<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 September 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 October 31, 1998, the registrant had 32,704,849 shares of common stock
outstanding.
<PAGE> 2
PART I
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>
SEPTEMBER 30, 1998 DECEMBER 31, 1997(1)
------------------ --------------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 16,271 $ 4,212
Accounts receivable, net of allowance for bad
debts of $482 at September 30, 1998 and $467 at
December 31, 1997 54,394 44,890
Inventories 58,081 37,525
Deferred tax assets 1,817 1,615
Prepaid expenses and other current assets 3,656 1,324
--------- ---------
Total Current Assets 134,219 89,566
Property, plant and equipment, net 26,051 14,263
Deferred tax assets 48,878 48,777
Other assets 69,826 20,404
--------- ---------
TOTAL $ 278,974 $ 173,010
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 126 $ 14,112
Accounts payable 17,847 17,172
Accrued expenses and other current liabilities 17,011 10,578
--------- ---------
Total Current Liabilities 34,984 41,862
Long-term debt, less current portion 43,449 100,267
--------- ---------
Total Liabilities 78,433 142,129
--------- ---------
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; 32,704,849 shares outstanding as of
September 30, 1998 and 28,470,100 shares
outstanding as of December 31, 1997 32,705 28,470
Additional paid-in capital 289,324 145,917
Accumulated deficit (121,488) (143,506)
--------- ---------
Total Shareholders' Equity 200,541 30,881
--------- ---------
TOTAL $ 278,974 $ 173,010
========= =========
</TABLE>
1) Includes the amounts for the balance sheet of PR Nutrition, Inc., which was
acquired on August 20, 1998 and has been accounted for as a pooling of
interests.
2
<PAGE> 3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1997(1) 1998 1997(1)
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 90,552 $ 53,307 $ 253,351 $ 157,812
COST OF SALES 43,766 30,352 123,193 87,192
--------- --------- --------- ---------
GROSS PROFIT 46,786 22,955 130,158 70,620
OPERATING EXPENSES 27,322 12,099 76,766 34,361
MERGER EXPENSES 1,503 -- 1,503 --
--------- --------- --------- ---------
INCOME FROM OPERATIONS 17,961 10,856 51,889 36,259
OTHER (EXPENSE) INCOME:
Interest income 345 40 1,271 130
Interest expense (1,495) (3,136) (6,863) (9,327)
Other 8 11 (47) 23
--------- --------- --------- ---------
(1,142) (3,085) (5,639) (9,174)
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY ITEM 16,819 7,771 46,250 27,085
PROVISION FOR INCOME TAXES 6,545 2,784 16,939 9,414
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 10,274 4,987 29,311 17,671
EXTRAORDINARY ITEM, NET OF TAX (2,076) -- (4,941) --
--------- --------- --------- ---------
NET INCOME $ 8,198 $ 4,987 $ 24,370 $ 17,671
========= ========= ========= =========
BASIC INCOME PER SHARE
Income Before Extraordinary Item $ 0.31 $ 0.18 $ 0.94 $ 0.63
Extraordinary Item (0.06) -- (0.16) --
--------- --------- --------- ---------
Net Income $ 0.25 $ 0.18 $ 0.78 $ 0.63
========= ========= ========= =========
DILUTED INCOME PER SHARE
Income Before Extraordinary Item $ 0.31 $ 0.18 $ 0.94 $ 0.63
Extraordinary Item (0.06) -- (0.16) --
--------- --------- --------- ---------
Net Income $ 0.25 $ 0.18 $ 0.78 $ 0.63
========= ========= ========= =========
Weighted average common shares used in computing
basic income per share 32,705 28,150 31,084 28,150
========= ========= ========= =========
Weighted average common shares used in computing
diluted income per share 32,792 28,201 31,229 28,180
========= ========= ========= =========
Pro forma relating to change in tax status:
Historical income before provision for income
taxes and extraordinary item $ 16,819 $ 7,771 $ 46,250 $ 27,085
Pro forma provision for income taxes 6,622 2,997 18,106 10,536
--------- --------- --------- ---------
Pro forma income before extraordinary item 10,197 4,774 28,144 16,549
Extraordinary item (2,076) -- (4,941) --
--------- --------- --------- ---------
Pro forma net income $ 8,121 $ 4,774 $ 23,203 $ 16,549
========= ========= ========= =========
Basic income before extraordinary item per share $ 0.31(2) $ 0.17 $ 0.91(2) $ 0.59
========= ========= ========= =========
Diluted income before extraordinary item per share $ 0.31(2) $ 0.17 $ 0.90(2) $ 0.59
========= ========= ========= =========
Basic net income per share $ 0.25 $ 0.17 $ 0.75 $ 0.59
========= ========= ========= =========
Diluted net income per share $ 0.25 $ 0.17 $ 0.74 $ 0.59
========= ========= ========= =========
</TABLE>
(1) Includes the operations of PR Nutrition, Inc., which was acquired on August
20, 1998 and has been accounted for as a pooling of interests.
