<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission file number 0-21003
TWINLAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3317986
(State of incorporation) (IRS Employer Identification No.)
150 Motor Parkway, Suite 210, Hauppauge, New York 11788
(Address of principal executive office) (zip code)
(516) 467-3140
(Registrant's telephone number, including area code)
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
------------------ -------------------
At July 31, 1998, the registrant had 31,554,649 shares of common stock
outstanding.
<PAGE> 2
PART 1
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997(1)
------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 41,012 $ 4,029
Accounts receivable, net of allowance for bad
debts of $444 at June 30, 1998 and $406 at
December 31, 1997 42,805 44,509
Inventories 56,850 37,254
Deferred tax assets 1,661 1,615
Prepaid expenses and other current assets 2,723 1,288
-------- --------
Total Current Assets 145,051 88,245
Property, plant and equipment, net 21,848 13,958
Deferred tax assets 48,614 48,777
Other assets 70,158 20,344
-------- --------
TOTAL $285,671 $171,324
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 166 $ 13,993
Accounts payable 16,038 16,534
Accrued expenses and other current liabilities 12,800 10,208
-------- --------
Total Current Liabilities 29,004 40,735
Long-term debt, less current portion 65,238 100,245
-------- --------
Total Liabilities 94,242 140,980
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued -- --
Common stock, $1.00 par value; 75,000,000 shares
authorized; 31,554,449 shares outstanding as of
June 30, 1998 and 27,320,100 shares outstanding
as of December 31, 1997 31,554 27,320
Additional paid-in capital 290,401 147,003
Accumulated deficit (130,526) (143,979)
-------- --------
Total Shareholders' Equity 191,429 30,344
-------- --------
TOTAL $285,671 $171,324
======== ========
</TABLE>
(1) The consolidated balance sheet as of December 31, 1997 has been taken from
the audited financial statement at that date.
1
<PAGE> 3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -----------------
1998 1997 1998 1997
------- -------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $78,573 $44,567 $152,024 $95,736
COST OF SALES 38,946 25,389 76,178 54,572
------- -------- -------- -------
GROSS PROFIT 39,627 19,178 75,846 41,164
OPERATING EXPENSES 24,639 8,400 44,678 18,088
------- -------- -------- -------
INCOME FROM OPERATIONS 14,988 10,778 31,168 23,076
OTHER (EXPENSE) INCOME:
Interest income 822 41 920 85
Interest expense (2,251) (3,138) (5,354) (6,182)
Other 16 6 (65) 12
------- -------- -------- -------
(1,413) (3,091) (4,499) (6,085)
INCOME BEFORE PROVISION FOR INCOME
TAXES AND EXTRAORDINARY ITEM 13,575 7,687 26,669 16,991
PROVISION FOR INCOME TAXES 5,244 2,949 10,351 6,586
------- -------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM 8,331 4,738 16,318 10,405
EXTRAORDINARY ITEM, NET OF $1,816
PROVISION FOR INCOME TAXES 2,865 -- 2,865 --
------- -------- -------- -------
NET INCOME $ 5,466 $ 4,738 $ 13,453 $10,405
======= ======== ======== =======
BASIC INCOME PER SHARE
Income Before Extraordinary Item $ 0.27 $ 0.18 $ 0.56 $ 0.39
Extraordinary Item (0.09) -- (0.10) --
------- -------- -------- -------
Net Income $ 0.18 $ 0.18 $ 0.46 $ 0.39
======= ======== ======== =======
DILUTED INCOME PER SHARE
Income Before Extraordinary Item $ 0.27 $ 0.18 $ 0.56 $ 0.39
Extraordinary Item (0.09) -- (0.10) --
------- -------- -------- -------
Net Income $ 0.18 $ 0.18 $ 0.46 $ 0.39
======= ======== ======== =======
Weighted Average Common Shares
Used in Computing Basic Income Per Share 30,881 27,000 29,111 27,000
======= ======== ======== =======
Weighted Average Common Shares
Used in Computing Diluted Income Per Share 31,177 27,025 29,285 27,020
======= ======== ======== =======
</TABLE>
2
<PAGE> 4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 13,453 $10,405
Adjustment to reconcile net income to net cash
provided by operating activities:
Extraordinary item................................. 2,865 --
Depreciation and amortization...................... 1,893 873
Bad debt expense................................... -- 200
Deferred income taxes.............................. 1,933 2,225
Changes in operating assets and liabilities:
Accounts receivable.............................. 3,158 583
Inventories...................................... (12,584) (9,072)
Prepaid expenses and other current assets........ (1,194) (450)
Accounts payable................................. (1,455) 1,098
Accrued expenses and other current liabilities... 934 (3,769)
-------- -------
Net cash provided by operating activities....... 9,003 2,093
