Exhibit 99.1
MET-Rx USA, Inc. and
MET-Rx Substrate
Technology, Inc.
Combined Financial Statements as of and for
the Year Ended December 31, 1998 and Independent
Auditors' Report
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
MET-Rx USA, Inc. and
MET-Rx Substrate Technology, Inc.
Irvine, California
We have audited the accompanying combined balance sheets of MET-Rx USA, Inc. and
MET-Rx Substrate Technology, Inc. (collectively, the Companies) as of December
31, 1998, and the related combined statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of MET-Rx USA, Inc. and
MET-Rx Substrate Technology, Inc. as of December 31, 1998, and the combined
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
March 12, 1999
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31,
1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 749,000
Accounts receivable, less allowance for doubtful accounts of $229,000 10,540,000
Other accounts receivable 43,000
Inventories (Note 2) 6,377,000
Prepaid expenses and other current assets 560,000
Deferred income taxes (Note 6) 106,000
-----------
Total current assets 18,375,000
PROPERTY AND EQUIPMENT, net (Note 3) 1,405,000
OTHER ASSETS 886,000
-----------
$20,666,000
===========
See accompanying notes to combined financial statements.
2
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED BALANCE SHEET
- --------------------------------------------------------------------------------
December 31,
1998
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,999,000
Cash overdraft 711,000
Accrued expenses and other current liabilities 2,921,000
Current portion of term loan (Note 5) 1,200,000
Current portion of capital lease payable (Note 7) 25,000
------------
Total current liabilities 9,856,000
LINE OF CREDIT (Note 5) 7,030,000
CAPITAL LEASE PAYABLE (Note 7) 6,000
TERM LOAN (Note 5) 3,700,000
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Preferred stock:
MET-Rx Substrate Technology, Inc., no par value; 2,000,000 shares
of convertible preferred stock authorized; no shares issued and
outstanding
MET-Rx Substrate Technology, Inc., no par value; 3,000,000 shares
authorized; no shares issued and outstanding
Common stock:
MET-Rx USA, Inc., $0.01 par value; 2,500,000 shares authorized;
1,900 shares issued and outstanding at December 31, 1998
MET-Rx Substrate Technology, Inc.; no par value; 25,000,000
shares authorized; 2,101,400 shares issued and outstanding
at December 31, 1998
Additional paid-in capital 3,917,000
Accumulated deficit (3,843,000)
------------
Total stockholders' equity 74,000
------------
$ 20,666,000
============
See accompanying notes to combined financial statements.
3
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
Year ended
December 31,
1998
NET SALES $ 80,165,000
COST OF GOODS SOLD 40,347,000
------------
GROSS PROFIT 39,818,000
OPERATING EXPENSES:
Selling 21,574,000
General and administrative 14,455,000
------------
Total operating expenses 36,029,000
------------
INCOME FROM OPERATIONS 3,789,000
OTHER (EXPENSE) INCOME:
Interest expense, net (1,337,000)
Other income 475,000
------------
Total other expense (862,000)
------------
INCOME BEFORE INCOME TAX PROVISION 2,927,000
INCOME TAX PROVISION 43,000
------------
NET INCOME $ 2,884,000
============
See accompanying notes to combined financial statements.
4
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
- --------------------------------------------------------------------------------
Met-Rx Substrate
Met-Rx USA, Inc. Technology, Inc.
common stock common stock
------------------------- -----------------------------
Shares Amount Shares Amount
BALANCE, December 31, 1997 1,759 1,945,454
Stock issued in conjunction with exercise of
options (Note 8) 141 155,946
Compensation costs related to stock
options (Note 8)
Dividends
Net income
------ --- ----------- ---
BALANCE, December 31, 1998 1,900 $-- 2,101,400 $--
====== === =========== ===
[RESTUBBED TABLE]
Additional
paid-in Accumulated
capital deficit Total
BALANCE, December 31, 1997 2,910,000 (5,888,000) (2,978,000)
Stock issued in conjunction with exercise of
options (Note 8)
Compensation costs related to stock
options (Note 8) 1,007,000 1,007,000
Dividends -- (839,000) (839,000)
Net income -- 2,884,000 2,884,000
----------- ----------- -----------
BALANCE, December 31, 1998 $ 3,917,000 $(3,843,000) $ 74,000
=========== =========== ===========
See accompanying notes to combined financial statements.