(2) Basic and diluted income before extraordinary item per share, excluding
$1,503 of merger expenses related to PR Nutrition, Inc.($924 net of tax),
would have been $.034 and $0.93 for the three and the nine months ended
September 30, 1998, respectively.
3
<PAGE> 4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997(1)
--------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,370 $ 17,671
Adjustment to reconcile net income to net cash provided by
operating activities:
Extraordinary item 4,941 --
Depreciation and amortization 3,406 1,434
Bad debt expense 22 --
Deferred income taxes 2,829 2,895
Changes in operating assets and liabilities:
Accounts receivable (7,622) (3,182)
Inventories (13,544) (7,627)
Prepaid expenses and other current assets (2,090) (860)
Accounts payable (284) 714
Accrued expenses and other current liabilities 4,781 (221)
--------- ---------
Net cash provided by operating activities 16,809 11,024
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business (56,105) --
Proceeds from sale of property plant and equipment -- 2,492
Acquisition of property, plant and equipment (9,245) (3,286)
(Increase)decrease in other assets (7,924) 169
--------- ---------
Net cash used in investing activities (73,274) (625)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of debt 700 2,395
Distributions to shareholders (2,352) (2,712)
Payments of debt (14,606) (8,241)
Redemption of senior subordinated notes and related premium (62,687) --
Proceeds from exercise of stock options 80 --
Net proceeds from common stock offering 147,506 --
Principal payments of capital lease obligations (117) (108)
--------- ---------
Net cash provided by (used in) financing activities 68,524 (8,666)
--------- ---------
Net increase in cash and cash equivalents 12,059 1,733
Cash and cash equivalents at beginning of period 4,212 3,955
--------- ---------
Cash and cash equivalents at end of period $ 16,271 $ 5,688
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 6,667 $ 6,630
========= =========
Income taxes $ 12,134 $ 7,734
========= =========
</TABLE>
(1) Includes the amounts for PR Nutrition, Inc., which was acquired on August
20, 1998 and has been accounted for as a pooling of interests.
4
<PAGE> 5
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. SUMMARY OF ACCOUNTING POLICIES
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 September 30, 1998,
the results of its operations for the three months and nine months ended
September 30, 1998 and 1997, and its cash flows for the nine months ended
September 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 nine
months ended September 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. ACQUISITIONS
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
markets its MD Pharmaceutical(R) brand exclusively to United State
military commissaries. This transaction has been accounted for as a
purchase.
On August 20, 1998, the Company acquired PR Nutrition, Inc. ("PR") of San
Diego, California for 1,150,000 shares of common stock having a market
value at the date of the merger of approximately $39.7 million. PR markets
and distributes nutritionally enhanced sports performance and nutrient
replacement products, which include food bars and powdered drinks, that
are marketed to active lifestyle consumers. The transaction has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements have been retroactively restated to include the
accounts of PR for all periods presented. The following is a
reconciliation of certain restated amounts with amounts previously
reported:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,1997 SEPTEMBER 30,1997
----------------- -----------------
<S> <C> <C>
Revenues:
As previously reported $ 49,189 $144,925
Effect of PR pooling-of-interest 4,118 12,887
-------- --------
As restated $ 53,307 $157,812
======== ========
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,1997 SEPTEMBER 30,1997
----------------- -----------------
<S> <C> <C>
Net Income:
As previously reported $ 4,466 $14,871
Effect of PR pooling-of-interest 521 2,800
------- -------
As restated $ 4,987 $17,671
======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30,1997 SEPTEMBER 30,1997
----------------- -----------------
<S> <C> <C>
Diluted Income Per Share:
As previously reported $0.17 $0.55
Effect of PR pooling-of-interest 0.01 0.08
----- -----
As restated $0.18 $0.63
===== =====
</TABLE>
PR was a Subchapter S Corporation for federal income tax purposes prior to
the transaction and accordingly, no federal income taxes were provided in
its financial statements prior to August 20, 1998. To allow for
comparability, pro forma results have been provided for all periods
showing the combined results with a pro forma provision for income taxes
for PR.