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business................................. (56,105) --
Proceeds from sale of property plant and equipment... -- 2,491
Acquisition of property, plant and equipment......... (4,779) (2,920)
Increase in other assets............................. (6,558) (23)
-------- -------
Net cash used in investing activities........... (67,442) (452)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from second common stock offering....... 147,506 --
Payments of debt..................................... (13,757) (3,012)
Redemption of senior subordinated notes and related
premium.............................................. (38,325) --
Proceeds from exercise of stock options.............. 75 --
Principal payments of capital lease obligations...... (77) (72)
-------- -------
Net cash provided by (used in) financing
activities...................................... 95,422 (3,084)
-------- -------
Net increase (decrease) in cash and cash equivalents... 36,983 (1,443)
Cash and cash equivalents at beginning of period....... 4,029 3,794
-------- -------
Cash and cash equivalents at end of period............. $ 41,012 $ 2,351
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest........................................... $ 4,787 $ 5,738
======== =======
Income taxes....................................... $ 8,996 $ 5,701
======== =======
</TABLE>
3
<PAGE> 5
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------
1. In the opinion of management, the accompanying consolidated unaudited
financial statements include all necessary adjustments (consisting of normal
recurring accruals) and present fairly the financial position of Twinlab
Corporation ("Twinlab") and subsidiaries as of June 30, 1998, the results
of its operations for the three months and six months ended June 30, 1998
and 1997, and its cash flows for the six months ended June 30, 1998 and
1997 in conformity with generally accepted accounting principles for the
interim financial information applied on a consistent basis. The results of
operations for the three months and six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in Twinlab Corporation's December 31, 1997 Annual Report
to Stockholders on Form 10-K as filed with the Securities and Exchange
Commission.
2. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
The Company's amended revolving credit facility and restrictive covenants
contained in the indenture governing the senior subordinated notes restrict
the payment of dividends and the making of loans, advances or other
distributions to Twinlab by any of its subsidiaries except in certain
limited circumstances. The condensed financial information of Twinlab, on a
stand-alone basis, is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash $ 32,744 $ 169
Investment in subsidiaries 158,685 30,175
--------- ---------
$ 191,429 $ 30,344
========= =========
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 2,000,000 shares
authorized; none issued $ -- $ --
Common stock, $1.00 par value; 75,000,000
shares authorized; 31,554,449 outstanding as
of June 30, 1998 and 27,320,100 outstanding
as of December 31, 1997 31,554 27,320
Additional paid-in capital 290,401 147,003
Accumulated deficit (130,526) (143,979)
--------- ---------
$ 191,429 $ 30,344
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Equity interest in net income of subsidiaries $4,998 $4,767 $13,010 $10,533
Interest income 725 2 727 3
------ ------ ------- -------
Income before provision for income taxes 5,723 4,769 13,737 10,536
Provision for income taxes 257 31 284 131
------ ------ ------- -------
Net income $5,466 $4,738 $13,453 $10,405
====== ====== ======= =======
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 13,453 $ 10,405
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries (128,459) (10,402)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from second common stock offering 147,506 --
Proceeds from the exercise of stock options 75 --
--------- --------
Net cash provided by financing activities 147,581 --
--------- --------
Net increase in cash 32,575 3
Cash at beginning of period 169 162
--------- --------
Cash at end of period $ 32,744 $ 165
========= ========
</TABLE>
Twin Laboratories Inc. ("Twin") is a direct wholly owned subsidiary of Twinlab.
Advanced Research Press, Inc. ("ARP"), Changes International of Fort Walton
Beach Inc. ("Changes"), Bronson Laboratories, Inc. and Health Factors
International, Inc., both of which form the Bronson Group ("Bronson"), are
indirect wholly owned subsidiaries of Twinlab. Twinlab, ARP, Changes and
Bronson are guarantors of the senior subordinated notes of Twin.
