<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q/A
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
INTRODUCTORY NOTE
This Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1998, and is being filed to reflect the
restatement of the Registrant's consolidated financial statements contained in
such Form 10-Q. Subsequent to the issuance of such Form 10-Q, and in the course
of reviewing its 1998 year-end results in conjunction with its annual audit, the
Company concluded that certain revenues were incorrectly stated during the
first, second, and third quarters of 1998 and 1997. The sales relate to
irrevocable, unconditional, bona fide sales orders that were received within a
quarter but not completely shipped before the end of the quarter. As a result,
the Company's financial statements for the three months and nine months ended
September 30, 1998 and 1997 have been restated from the amounts previously
reported to reflect the timing of certain sales between quarters.
2
<PAGE> 3
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)
Assets (As restated, see Note 9)
<S> <C> <C>
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 43,500 44,890
Inventories 63,561 37,525
Deferred tax assets 1,817 1,615
Prepaid expenses and other current assets 3,656 1,324
--------- ---------
Total current assets 128,805 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 $ 273,560 $ 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 14,910 10,578
--------- ---------
Total current liabilities 32,833 41,862
Long-term debt, less current portion 43,449 100,267
--------- ---------
Total liabilities 76,332 142,129
--------- ---------
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 (124,801) (143,506)
--------- ---------
Total shareholders' equity 197,228 30,881
--------- ---------
TOTAL $ 273,560 $ 173,010
========= =========
</TABLE>
- ----------
(1) Includes the amounts for the balance sheet of PR Nutrition, Inc., which
was acquired on August 21, 1998 and has been accounted for as a pooling of
interests.
3
<PAGE> 4
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)
(As restated, see Note 9) (As restated, see Note 9)
<S> <C> <C> <C> <C>
NET SALES $ 84,405 $ 51,438 $ 242,457 $ 155,249
COST OF SALES 40,898 29,383 117,713 85,820
--------- --------- --------- ---------
GROSS PROFIT 43,507 22,055 124,744 69,429
OPERATING EXPENSES 27,322 12,099 76,766 34,361
MERGER EXPENSES 1,503 -- 1,503 --
--------- --------- --------- ---------
INCOME FROM OPERATIONS 14,682 9,956 46,475 35,068
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 13,540 6,871 40,836 25,894
PROVISION FOR INCOME TAXES 5,272 2,435 14,838 8,951
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 8,268 4,436 25,998 16,943
EXTRAORDINARY ITEM, NET OF TAX (2,076) -- (4,941) --
--------- --------- --------- ---------
NET INCOME $ 6,192 $ 4,436 $ 21,057 $ 16,943
========= ========= ========= =========
BASIC INCOME PER SHARE
Income Before Extraordinary Item $ 0.25 $ 0.16 $ 0.84 $ 0.60
Extraordinary Item (0.06) -- (0.16) --
--------- --------- --------- ---------
Net Income $ 0.19 $ 0.16 $ 0.68 $ 0.60
========= ========= ========= =========
DILUTED INCOME PER SHARE
Income Before Extraordinary Item $ 0.25 $ 0.16 $ 0.83 $ 0.60
Extraordinary Item (0.06) -- (0.16) --
--------- --------- --------- ---------
Net Income $ 0.19 $ 0.16 $ 0.67 $ 0.60
========= ========= ========= =========
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 $ 13,540 $ 6,871 $ 40,836 $ 25,894
Pro forma provision for income taxes 5,349 2,648 16,005 10,073
--------- --------- --------- ---------
Pro forma income before extraordinary item 8,191 4,223 24,831 15,821
Extraordinary item (2,076) -- (4,941) --
--------- --------- --------- ---------
Pro forma net income $ 6,115 $ 4,223 $ 19,890 $ 15,821
========= ========= ========= =========
Basic income before extraordinary item per share $ 0.25(2) $ 0.15 $ 0.80(2) $ 0.56
========= ========= ========= =========
Diluted income before extraordinary item per share $ 0.25(2) $ 0.15 $ 0.80(2) $ 0.56
========= ========= ========= =========
Basic net income per share $ 0.19 $ 0.15 $ 0.64 $ 0.56
========= ========= ========= =========
Diluted net income per share $ 0.19 $ 0.15 $ 0.64 $ 0.56
========= ========= ========= =========
</TABLE>
(1) Includes the operations of PR Nutrition, Inc., which was acquired on
August 21, 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 $0.28 and $0.28, respectively, and $0.83 and $0.82,
respectively, for the three and the nine months ended September 30, 1998,
respectively.
4
<PAGE> 5
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997(1)
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: (As restated, see Note 9)
<S> <C> <C>
Net income $ 21,057 $ 16,943
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 22 200
Deferred income taxes 2,829 2,895
Changes in operating assets and liabilities:
Accounts receivable 3,272 (619)
Inventories (19,024) (8,999)
Prepaid expenses and other current assets (2,090) (860)
Accounts payable (284) 714
Accrued expenses and other current liabilities 2,680 (684)
-------- --------
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
21, 1998 and has been accounted for as a pooling of interests.