3. 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 its subsidiaries, except in certain
limited circumstances. The condensed financial information of Twinlab, on
a stand-alone basis, is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
CONDENSED BALANCE SHEETS (UNAUDITED) (RESTATED)
<S> <C> <C>
ASSETS
Cash $ 3,289 $ 169
Investment in subsidiaries 197,252 30,712
--------- ---------
$ 200,541 $ 30,881
========= =========
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; 32,704,849 outstanding as of
September 30, 1998 and 28,470,100 outstanding as of
December 31, 1997 32,705 28,470
Additional paid-in capital 289,324 145,917
Accumulated deficit (121,488) (143,506)
--------- ---------
$ 200,541 $ 30,881
========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1998 1997(RESTATED) 1998 1997(RESTATED)
------- ------- ------- -------
CONDENSED STATEMENTS OF INCOME UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Equity interest in net income of subsidiaries $ 8,142 $ 5,016 $23,871 $17,828
Interest income 221 2 948 5
------- ------- ------- -------
Income before provision for income taxes 8,363 5,018 24,819 17,833
Provision for income taxes 165 31 449 162
------- ------- ------- -------
Net income $ 8,198 $ 4,987 $24,370 $17,671
======= ======= ======= =======
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997(RESTATED)
---- --------------
(UNAUDITED)
<S> <C> <C>
CONDENSED STATEMENTS OF CASH FLOW
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 24,370 $ 17,671
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries (168,836) (17,668)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from second common
stock offering 147,506 --
Proceeds from the exercise of stock
options 80 --
--------- ---------
Net cash provided by financing
activities 147,586 --
--------- ---------
Net increase in cash 3,120 3
Cash at beginning of period 169 162
--------- ---------
Cash at end of period $ 3,289 $ 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"), and PR Nutrition Inc. ("PR"), are indirect wholly owned
subsidiaries of Twinlab. Twinlab, ARP, Changes, Bronson and PR 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, Bronson and PR.
Twin has no direct or indirect subsidiaries other than ARP, Changes,
Bronson and PR. Twin has no stockholder other than Twinlab. Accordingly,
the Company has determined that separate financial statements of Twin,
ARP, Changes, Bronson, and PR would not be material to investors and,
therefore, are not included herein.
Summarized financial information of Twin is as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998 AS OF DECEMBER 31, 1997
------------------------ -----------------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
Current assets $130,890 $ 89,388
Noncurrent assets 144,767 83,454
Current liabilities 38,091 45,951
Noncurrent liabilities 43,449 100,267
Shareholder's equity 194,117 26,624
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1997(RESTATED) 1998 1997(RESTATED)
---- -------------- ---- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 90,552 $ 53,307 $ 253,351 $ 157,812
Gross profit 46,786 70,620 130,158 70,620
Net income 8,142 5,016 23,871 17,828
</TABLE>
7
<PAGE> 8
Summarized financial information of Twin's subsidiaries is as follows:
AS OF SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
BRONSON HEALTH
LABORATORIES FACTORS,
ARP CHANGES INC. INC. PR
--- ------- ---- ---- --
<S> <C> <C> <C> <C> <C>
Current assets $ 1,511 $ 7,805 $ 7,079 $ 4,487 $ 3,376
Noncurrent assets 188 12,604 41,041 7,551 432
Current liabilities 503 3,221 2,645 363 2,422
Noncurrent liabilities -- -- -- -- --
Shareholder's equity 1,196 17,188 45,475 11,675 1,386
</TABLE>
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
ARP CHANGES PR
--- ------- --
<S> <C> <C> <C>
Current assets $ 1,399 $ 4,005 $ 1,321
Noncurrent assets 193 13,026 365
Current liabilities 568 2,685 1,127
Noncurrent liabilities -- -- 22
Shareholder's equity 1,024 14,346 537
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
BRONSON HEALTH
LABORATORIES FACTORS
ARP CHANGES INC. INC. PR
--- ------- ---- ---- --
<S> <C> <C> <C> <C> <C>
Net Sales $ 933 $13,158 $ 4,558 $ 2,967 $ 5,185
Gross Profit 46 10,972 2,805 486 3,686
Net Income (66) 870 556 122 521
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ARP PR
--- --
<S> <C> <C>
Net Sales $1,388 $4,118
Gross Profit 325 2,888
Net Income 133 521
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
BRONSON HEALTH
LABORATORIES FACTORS,
ARP CHANGES INC. INC. PR
--- ------- ---- ---- --
<S> <C> <C> <C> <C> <C>
Net Sales $ 3,511 $39,206 $ 7,313 $ 4,778 $15,960
Gross Profit 720 32,496 4,313 942 11,212
Net Income 172 2,954 766 280 3,241
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ARP PR
--- --
<S> <C> <C>
Net Sales $ 4,341 $12,887
Gross Profit 1,029 9,390
Net Income 374 2,800
</TABLE>
8
<PAGE> 9
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31,1997
------------------ ----------------
(UNAUDITED) (RESTATED)
<S> <C> <C>
Raw Materials $29,616 $16,340
Work in Process 10,717 7,393
Finished Goods 17,748 13,792
------- -------
Total $58,081 $37,525
======= =======
</TABLE>
The increase from December 31, 1997 of $20,556 is primarily due to an
increase in herbal inventories to support higher sales and to the
inclusion of Bronson inventories acquired in April 1998.