The assets, results of operations and shareholders' equity of Twin comprise
substantially all of the assets, results of operations and shareholders' equity
of Twinlab on a consolidated basis. Twinlab has no separate operations and has
no significant assets other than Twinlab's investment in Twin and, through
Twin, in ARP, Changes and Bronson. Twin has no direct or indirect subsidiaries
other than ARP, Changes and Bronson; and Twin has no other stockholder than
Twinlab. Accordingly, the Company has determined that separate financial
statements of Twin, ARP, Changes and Bronson would not be material to investors
and, therefore, are not included herein.
Summarized financial information of Twin is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997
------------------- -----------------------
(UNAUDITED)
<S> <C> <C>
Current assets $112,307 $ 88,077
Noncurrent assets 140,620 83,079
Current liabilities 32,265 44,825
Noncurrent liabilities 65,238 100,245
Shareholder's equity 155,424 26,086
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $78,573 $44,567 $152,024 $95,736
Gross profit 39,627 19,178 75,846 41,164
Net income 4,998 4,767 13,010 10,533
</TABLE>
Summarized financial information of ARP is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998 AS OF DECEMBER 31, 1997
------------------- -----------------------
(UNAUDITED)
<S> <C> <C>
Current assets $1,943 $1,399
Noncurrent assets 189 193
Current liabilities 870 568
Noncurrent liabilities -- --
Shareholder's equity 1,262 1,024
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $1,235 $1,362 $2,578 $2,953
Gross profit 329 298 674 704
Net income 109 95 238 241
</TABLE>
Summarized financial information of Changes is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------
(UNAUDITED)
<S> <C>
Current assets $ 6,902
Noncurrent assets 12,843
Current liabilities 3,427
Noncurrent liabilities --
Shareholder's equity 16,318
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1998
-------------------------------- ------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net sales $13,482 $26,048
Gross profit 11,274 21,524
Net income 1,124 2,084
</TABLE>
Summarized Financial information of Bronson Laboratories, Inc. is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------
(UNAUDITED)
<S> <C>
Current assets $ 5,950
Noncurrent assets 41,588
Current liabilities 2,618
Noncurrent liabilities --
Shareholder's equity 44,920
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
(UNAUDITED)
<S> <C>
Net sales $2,755
Gross profit 1,508
Net income 210
</TABLE>
Summarized Financial information of Health Factors International, Inc.
is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------
(UNAUDITED)
<S> <C>
Current assets $ 4,585
Noncurrent assets 7,596
Current liabilities 629
Noncurrent liabilities --
Shareholder's equity 11,552
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
--------------------------------
(UNAUDITED)
<S> <C>
Net sales $1,811
Gross profit 456
Net income 158
</TABLE>
6
<PAGE> 8
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
(UNAUDITED)
<S> <C> <C>
Raw Materials $27,892 $16,340
Work in Process 10,192 7,393
Finished Goods 18,766 13,521
------- -------
Total $56,850 $37,254
======= =======
</TABLE>
4. NET INCOME PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share" and restated net income per common share
for all periods presented. Basic net income per common share was calculated
based upon the weighted average number of common shares outstanding during the
respective periods. Diluted net income per common share was calculated based
upon the weighted average number of common shares outstanding and included the
equivalent shares for dilutive options outstanding during the respective
periods.
The weighted average common shares outstanding for the computation of basic net
income per common share for the three months ended June 30, 1998 and 1997 were
30,880,936 and 27,000,000, respectively, and for the six months ended June 30,
1998 and 1997 were 29,110,829 and 27,000,000, respectively.
Additionally, for the diluted calculation, 296,266 and 24,657 of equivalent
common shares were included for the three months ended June 30, 1998 and 1997,
respectively, and 174,105 and 20,300 of equivalent common shares were included
for the six months ended June 30, 1998 and 1997, respectively.
5. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. For
the six months ended June 30, 1998 there are no items of comprehensive income
as defined in the pronouncement.
Recent pronouncements of the Financial Accounting Standards Board, which are
not required to be adopted at this date, include SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," and
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
These pronouncements are not expected to have a material impact on the
Company's financial statements.
6. SECOND PUBLIC OFFERING
In April 1998, the Company completed a second public offering of 9.2 million
shares of its common stock priced at $36.50 per share. Of the total shares
offered, 4.2 million shares were sold by the Company. The net proceeds to the
Company from the offering after expenses were approximately $147.5 million. Of
the net proceeds to the Company, approximately $56.1 million was used to pay
the purchase price for the Bronson acquisition (discussed in Note 7), including
related fees and expenses; approximately $40.1 million was used to redeem $35.0
million of the Company's senior subordinated notes at a redemption price of
109 1/2 percent, plus accrued and unpaid interest; approximately $9.9 million
was used to reduce outstanding borrowings under the Company's revolving credit
facility, including accrued and unpaid interest; and approximately $41.4
million was available for working capital and other general corporate purposes.