5
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended
December 31,
1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,884,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,145,000
Provision for bad debt 592,000
Provision for inventory reserves 1,121,000
Compensation costs related to stock options (Note 8) 1,007,000
Gain on arbitration settlement (Note 7) (340,000)
Loss on disposal of assets 47,000
Deferred income taxes (1,000)
Changes in operating assets and liabilities:
Accounts receivable (3,744,000)
Inventories 414,000
Prepaid expenses and other assets (130,000)
Accounts payable 518,000
Cash overdraft 457,000
Accrued expenses and other liabilities (1,084,000)
-----------
Net cash provided by operating activities 2,886,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for property and equipment (755,000)
Proceeds from sale of property and equipment 46,000
-----------
Net cash used in investing activities (709,000)
See accompanying notes to combined financial statements.
6
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
COMBINED STATEMENT OF CASH FLOWS (Continued)
- --------------------------------------------------------------------------------
Year Ended
December 31,
1998
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of dividends $ (839,000)
Net borrowings on line of credit 1,928,000
Payments on capital lease (20,000)
Payments on notes payable (1,488,000)
Borrowings (payments) on term loan (1,100,000)
-----------
Net cash used in financing activities (1,519,000)
-----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 658,000
CASH AND CASH EQUIVALENTS, beginning of year 91,000
-----------
CASH AND CASH EQUIVALENTS, end of year $ 749,000
===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Cash paid during the period for:
Interest $ 1,603,000
===========
Income taxes $ 2,000
===========
See accompanying notes to combined financial statements.
7
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business - MET-Rx USA, Inc. (MUSA), incorporated in
Nevada in 1994, is primarily engaged in the sale and distribution of
engineered foods to health and fitness retailers, supermarkets and mass
merchandisers located throughout the United States. MUSA conducts its
operations and maintains office and warehouse facilities in California
and Virginia.
MET-Rx Substrate Technology, Inc. (MSTI), incorporated in California in
1990, is an affiliate of MUSA through common ownership. MSTI is
primarily engaged in the development of engineered foods. MSTI conducts
its operations and maintains office facilities in California.
Principles of Combination - The accompanying combined financial
statements include the accounts of MET-Rx USA, Inc. and MET-Rx Substrate
Technology, Inc. (collectively, the Companies), which are entities under
common ownership and management. All material intracompany transactions
and balances have been eliminated in combination.
Use of Estimates - The preparation of combined financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting years. Actual
results could differ from those estimates.
Cash Equivalents - The Companies consider all highly liquid investments
with an original maturity of three months or less to be cash
equivalents.
Concentrations of Credit Risk - The Companies provide credit, in the
normal course of business, to a large number of supermarkets, mass
merchandisers, wholesalers, distributors, and retailers. The Companies
perform ongoing credit evaluations of their customers and maintain
allowances for potential credit losses.
Inventories - Inventories are stated at the lower of cost or market,
cost generally being determined on a first-in, first-out basis.
Prepaid Advertising - Included in prepaid expenses is approximately
$71,000 of prepaid advertising as of December 31, 1998. Prepaid
advertising is expensed in the month in which the ad first appears.
8
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Property and Equipment - Property and equipment is stated at cost, less
accumulated depreciation and amortization. Depreciation is provided on
the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. Leasehold improvements are
amortized on the straight-line method over the term of the lease or
estimated useful life, whichever is shorter. Expenditures for
maintenance and repairs are charged to operations as incurred, while
renewals and betterments are capitalized.
Deferred Financing Costs - Included in other assets are deferred
financing costs incurred in obtaining the Companies' credit facility
(Note 5). Deferred finance costs, which total $1,126,000 at December 31,
1998, are being amortized over the three-year term of the debt
agreement. Accumulated amortization was $375,000 at December 31, 1998.
Income Taxes - The Companies have elected to be taxed as an S
corporation under the provision of the Internal Revenue Code and similar
statutes in the State of California. Accordingly, the Companies' taxable
income or loss is treated as if it were distributed to the stockholders,
who are responsible for payment of taxes thereon. Additionally, in
accordance with state laws regarding S corporations, the Companies are
subject to a 1.5% California franchise tax. Deferred taxes are provided
on items for which there are temporary differences in recording such
items for financial and income tax reporting purposes.
Research and Development Costs - Research and development costs included
in general and administrative expenses amounted to $646,000 for the year
ended December 31, 1998.
Major Customers - Two customers accounted for approximately 25% of
revenues for the year ended December 31, 1998. A decision by such
customers to decrease the amount purchased from the Companies or to
cease carrying the Companies' products could have a material adverse
effect on the Companies' financial condition and results of operations.