5. 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 September 30,
1998 and 1997 were 32,704,766 and 28,150,000, respectively, and for the
nine months ended September 30, 1998 and 1997 were 31,084,411 and
28,150,000, respectively.
Additionally, for the diluted calculation, 86,819 and 50,928 of equivalent
common shares were included for the three months ended September 30, 1998
and 1997, respectively, and 145,009, and 30,257 of equivalent common
shares representing the dilutive effect of the Company's stock options
were included for the nine months ended September 30, 1998 and 1997,
respectively.
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 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 1998, 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 an aggregate of $20.8 million, including interest of
$.4 million. In September 1998, the Company purchased an additional $3.6
million aggregate principal amount of senior subordinated notes in the
open market at a price of 108-1/2 percent or an aggregate of $4.1 million,
including interest of $.1 million. The Company may from time to time
purchase additional senior subordinated notes in the open market.
9
<PAGE> 10
7. FTC INQUIRY
The Company received an inquiry from the Federal Trade Commission("FTC")
with respect to the Company's substantiation for certain advertising
claims made for its product "Herbal Phen Fuel,". After the Company
submitted scientific substantiation to the FTC, the FTC forwarded a
proposed consent order (the "Consent Order") to the Company. The proposed
Consent Order provides for, among other things: (1) injunctive relief
prohibiting the Company from making certain claims for its products
without adequate scientific substantiation; and (2) payment of an
unspecified sum of money to the FTC. The proposed Consent Order is
currently the subject of negotiation between the FTC Staff and the
Company. The Company is unable to predict whether it will be able to reach
a negotiated settlement of this matter. There can be no assurance that any
injunctive relief or monetary payment resulting from resolution of this
matter would not have a material adverse effect on the Company.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
1998. For the nine months ended September 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", 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.
10
<PAGE> 11
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 five primary business areas: the TWINLAB division, the
herbal products division, the network marketing division, the catalog mail
order division, and the PR Nutrition business. Products sold under the
Twinlab division name include vitamins, minerals, amino acids, fish and
marine oils, sports nutrition products and special formulas and a line of
herbal products introduced in September of 1998. 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 PR Nutrition business markets and
distributes a line of nutritionally enhanced sports performance and
nutrient replacement bars and powdered drinks under the PR and Ironman
label (brands). 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.
On August 20, 1998, the Company acquired PR Nutrition, Inc. ("PR") of San
Diego, California for 1,150,000 share of common stock having a market
value at the date of the merger of approximately $39.7 million. PR markets
and distributes nutritionally enhanced sports performance and nutrient
replacement products, which include food bars and powdered drinks, that
are marketed to active lifestyle consumers. The transaction has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements have been retroactively restated to include the
accounts of PR for all periods presented.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES: Net sales for the nine months ended September 30, 1998 were
$253.4 million, an increase of $95.6 million, or 60.5%, as compared to net
sales of $157.8 million for the nine months ended September 30, 1997.
TWINLAB brand net sales contributed $128.1 million, an increase of $16.0
million, or 14.3% as compared to $112.1 million for the nine months ended
September 30, 1997. The increase in net sales was primarily due to an
increase in vitamins, sports nutrition and special formula product sales.
Herbal products contributed $55.0 million, an increase of $26.0 million or
89.8% as compared to $29.0 million for the nine months ended September 30,
1997. The herbal category benefited from the strong demand for St.John's
Wort, Gingko, Kava Kava and Saw Palmetto. The PR bar and powdered drink
products contributed $16.0 million, an increase of 23.8% compared to $12.8
million for the nine months ended September 30, 1997. The network
marketing division, which was acquired in the fourth quarter of 1997,
contributed $39.2 million to net sales. The catalog mail order division
acquired on April 30, 1998 contributed $12.1 million to net sales.