In July, the Company purchased $18.1 million of its senior subordinated notes
on the open market at a price of 112 1/2 percent or $20.4 million with interest
of $.4 million totaling $20.8 million. The Company may from time to time
purchase additional senior subordinated notes in the open market.
7
<PAGE> 9
7. BRONSON ACQUISITION
On April 30, 1998 the Company acquired substantially all of the assets and
assumed certain liabilities of the Bronson Division of Jones Medical
Industries, Inc. The purchase price was approximately $56.1 million, including
related fees and expenses. Bronson manufactures, markets and distributes a line
of over 350 vitamins, herbs, nutritional supplements and health and beauty
aids, which are sold under the Bronson(R) name through catalogs and direct
mailings to customers, including healthcare and nutritional professionals and
mail order and retail customers. Bronson also markets its MD Pharmaceutical(R)
brand exclusively to United States military commissaries.
8
<PAGE> 10
ITEM 2.: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report.
The Company operates in one business segment, the manufacturing and marketing of
brand name nutritional supplements. Within this segment, the Company operates in
four primary business areas: the TWINLAB division, the herbal products division,
the network marketing division and the catalog mail order division. Products
sold under the Twinlab division name include vitamins, minerals, amino acids,
fish and marine oils, sports nutrition products and special formulas. The herbal
products division includes a full line of herbal supplements and phytonutrients
marketed by the Nature's Herbs division and a full line of herbal teas marketed
by the Alvita Tea division. The Company's network marketing activities are
conducted through Changes International, which was acquired in November 1997.
The catalog mail order division activities are conducted through Bronson which
was acquired on April 30, 1998. In addition, the Company's publishing activities
are conducted through its subsidiary, Advanced Research Press, Inc.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
NET SALES: Net sales for the six months ended June 30, 1998 were $152.0
million, an increase of $56.3 million, or 58.8%, as compared to net sales of
$95.7 million for the six months ended June 30, 1997. The 58.8% increase was
attributable to increases in gross sales, which were due to the Company's
increased sales volume. TWINLAB brand net sales contributed $75.1 million, a
decrease of $1.8 million, or 2.4% as compared to $76.9 million for the six
months ended June 30, 1997. The decrease in net sales was primarily due to a
decrease in special formula product sales and an increase in discounts and
allowances on the TWINLAB brand products. Herbal products contributed $44.1
million, an increase of $27.9 million or 171.1% as compared to $16.2 million
for the six months ended June 30, 1997. The herbal category continued to
benefit from the strong demand for St. John's Wort, Gingko, Kava Kava and Saw
Palmetto. Publishing activities contributed $2.2 million as compared to $2.6
million for the six months ended June 30, 1997. The network marketing division,
which was acquired in the fourth quarter of 1997, contributed $26.0 million to
net sales. The catalog mail order division acquired on April 30, 1998
contributed $4.6 million to net sales.
GROSS PROFIT: Gross profit for the six months ended June 30, 1998 was $75.8
million, which represented an increase of $34.7 million, or 84.3%, as compared
to $41.2 million for the six months ended June 30, 1997. Gross profit margin
was 49.9% for the six months ended June 30, 1998, as compared to 43.0% for the
six months ended June 30, 1997. The overall increase in gross profit dollars
was attributable to the Company's higher sales volume for the six months ended
June 30, 1998. The increase in gross profit margin for the six months ended
June 30, 1998, as compared to the six months ended June 30, 1997, was due
primarily to higher gross profit margins of the network marketing division.
OPERATING EXPENSES: Operating expenses were $44.7 million for the six months
ended June 30, 1998, representing an increase of $26.6 million, or 147.0%, as
compared to $18.1 million for the six months ended June 30, 1997. As a percent
of net sales, operating expenses increased from 18.9% for the six months ended
June 30, 1997 to 29.4% for the six months ended June 30, 1998. The increase in
operating expenses and operating expenses as a percent of net sales was
primarily attributable to increased selling and marketing expenses and higher
general and administrative expenses resulting from the Company's increased
level of operations for the six months ended June 30, 1998, comprised primarily
of an increase in the Company's advertising expenses and increased commission
expense for the network marketing division.