Long-Lived Assets - The Companies account for the impairment and
disposition of long-lived assets in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. In accordance with SFAS No. 121, long-lived assets are reviewed for
events or changes in circumstances which indicate that their carrying
value may not be recoverable.
Comprehensive Income - In 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 130, Reporting Comprehensive Income, which
established standards for the reporting and displaying of comprehensive
income and its components. For the year ended December 31, 1998, there
was no material difference between the Companies' net income and
comprehensive income.
New Accounting Pronouncements - In 1998, the FASB issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities, which the Companies
will adopt in fiscal 2000. Management is currently evaluating the impact
of the adoption of SFAS No. 133 on the financial statements of the
Companies.
9
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
2. INVENTORIES
Inventories consist of the following:
Year ended
December 31,
1998
Raw materials $ 3,394,000
Finished goods 3,946,000
-----------
7,340,000
Less reserves (963,000)
-----------
Total inventories $ 6,377,000
===========
The availability and cost of raw materials used in the Companies'
products can be affected by a number of factors beyond their control,
such as general economic conditions affecting growing decisions, weather
conditions, and plant disease. Because the Companies do not control the
production of raw materials, they are subject to delays caused by
interruptions in production of their raw materials. There can be no
assurance that the Companies' suppliers will be able to obtain alternate
sources of raw materials at favorable prices, or at all. The inability
of the Companies' suppliers to obtain adequate supplies of raw materials
at favorable prices could cause an increase in the Companies' cost of
sales, resulting in a material adverse effect on the Companies'
business, results of operations, and financial condition.
10
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Year ended
December 31,
1998
Leasehold improvements $ 799,000
Computer equipment 1,160,000
Office equipment 673,000
Machinery and equipment 447,000
-----------
Subtotal 3,079,000
Less accumulated depreciation and amortization (1,674,000)
-----------
Total property and equipment $ 1,405,000
===========
4. TRANSACTIONS with affiliates
Reacquisition of Distribution Rights - On January 1, 1995, the Companies
entered into a settlement agreement under which they effectively
acquired the distribution rights for all MET-Rx products previously held
by Myosystems, Inc., an affiliated company. The terms of the agreement
required payments to two Myosystems shareholders, one of whom is the
majority stockholder of the Companies, in an aggregate amount of
$5,704,000, plus interest imputed at 10%. Amounts due to the unrelated
party were expensed in fiscal 1995 and were paid in full in fiscal 1998.
Amounts due to the majority stockholder were recorded as a contra-equity
account and charged to retained earnings in fiscal 1997 when paid.
11
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
5. DEBT
Line of Credit - On December 31, 1997, the Companies entered into a
credit agreement with a financial institution that allows for maximum
borrowings of up to $10,000,000, based on certain percentages of
eligible accounts receivable and inventory, as defined. Amounts due
under the line of credit bear interest at the alternate base rate plus
1%. The alternate base rate is the greater of the prime rate (7.75% at
December 31, 1998) or the federal funds rate (4.7% at December 31, 1998)
plus .5%, provided that the rate is never less than 6%. Borrowings under
the line of credit are collateralized by substantially all assets of the
Companies.
Term Loan - The Companies' credit agreement also provides for a
$6,000,000 term loan that is due in 35 monthly installments of $100,000,
commencing on February 1, 1998, with the remaining unpaid principal and
interest due on December 31, 2000. Amounts due under the term loan bear
interest at the alternate base rate plus 2% and are collateralized by
substantially all assets of the Companies.
Amounts due under the line of credit and term loan were repaid
subsequent to year-end with new financing obtained on January 5, 1999
(Note 9).
6. INCOME TAXES
The provision for income taxes consists of the following:
Year ended
December 31,
1998
Current - State $ 44,000
Deferred - State (1,000)
--------
Provision for income taxes $ 43,000
========
The provision for income taxes differs from the amount computed by
applying the statutory rate for an S corporation, primarily because of
the change in valuation allowance, the nondeductibility of a portion of
meals and entertainment expenses and the use of certain tax credits.
