG. 31 NOV. 30 FEB. 29 MAY 31. ----- ------- ------- ------- ------- Net sales........................................... $89,967 $87,376 $90,449 $96,876 Gross profit........................................ 33,535 32,861 33,799 35,900 Income from operations.............................. 2,959 4,395 4,138 1,989 Income tax expense (benefit)........................ (19) 662 733 (231) Net income (loss)................................... 246 1,043 854 (1,070) Basic and diluted net income (loss) per share....... .01 .04 .03 (.04)
QUARTER ENDED ---------------------------------------- 1999: AUG. 31 NOV. 30 FEB. 28 MAY 31. ----- ------- ------- ------- ------- Net sales........................................... $67,946 $83,274 $89,030 $95,238 Gross profit........................................ 23,528 28,503 33,350 29,045 Income (loss) from operations....................... 4,538 (6,496) 3,506 (5,585) Income tax expense (benefit)........................ 1,115 (3,740) 307 (2,921) Net income (loss)................................... 1,707 (5,440) 407 (5,452) Basic and diluted net income (loss) per share....... .07 (.22) .02 (.22)
F-20 62 WEIDER NUTRITION INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
QUARTER ENDED ---------------------------------------- 1998: AUG. 31 NOV. 30 FEB. 28 MAY 31. ----- ------- ------- ------- ------- Net sales........................................... $53,515 $60,811 $62,368 $73,848 Gross profit........................................ 17,873 20,629 23,003 27,703 Income from operations.............................. 3,996 5,406 7,752 10,750 Income tax expense.................................. 1,127 1,574 2,538 3,771 Net income.......................................... 1,692 2,532 3,971 5,809 Basic net income per share.......................... .07 .10 .16 .24 Diluted net income per share........................ .07 .10 .16 .23
The Company's operating results for fiscal 2000 and 1999 were affected by several strategic initiatives that were initially and/or primarily implemented during this two-year period. These initiatives included, among others, organizational changes and upgrading management systems (including senior management changes), the decision to reduce SKUs by over two-thirds, the refinement of the Company's growth and business strategies designed to focus on its primary brands and customers, including the introduction of an enhanced marketing plan resulting in significantly increased selling and marketing costs, the expansion of the Company's international operations primarily from the acquisition of Haleko, the closing of the Company's capsule and tablet manufacturing facility in California, the limitation of contract manufacturing business to select customers that otherwise carry the Company's brands and certain other initiatives. Costs associated with these various initiatives were recorded in the period that they were incurred. Implementation of certain initiatives including, among others, organizational changes and upgrading management systems, the decision to reduce domestic SKUs by over two-thirds (resulting in realization of excess returns and credits and inventory related charges) and the refinement of the Company's growth and business strategies as well as settlement of certain litigation matters resulted in significant costs being incurred during the fourth quarters of fiscal 2000 and/or 1999. During the fourth quarters of fiscal 2000 and 1999, the Company recognized approximately $2.3 million and $11.0 million, respectively, of aggregate pre-tax charges primarily associated with decisions made by management during these respective periods to implement, continue and/or substantially finalize certain of the strategic initiatives described above. F-21