9
<PAGE> 11
INCOME FROM OPERATIONS: Income from operations was $31.2 million for the six
months ended June 30, 1998, representing an increase of $8.1 million, or 35.1%,
as compared to $23.1 million for the six months ended June 30, 1997. Income from
operations margin decreased to 20.5% of net sales for the six months ended June
30, 1998, as compared to 24.1% of net sales for the six months ended June 30,
1997. The increase in income from operations was primarily due to the Company's
higher sales volume together with higher gross margins. The decrease in income
from operations margins was primarily due to higher operating expenses as a
percent of net sales of the six months ended June 30, 1998.
OTHER EXPENSE: Other expense was $4.5 million for the six months ended June 30,
1998, as compared to $6.1 million for the six months ended June 30, 1997. The
net decrease of $1.6 million is primarily due to increased interest income of
$.8 million and decreased interest expense of $.8 million, both primarily as a
result of reduced debt levels and increased cash balances which resulted
primarily from the Company's second public offering in April 1998 (see note 6 to
the Company's unaudited consolidated financial statements).
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
NET SALES: Net sales for the three months ended June 30, 1998 were $78.6
million, an increase of $34.0 million, or 76.3%, as compared to net sales of
$44.6 million for the three months ended June 30, 1997. The 76.3% increase was
attributable to increases in gross sales, which were due to the Company's
increased sales volume. Net sales of Twinlab products were $41.2 million, an
increase of $5.9 million or 16.7%, as compared to $35.3 million for the three
months ended June 30, 1997. The increase in net sales of Twinlab products was
primarily due to an increase in vitamins, sports nutrition and special formula
product lines. Herbal products contributed $18.3 million, an increase of $10.2
million, or 126.6%, from the $8.1 million in net sales for the three months
ended June 30, 1997. The herbal category continued to benefit from the strong
demand for St. John's Wort, Gingko, Kava Kava and Saw Palmetto. Publishing
contributed $1.1 million as compared to $1.2 million for the three months ended
June 30, 1997. The network marketing division, which was acquired in the fourth
quarter of 1997, contributed $13.5 million in net sales during the three months
ended June 30, 1998. The catalog mail order division acquired on April 30, 1998
contributed $4.6 million to net sales.
GROSS PROFIT: Gross profit for the three months ended June 30, 1998 was $39.6
million, which represented an increase of $20.4 million, or 106.6%, as compared
to $19.2 million for the three months ended June 30, 1998. Gross profit margin
was 50.4% for the three months ended June 30, 1998, as compared to 43.0% for the
three months ended June 30, 1997. The overall increase in gross profit dollars
was attributable to the Company's higher sales volume for the three months ended
June 30, 1998. The increase in gross profit margin for the three months ended
June 30, 1998, as compared to the three months ended June 30, 1997, was due
primarily to higher gross profit margins of the network marketing division.
OPERATING EXPENSES: Operating expenses were $24.6 million for the three months
ended June 30, 1998, representing an increase of $16.2 million, 193.3%, as
compared to $8.4 million for the three months ended June 30, 1997. As a percent
of net sales, operating expenses increased from 18.9% for the three months ended
June 30, 1997 to 31.4% for the three months ended June 30, 1998. The increase in
operating expenses and operating expenses as a percent of net sales was
primarily attributable to increased selling and marketing expenses and higher
general and administrative expenses resulting from the Company's increased level
of operations for the three months ended June 30, 1998, comprised primarily of
an increase in the Company's advertising expenses and increased commission
expense for the network marketing division.
INCOME FROM OPERATIONS: Income from operations was $15.0 million for the three
months ended June 30, 1998, representing an increase of $4.2 million, or 39.1%,
as compared to $10.8 million for the three months ended June 30, 1997. Income
from operations margin decreased to 19.1% of net sales for the three months
ended June 30, 1998, as compared to 24.2% of net sales for the three months
ended June 30, 1997. The increase in income from operations was primarily due
to the Company's higher sales volume together with higher gross margins. The
decrease in income from operations margins was primarily due to higher
operating expenses as a percent of net sales for the three months ended June
30, 1998.
10
<PAGE> 12
OTHER EXPENSE: Other expense was $1.4 million for the three months ended June
30, 1998, as compared to $3.1 million for the three months ended June 30, 1997.