Publishing activities contributed $3.0 million as compared to $3.8 million
for the nine months ended September 30, 1997
GROSS PROFIT: Gross profit for the nine months ended September 30, 1998
was $130.2 million, which represented an increase of $59.6 million, or
84.3%, as compared to $70.6 million for the nine months ended September
30, 1997. Gross profit margin was 51.4% for the nine months ended
September 30, 1998, as compared to 44.7% for the nine months ended
September 30, 1997. The overall increase in gross profit dollars was
attributable to the Company's higher sales volume for the nine months
ended September 30, 1998. The increase in gross profit margin for the nine
months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, was due primarily to higher gross profit margins of
the network marketing division.
11
<PAGE> 12
OPERATING EXPENSES: Operating expenses were $76.8 million for the nine
months ended September 30, 1998, representing an increase of $42.4
million, or 123.4%, as compared to $34.4 million for the nine months ended
September 30, 1997. As a percent of net sales, operating expenses
increased from 21.8% for the nine months ended September 30, 1997 to 30.3%
for the nine months ended September 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 nine months ended September 30, 1998,
comprised primarily of an increase in the Company's advertising expenses
and increased commission expense for the network marketing division.
MERGER EXPENSES: Merger expenses were $1.5 million for the nine months
ended September 30, 1998 as a result of the August 20, 1998 acquisition of
PR.
INCOME FROM OPERATIONS: Income from operations was $51.9 million for the
nine months ended September 30, 1998, representing an increase of $15.6
million, or 43.1%, as compared to $36.3 million for the nine months ended
September 30, 1997. Income from operations margin decreased to 20.5% of
net sales for the nine months ended September 30, 1998, as compared to
23.0% of net sales for the nine months ended September 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 margin was primarily due to higher operating
expenses as a percent of net sales for the nine months ended September 30,
1998.
OTHER EXPENSE: Other expense was $5.6 million for the nine months ended
September 30, 1998, as compared to $9.2 million for the nine months ended
September 30, 1997. The net decrease of $3.6 million is primarily due to
increased interest income of $1.1 million and decreased interest expense
of $2.5 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.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES: Net sales for the three months ended September 30, 1998 were
$90.6 million, an increase of $37.3 million, or 69.9%, as compared to net
sales of $53.3 million for the three months ended September 30, 1997. Net
sales of Twinlab products were $53.0 million, an increase of $17.8 million
or 50.5%, as compared to $35.2 million for the three months ended
September 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 $10.9 million, a
decrease of $1.8 million, or 14.6%, from the $12.7 million in net sales
for the three months ended September 30, 1997 due primarily to a decline
in sales in the core health food channel. Mass market revenues for the
three months ended September 30, 1998 increased 43.1% to $6.7 million from
$4.6 million for the three months ended September 30, 1997. High initial
pipeline fill by a large customer resulted in lower orders in the three
months ended September 30, 1998 compared to levels experienced in the
first and second quarter of 1998. However, this was more than offset by
sales in the core health food channel and the successful introduction of
our new Twinlab TruHerbs and Twinlab Ironman products with the mass
market. The PR bar and powdered drinks contributed $5.2 million, an
increase of $1.1 million or 25.9% for the three months ended September 30,
1998 as compared to $4.1 million for the three months ended September 30,
1997. The network marketing division, which was acquired in the fourth
quarter of 1997, contributed $13.2 million in net sales during the three
months ended September 30, 1998. The catalog mail order division acquired
on April 30, 1998 contributed $7.5 million to net sales. Publishing
contributed $.8 million as compared to $1.2 million for the three months
ended September 30, 1997.
GROSS PROFIT: Gross profit for the three months ended September 30, 1998
was $46.8 million, which represented an increase of $23.8 million, or
103.8%, as compared to $23.0 million for the three months ended September
30, 1997. Gross profit margin was 51.7% for the three months ended
September 30, 1998, as compared to 43.1% for the three months ended
September 30, 1997. The overall increase in gross profit dollars was
attributable to the Company's higher sales
12
<PAGE> 13
volume for the three months ended September 30, 1998. The increase in
gross profit margin for the three months ended September 30, 1998, as
compared to the three months ended September 30, 1997, was due primarily
to higher gross profit margins of the network marketing division.