5
<PAGE> 6
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
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 (the "Company") 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.
The following unaudited pro forma information assumes that the acquisition of
Bronson and Changes International (which was acquired in November 1997) had
occurred as of January 1, 1997, including the impact of the amortization expense
associated with intangible assets acquired, increased interest expense on
acquisition debt and related income tax effects. The pro forma operations data
has been prepared for comparative purposes only and does not purport to
represent what the Company's actual results of operations would have been had
the acquisitions, in fact, occurred on January 1, 1997.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1998 1997
---- ----
<S> <C> <C>
Net sales $252,474 $209,330
Income before extraordinary item 27,245 22,016
Basic and diluted income before
extraordinary item per share 0.86 0.73
Diluted weighted average shares
outstanding (in thousands) 31,807 30,094
</TABLE>
6
<PAGE> 7
On August 21, 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. Included in the operating results of the Company for the three and
nine months ended September 30, 1998 are approximately $2,629 and $13,404,
respectively, of net sales and approximately $287 and $3,007, respectively, of
net income of PR prior to the date of acquisition. 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 (a) $53,307 $157,812
======= ========
<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(a) $ 4,987 $ 17,671
======= ========
<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(a) $ 0.18 $ 0.63
======= ========
</TABLE>
(a) Restated amounts do not give effect to the "restatement" described in Note
9.
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 21, 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 and with 1998
information restated for the matter discussed in Note 9, is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets September 30, 1998 December 31, 1997
- ------------------------ ------------------ -----------------
<S> <C> <C>
Assets
Cash $ 3,289 $ 169
Investment in subsidiaries 193,939 30,712
--------- ---------
$ 197,228 $ 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
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C>
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 (124,801) (143,506)
--------- ---------
$ 197,228 $ 30,881
========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Condensed Statements of Income
Equity interest in net income of subsidiaries $ 6,136 $ 4,465 $20,558 $17,100
Interest income 221 2 948 5
------- ------- ------- -------
Income before provision for income taxes 6,357 4,467 21,506 17,105
Provision for income taxes 165 31 449 162
------- ------- ------- -------
Net income $ 6,192 $ 4,436 $21,057 $16,943
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---- ----
<S> <C> <C>
Condensed Statements of Cash Flow
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 21,057 $ 16,943
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries (165,523) (16,940)
--------- ---------
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 (information as of September 30, 1998 and for
the three and nine months ended September 30, 1998 and 1997 restated for the
matter discussed in Note 9) of Twin is as follows:
<TABLE>
<CAPTION>
As of September 30, 1998 As of December 31, 1997
------------------------ -----------------------
<S> <C> <C>
Current assets $125,516 $ 89,398
Noncurrent assets 144,755 83,444
Current liabilities 35,990 45,952
Noncurrent liabilities 43,449 100,267
Shareholder's equity 190,832 26,623
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 84,405 $ 51,438 $242,457 $155,249
Gross profit 43,507 22,055 124,744 69,429
Net income 6,136 4,465 20,558 17,100
</TABLE>
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>
9
<PAGE> 10
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>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Raw Materials $29,616 $16,340
Work in Process 10,717 7,393
Finished Goods 23,228 13,792
------- -------
Total $63,561 $37,525
======= =======
</TABLE>
The increase from December 31, 1997 of $26,036 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 includes the
potential common 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 potential 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
10
<PAGE> 11
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.
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.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998. For
the nine months ended September 30, 1998 there were 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". The Company is
currently evaluating the disclosure requirements of SFAS No.131. SFAS No.s 132
and 133 are not expected to have a material impact on the Company's financial
statements.
9. RESTATEMENT
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998, and in the course of reviewing
its 1998 year-end results in conjunction with its annual audit, the Company
concluded that certain revenues were incorrectly stated during the first,
second, and third quarters of 1998 and 1997. The sales relate to irrevocable,
unconditional, bona fide sales orders that were received within a quarter but
not completely shipped before the end of the quarter. As a result, the Company's
financial statements for the three months and nine months ended September 30,
11
<PAGE> 12
1998 and 1997 have been restated from the amounts previously reported to reflect
the timing of certain sales between quarters. The effect of the restatement is
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
As Previously As As Previously As
Reported Restated Reported (a) Restated
-------- -------- ------------ --------
<S> <C> <C> <C> <C>
At September 30:
Accounts receivable $ 54,394 $ 43,500
Inventories 58,081 63,561
Accrued expenses and other
current liabilities 17,011 14,910
Accumulated deficit (121,488) (124,801)
For the three months
ended September 30:
Net sales 90,552 84,405 $ 53,307 $ 51,438
Cost of sales 43,766 40,898 30,352 29,383
Provision for income taxes 6,545 5,272 2,784 2,435
Net income 8,198 6,192 4,987 4,436
Pro forma net income 8,121 6,115 4,774 4,223
Basic and diluted net income
per share $ 0.25 $ 0.19 $ 0.18 $ 0.16
Basic and diluted pro forma net
Income per share $ 0.25 $ 0.19 $ 0.17 $ 0.15
For the nine months ended
September 30:
Net sales 253,351 242,457 157,812 155,249
Cost of sales 123,193 117,713 87,192 85,820
Provision for income taxes 16,939 14,838 9,414 8,951
Net income 24,370 21,057 17,671 16,943
Pro forma net income 23,203 19,890 16,549 15,821
Basic net income per share $ 0.78 $ 0.68 $ 0.63 $ 0.60
Diluted net income per share $ 0.78 $ 0.67 $ 0.63 $ 0.60
Basic pro forma net income
per share $ 0.75 $ 0.64 $ 0.59 $ 0.56
Diluted pro forma net income
per share $ 0.74 $ 0.64 $ 0.59 $ 0.56
</TABLE>
(a) Amounts reflect the acquisition of PR Nutrition, which was accounted for
as a pooling-of-interests.