The net decrease of $1.7 million is primarily due to increased interest income
of $.8 million and decreased interest expense of $.9 million, both primarily as
a result of reduced debt levels and increased cash balances which resulted
primarily from the Company's second public offering in April 1998 (see note 6 to
the Company's unaudited consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998, cash provided by operating activities
was $9.0 million, as compared to $2.1 million for the six months ended June 30,
1997. Cash provided from financing activities was $95.4 million for the six
months ended June 30, 1998, and cash used for financing activities was $3.1
million for the six months ended June 30, 1997. For the six months ended June
30, 1998, cash generated was a result of the second public offering of common
stock offset by payment of debt, including the redemption of $35 million
aggregate principal amount of senior subordinated notes.
Capital expenditures were $4.8 million and $2.9 million for the six months ended
June 30, 1998 and 1997, respectively. Capital expenditures were primarily for
the purchase of production equipment to expand capacity or improve manufacturing
efficiency and for the expansion of the Utah facility. Capital expenditures are
expected to be approximately $17.0 million during 1998, approximately $13.3
million of which will be used for the expansion of the Utah facility and the
remainder for the purchase of production equipment. The Company estimates that
its historical level of maintenance capital expenditures has been approximately
$0.5 million per fiscal year. The Company recently entered into a lease for
approximately 21,000 square feet of office space in Hauppauge, New York for its
executive and administrative personnel and has entered into a lease for 106,000
square feet of space in Bohemia, New York for distribution, warehouse and
packaging (tablet and capsule) operations.
Twinlab has no operations of its own, and accordingly, has no independent means
of generating revenue. As a holding company, Twinlab's internal sources of funds
to meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. The indenture,
dated as of May 7, 1996, as amended, among Twinlab, Twin Laboratories Inc., ARP,
Changes International, Bronson and State Street Bank and Trust Company, as
trustee, relating to the senior subordinated notes and the amended revolving
credit facility impose upon the Company certain financial and operating
covenants, including, among others, requirements that the Company maintain
certain financial ratios and satisfy certain financial tests, limitations on
capital expenditures and restrictions on the ability of the Company to incur
debt, pay dividends or take certain other corporate actions.
In April 1998, the Company completed a second public offering of 9.2 million
shares of its common stock priced at $36.50 per share. Of the total shares
offered, 4.2 million shares were sold by the Company. The net proceeds to the
Company from the offering after expenses were approximately $147.5 million. Of
the net proceeds to the Company, approximately $56.1 million was used to pay the
purchase price for the Bronson acquisition (discussed in Note 7 to the Company's
unaudited consolidated financial statements), including related fees and
expenses; approximately $40.1 million was used to redeem $35.0 million aggregate
principal amount of the Company's senior subordinated notes at a redemption
price of 109 1/2 percent, plus accrued and unpaid interest; approximately $9.9
million was used to reduce outstanding borrowings under the Company's revolving
credit facility, including accrued and unpaid interest; and approximately $41.4
million was available for working capital and other general corporate purposes.
On April 30, 1998 the Company acquired substantially all of the assets and
assumed certain liabilities of the Bronson Division of Jones Medical Industries,
Inc. The purchase price was approximately $56.1 million including related fees
and expenses. Bronson manufactures, markets and distributes a line of over 350
vitamins, herbs, nutritional supplements and health and beauty aids, which are
sold under the Bronson(R) name through catalogs and direct mailings to
customers, including healthcare and nutritional professionals and mail order and
retail customers. Bronson also markets its MD Pharmaceutical(R) brand
exclusively to United States military commissaries.
In July, the Company purchased $18.1 million aggregate principal amount of
senior subordinated notes in the open market at a price of 112 1/2% percent or
$20.4 million with interest of $.4 million totaling $20.8 million. The Company
may from time to time purchase additional senior subordinated notes in the open
market.
11
<PAGE> 13
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and actively pursue its business strategy for the next 18 to 24
months. The Company's capital resources and liquidity are expected to be
provided by the Company's cash flow from operations, borrowings under its
amended revolving credit facility and the remaining proceeds from its second
public offering. As of July 30, 1998, approximately $50 million of borrowings
were available under the amended revolving credit facility for working capital
requirements and general corporate purposes.
One of the Company's business strategies is to actively pursue acquisition
opportunities, including product line acquisitions, that complement or extend
existing products, expand its distribution channels or are compatible with its
business philosophy and strategic goals. Future acquisitions could be financed
by internally generated funds, bank borrowings, public offerings or private
placements of equity or debt securities, or a combination of the foregoing. Up
to $35 million of borrowings under the amended revolving credit facility,
subject to certain conditions and reductions, will be available to fund future
acquisitions. There can be no assurance that the Company will be able to make
acquisitions on terms favorable to the Company or that funds to finance an
acquisition will be available or permitted under the Company's financing
instruments.