OPERATING EXPENSES: Operating expenses were $27.3 million for the three
months ended September 30, 1998, representing an increase of $15.2
million, or 125.8%, as compared to $12.1 million for the three months
ended September 30, 1998. As a percent of net sales, operating expenses
increased from 22.7% for the three months ended September 30, 1997 to
30.2% for the three months ended September 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 September 30,
1998, comprised primarily of an increase in the Company's commission
expense for the network marketing division and advertising expenses.
MERGER EXPENSES: Merger expenses were $1.5 million for the three months
ended September 30, 1998 as a result of the August 20, 1998 acquisition of
PR.
INCOME FROM OPERATIONS: Income from operations was $18.0 million for the
three months ended September 30,1998, representing an increase of $7.1
million, or 65.5%, as compared to $10.9 million for the three months ended
September 30, 1997. Income from operations margin decreased to 19.8% of
net sales for the three months ended September 30, 1998, as compared to
20.4% of net sales for the three months ended September 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 September
30, 1998.
OTHER EXPENSE: Other expense was $1.1 million for the three months ended
September 30, 1998, as compared to $3.1 million for the three months ended
September 30, 1997. The net decrease of $2.0 million is primarily due to
increased interest income of $.3 million and decreased interest expense of
$1.6 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.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1998, cash provided by operating
activities was $16.8 million, as compared to $11.0 million for the nine
months ended September 30, 1997. Net Cash provided from financing
activities was $68.5 million for the nine months ended September 30, 1998
(represents the net proceeds of the second public offering of common stock
offset by payment of debt, including the redemption and repurchase of
$56.8 million aggregate principal amount of senior subordinated notes),
and cash used for financing activities was $8.7 million for the nine
months ended September 30, 1997.
Capital expenditures were $9.3 million and $3.3 million for the nine
months ended September 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 is
being used to expand 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,
13
<PAGE> 14
Twin Laboratories Inc., ARP, Changes International, Bronson, PR 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 2), 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 1998, 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 an aggregate of $20.8 million, including interest of
$.4 million. In September 1998, the Company purchased an additional $3.6
million aggregate principal amount of senior subordinated notes in the
open market at a price of 108-1/2 percent or an aggregate of $4.1 million,
including interest of $.1 million. The Company may from time to time
purchase additional senior subordinated notes in the open market.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and actively pursues 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 October 31, 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 intends to identify any existing risks to be
addressed. At this time, the Company believes that any risks are minimal
and it 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
14
<PAGE> 15
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 this 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, 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.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDING
FTC PROCEEDING
The Company received an inquiry from the Federal Trade Commission("FTC") with
respect to the Company's substantiation for certain advertising claims made for
its product "Herbal Phen Fuel". After the Company submitted scientific
substantiation to the FTC, the FTC forwarded a proposed consent order (the
"Consent Order") to the Company. The proposed Consent Order provides for, among
other things: (1) injunctive relief prohibiting the Company from making certain
claims for its products without adequate scientific substantiation; and (2)
payment of an unspecified sum of money to the FTC. The proposed Consent Order is
currently the subject of negotiation between the FTC Staff and the Company. The
Company is unable to predict whether it will be able to reach a negotiated
settlement of this matter. There can be no assurance that any injunctive relief
or monetary payment resulting from a resolution of this matter would not have a
material adverse effect on the Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 20, 1998, Twinlab issued an aggregate of 1,150,000 shares of its
Common Stock to the shareholders of PR Nutrition, Inc. as the purchase price for
all of the outstanding common stock of PR Nutrition, Inc. Such Common Stock was
transferred in a transaction that was exempt from registration under Section
4(2) of the Securities Act.
ITEM 5: OTHER INFORMATION
Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of
1934, as amended, if a stockholder who intends to present a proposal at the 1999
annual meeting of stockholders does not notify the Company of such proposal on
or prior to April 3, 1999, then management proxies would be allowed to use their
discretionary voting authority to vote on the proposal when the proposal is
raised at the annual meeting, even though there is no discussion of the proposal
in the proxy statement relating to the 1999 annual meeting of stockholders.
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-KA was filed on July 14, 1998, with respect to the
Bronson acquisition.
A report on Form 8-K was filed on September 4, 1998, with respect to the
acquisition of P.R. Nutrition, Inc.
A report on Form 8-KA was filed on October 2, 1998, with respect to the
acquisition of P.R. Nutrition, Inc.
16
<PAGE> 17
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
DATED: November 13, 1998
17
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