12
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Deferred taxes are recorded based upon the differences between the
financial statement and tax bases of assets and liabilities. Temporary
differences which give rise to deferred income tax assets and
liabilities are as follows:
Year ended
December 31,
1998
Deferred tax assets:
Various reserves and other $ 33,000
Research and development credits 65,000
Inventory capitalization 8,000
--------
Total deferred tax assets $106,000
========
7. COMMITMENTS AND CONTINGENCIES
Operating Leases - The Companies lease offices and warehouse facilities
under noncancelable operating leases expiring in various years through
2000, and are committed to minimum rental payments as follows:
Facilities
--------------------------
Related
party Other Total
Year ending December 31:
1999 $133,000 $250,000 $383,000
2000 7,000 7,000
-------- -------- --------
Total $133,000 $257,000 $390,000
======== ======== ========
Certain facilities are owned in part by certain of the Companies'
officers and stockholders. Lease rates are adjusted annually by
increases, if any, in the Consumer Price Index. Each lease requires
payment of certain additional expenses including real estate taxes,
insurance, utilities, property taxes, and other operational expenses.
Rent expense charged to operations for the year ended December 31, 1998
was $655,000, of which $244,000 was paid to related parties.
13
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Capital Leases - The Companies leased certain equipment under capital
leases expiring at various dates through 2001. Included in property,
plant, and equipment is property under capital lease of:
December 31,
1998
Equipment $ 88,000
Less accumulated depreciation (65,000)
--------
$ 23,000
========
Future minimum commitments under capital lease arrangements as of
December 31, 1998, are as follows:
1999 $ 27,000
2000 6,000
2001 1,000
--------
Net future minimum commitments 34,000
Less interest (3,000)
--------
Present value of future minimum commitments 31,000
Less current portion of capital lease obligations (25,000)
--------
$ 6,000
========
Purchase Commitment - In February 1996, MUSA entered into a termination
agreement with a supplier under which MUSA has agreed to pay such supplier a
royalty of $.02 per unit on the first three million units of the MET-Rx Total
Nutrition Drink Mix sold each month, effective from January 1, 1996 through June
30, 2000. Royalties shall be paid monthly based on the previous month's sales.
Royalty expenses, which are included in cost of goods sold, were $496,000 for
the year ended December 31, 1998.
14
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
In July 1996, MUSA entered into a licensing agreement with another
supplier under which MUSA will pay such supplier a monthly royalty of 6%
of sales of products containing HMB through fiscal 2003. Royalty
expenses incurred under this agreement were $253,000 for the year ended
December 31, 1998.
Endorsements and Sponsorship Agreements - The Companies have entered
into endorsement and sponsorship agreements with various sports and
entertainment personalities and organizations. The terms of these
agreements range from two months to four years. The Companies are
committed to minimum endorsement and sponsorship payments as follows:
Total
Year ending December 31:
1999 $829,000
2000 119,000
2001 28,000
--------
Total $976,000
========
Additionally, the Companies are committed to pay various incentive
bonuses based upon specific performance achievement by the endorsee.
Endorsement and sponsorship expense charged to operations was $1,191,000
for the year ended December 31, 1998.
Litigation - In November 1996, a former employee commenced an action
against MUSA and its majority shareholder, alleging breach of contract
and entitlement to a share of profits earned in 1993 and 1994. On May 6,
1998, a tentative decision was made, awarding the former employee
approximately $1,540,000. The Companies recorded this expense and
related liability in the year ended December 31, 1996. In November 1998,
the Companies entered into a settlement agreement with the former
employee for $1,200,000, which was paid in full in fiscal 1998. The
difference between the initial award and the final settlement of
$340,000 has been included in other income in the year ended December
31, 1998.
In November 1996, the MET-Rx Foundation for Health Enhancement (the
Foundation) filed a complaint against the Companies in the Superior
Court of the State of California. The Foundation seeks general damages
in the amount of the lesser of (i) $100,000 per month or (ii) 1 to 2% of
the Companies' net sales, for a period of five years commencing January
1, 1996, based upon causes of action related to the Companies' alleged
promise to fund the Foundation in the amounts described above. The
Companies deny all allegations of wrongdoing in the complaint and
believe that such allegations are without merit. The Companies intend to
vigorously defend against this action.
15
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
In November 1996, a former employee filed a complaint against MSTI
alleging wrongful termination. MSTI denies all allegations of wrongdoing
in the complaint and believes that such allegations are without merit.
MSTI intends to vigorously defend against this action.
In addition to the matters discussed above, the Companies are involved
in various litigation incidental to its business. The Companies do not
believe the outcome of such litigation will have a materially adverse
impact on its financial condition or results of operations.