YEAR 2000
The Company recognizes the importance of ensuring that neither its customers
nor its business operations are disrupted as a result of Year 2000 software
failures. The Company is communicating with customers, suppliers, financial
institutions and other vendors with which it does business to coordinate Year
2000 conversion efforts. Based on the results of this survey, the Company will
identify any existing risks to be addressed. At this time, the Company believes
that any risks are minimal. At the present time, the Company believes that its
systems are substantially Year 2000 compliant. Plans are in place to bring all
Company systems into compliance by mid-year 1999 with a total cost estimated to
be in the range of $50,000-$200,000. The Company does not expect Year 2000
issues to materially effect its products, services, competitive position or
financial performance. However, there can be no assurance that this will be the
case. The ability of third parties with whom the Company transacts business to
adequately address their Year 2000 issues is outside the Company's control
There can be no assurance that the failure of such third parties to adequately
address their respective Year 2000 issues will not have a material adverse
effect on the Company's business, financial condition, cash flows and results
of operations.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in the periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof of, other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results covered
by the forward-looking statements will be achieved, and other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
12
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on June 17,
1998, at which meeting the stockholders voted to elect directors of the
Company, adopt the Twinlab Corporation 1998 Stock Incentive Plan and
ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors of the fiscal year ending December 31, 1998.
The results of the matters voted on the Annual Meeting are shown below.
(b) The nominees for election as directors of the Company are listed below,
together with the number of votes cast for, against, and withheld with
respect to each such nominee, as well as the number of non-votes with
respect to each such nominee:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST WITHHELD NON-VOTING
________________________________________________________________________________
<S> <C> <C> <C> <C>
Brian Blechman 19,846,630 0 103,657 8,092,346
Dean Blechman 19,846,680 0 103,607 8,092,346
Neil Blechman 19,846,580 0 103,707 8,092,346
Ross Blechman 19,846,605 0 103,682 8,092,346
Steve Blechman 19,846,705 0 103,582 8,092,346
John G Danhakl 19,661,805 0 288,482 8,092,346
Jennifer Holden-Dunbar 19,847,005 0 103,282 8,092,346
Jonathan D. Sokoloff 19,670,805 0 279,482 8,092,346
Stephen Welling 23,188,062 0 270,841 8,092,346
</TABLE>
(d) Other matters voted upon at the meeting and the results of those votes are
as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTING
__________________________________________________________
<S> <C> <C> <C> <C>
Adoption of the Twinlab Corporation 1998
Stock Incentive Plan 16,481,808 3,441,361 27,118 8,092,346
Ratification of Deloitte & Touche LLP as
the Company's independent auditors 19,940,836 3,347 6,104 8,092,346
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
A report on Form 8-K was filed on May 12, 1988, with respect to the
Bronson acquisition.
A report on Form 8-KA was filed on July 14, 1998, with respect to the
Bronson acquisition.
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWINLAB CORPORATION
By: /s/ Ross Blechman
__________________________________________________
Ross Blechman
Chairman, President and Chief Executive Officer
By: /s/ John McCusker
__________________________________________________
John McCusker
Chief Financial Officer
Date: August 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 41,012
<SECURITIES> 0
<RECEIVABLES> 43,249
<ALLOWANCES> 444
<INVENTORY> 56,850
<CURRENT-ASSETS> 145,051
<PP&E> 31,009
<DEPRECIATION> 9,161
<TOTAL-ASSETS> 285,671
<CURRENT-LIABILITIES> 29,004
<BONDS> 0
0
0
<COMMON> 31,554
<OTHER-SE> 159,875
<TOTAL-LIABILITY-AND-EQUITY> 285,671
<SALES> 152,024
<TOTAL-REVENUES> 152,024
<CGS> 76,178
<TOTAL-COSTS> 76,178
<OTHER-EXPENSES> 44,678
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,354
<INCOME-PRETAX> 26,669
<INCOME-TAX> 10,351
<INCOME-CONTINUING> 16,318
<DISCONTINUED> 0
<EXTRAORDINARY> 2,865
<CHANGES> 0
<NET-INCOME> 13,453
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