12
<PAGE> 13
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 currently 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 21, 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.
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998, and in the course of reviewing
its 1998 year-end results in conjunction with its annual audit, the Company
concluded that certain revenues were incorrectly stated during the first,
second, and third quarters of 1998 and 1997. The sales relate to irrevocable,
unconditional, bona fide sales orders that were received within a quarter but
not completely shipped before the end of the quarter. As a result, the Company's
financial statements for the three months and nine months ended September 30,
1998 and 1997 have been restated from the amounts previously reported to reflect
the timing of certain sales between quarters.
13
<PAGE> 14
RESULTS OF OPERATIONS
Recent Trends
The reduction in net sales for the three months ended September 30, 1998 due to
the restatement of the Company's financial statements for the three and nine
months ended September 30, 1998 (See Note 9 of Notes to Consolidated Unaudited
Financial Statements) resulted in an increase in net sales that were recorded in
the fourth quarter of 1998. As the Company noted in its press release dated
February 24, 1999, which announced unaudited results for the year ended December
31, 1998, "with respect to the first quarter of 1999, we now believe that sales
will trail somewhat the adjusted first quarter of 1998 and that net income for
the quarter will be significantly below last year." Despite the fact that
reported net sales for the fourth quarter of 1998 were greater than reported net
sales for the third quarter of 1998, the Company believes that such trend is not
properly indicative of the reduced incoming sales order activity the Company
experienced in the fourth quarter of 1998.
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 $242.5
million, an increase of $87.3 million, or 56.2%, as compared to net sales of
$155.2 million for the nine months ended September 30, 1997. TWINLAB brand net
sales contributed $117.2 million, an increase of $7.6 million, or 7.0% as
compared to $109.6 million for the nine months ended September 30, 1997. The
increase in net sales was primarily due to an increase in vitamins and sports
nutrition product sales. Herbal products contributed $55.0 million, an increase
of $26.0 million or 89.6 % 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
$124.7 million, which represented an increase of $55.3 million, or 79.7%, as
compared to $69.4 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.
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 22.1% for the nine
months ended September 30, 1997 to 31.7% 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 21, 1998 acquisition of PR.
Income from Operations: Income from operations was $46.5 million for the nine
months ended September 30, 1998, representing an increase of $11.4 million, or
32.5%, as compared to $35.1 million for the nine months ended September 30,
1997. Income from operations margin decreased
14
<PAGE> 15
to 19.2% of net sales for the nine months ended September 30, 1998, as compared
to 22.6 % 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 $84.4
million, an increase of $33.0 million, or 64.1%, as compared to net sales of
$51.4 million for the three months ended September 30, 1997. Net sales of
Twinlab products were $46.6 million, an increase of $13.2 million or 39.8%, as
compared to $33.4 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 $11.1 million, a decrease of $1.6 million, or 12.8%, 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 36.3% to $6.5 million from
$4.7 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
$0.8 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
$43.6 million, which represented an increase of $21.5 million, or 97.3%, as
compared to $22.1 million for the three months ended September 30, 1997. Gross
profit margin was 51.5% for the three months ended September 30, 1998, as
compared to 42.9% for the three months ended September 30, 1997. The overall
increase in gross profit dollars was attributable to the Company's higher sales
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, 1997. As a
percent of net sales, operating expenses increased from 23.5% for the three
months ended September 30, 1997 to 32.4% 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.
15
<PAGE> 16
Merger Expenses: Merger expenses were $1.5 million for the three months ended
September 30, 1998 as a result of the August 21, 1998 acquisition of PR.
Income From Operations: Income from operations was $14.7 million for the three
months ended September 30,1998, representing an increase of $4.7 million, or
47.5%, as compared to $10.0 million for the three months ended September 30,
1997. Income from operations margin decreased to 17.4 % of net sales for the
three months ended September 30, 1998, as compared to 19.4% 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 $0.3 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 $9.2 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, 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
16
<PAGE> 17
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 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.
17
<PAGE> 18
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 21, 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 a the annual meeting, even though there is no discussion of the proposal
in the proxy statement relating to the 1999 annual meeting of stockholders.
18
<PAGE> 19
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 PR Nutrition, Inc.
A report on Form 8-KA was filed on October 2, 1998, with respect to the
acquisition of PR Nutrition, Inc.
19
<PAGE> 20
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: March 30, 1999
20
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