8. EMPLOYEE STOCK PLANS
In January 1995, an officer of the Companies was granted an option to
purchase 41 shares of MUSA common stock and 45,346 shares of MSTI common
stock for $.01 and $.001 per share, respectively. Such option vests
ratably over a period of 41 months through May 1998. The Companies
recorded compensation expense of $110,000, related to such stock award
and option grant for the year ended December 31, 1998. The officer
exercised this option in December 1998.
In September 1995, the Companies granted an officer an option to
purchase 100 shares of MUSA common stock and 110,600 shares of MSTI
common stock for $.01 and $.001 per share, respectively. Such option
vests over a period of 48 months with vesting accelerated in the event
of certain equity transactions as defined. As a result of a pending
equity transaction (Note 9), the Companies accelerated vesting of this
option and the officer exercised such option in December 1998. The
Companies recorded compensation expense of approximately $897,000
related to vesting of such option in the year ended December 31, 1998.
A summary of MUSA's outstanding options and activity is as follows:
1998
-------------------------
Weighted
Shares average
under exercise
MUSA option price
OPTIONS OUTSTANDING, beginning of period 174 $ 287.37
Expired (25) 0.01
Exercised (141) 0.01
---------
OPTIONS OUTSTANDING, end of period 8 $ 6,250
=========
OPTIONS EXERCISABLE, end of period 8 $ 6,250
=========
All MUSA stock options outstanding and exercisable at December 31, 1998
have an exercise price of $6,250. Such options have a weighted average
remaining contractual life of 6.5 years.
16
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
A summary of MSTI's outstanding options and activity is as follows:
1998
-----------------------
Weighted
Shares average
under exercise
MSTI option price
OPTIONS OUTSTANDING,
beginning of period 192,444 $ 0.26
Expired (27,650) 0.001
Exercised (155,946) 0.001
--------
OPTIONS OUTSTANDING, end of period 8,848 $ 5.65
========
OPTIONS EXERCISABLE, end of period 8,848 $ 5.65
========
All MSTI stock options outstanding and exercisable at December 31, 1998 have an
exercise price of $5.65. Such options have a weighted average remaining
contractual life of 6.5 years.
The Companies account for their stock option plan in accordance with the
provisions of the Accounting Principles Board's (APB) Opinion No. 25, Accounting
for Stock Issued to Employees. Had compensation cost for the stock option plan
been determined based on the fair value at the grant date consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the Companies'
net income would not have been materially different from the net income recorded
under APB Opinion No. 25 for the period presented.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option valuation model with the following assumptions: risk-free
interest rate of 6.5%, no dividend yield, no volatility factor, and an option
life of seven years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options and warrants that have no vesting restrictions and
are fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price volatility.
Because the Companies' employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of their employee stock options.
17
MET-RX USA, INC. AND Exhibit 99.1
MET-RX SUBSTRATE TECHNOLOGY, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
9. SUBSEQUENT EVENTS
In January 1999, the sole stockholder of the Companies and a third-party
investor formed and capitalized Met-Rx Nutrition, Inc. (MNI) for the
purpose of acquiring MSTI. MNI was capitalized with debt and equity
which, among other things, included 100% of the outstanding common
shares of MUSA. A wholly owned subsidiary (Merger Sub) of MNI was formed
and then acquired 100% of the outstanding common stock of MSTI.
Credit Facility - In January 1999, MNI entered into a credit agreement
that allows for maximum borrowings of up to $16,000,000, based on
certain percentages of eligible accounts receivable and inventories, as
defined. Amounts due under the line of credit bear interest at either
the alternate base rate plus 0.75% or LIBOR (5.1% at December 31, 1998)
plus 2.5%. The alternate base rate is the greater of the prime rate
(7.75% at December 31, 1998) or the federal funds rate (4.7% at December
31, 1998) plus 0.5%. Borrowings under the line of credit are
collateralized by substantially all assets of MNI and its subsidiaries,
MSTI and MUSA. The credit agreement contains covenants which, among
other things, place restrictions on capital expenditures and
distributions and requires that certain financial ratios are met. The
credit agreement also provides for a $16,000,000 term loan that requires
monthly interest payments with the principal due on January 5, 2005.
Amounts due under the term loan bear interest at either the alternate
base rate plus 1.25% or LIBOR plus 3.0% and are collateralized by
substantially all assets of MNI and its subsidiaries, MSTI and MUSA.
MNI has utilized amounts available under the credit agreement to pay off
the Companies' previously existing debt. As a result of the refinancing,
net deferred finance costs totaling $750,000 were written off in January
1999.
* * * * *
18