<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 0-21003
TWINLAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3317986
(State of incorporation) (IRS Employer Identification No.)
150 Motor Parkway, Suite 210, Hauppauge, New York 11788
(Address of principal executive office) (zip code)
(516) 467-3140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
At July 31, 1999, the registrant had 31,860,049 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>
JUNE 30, 1999 DECEMBER 31, 1998
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 14,921 $ 12,489
Accounts receivable, net of allowance for bad
debts of $537 at June 30, 1999 and $502 at
December 31, 1998 46,758 60,254
Inventories 72,748 72,355
Deferred tax assets 2,079 1,629
Prepaid expenses and other current assets 3,725 3,207
--------- ---------
Total current assets 140,231 149,934
Property, plant and equipment, net 42,645 29,551
Deferred tax assets 42,841 45,347
Other assets 60,153 65,186
--------- ---------
TOTAL $ 285,870 $ 290,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 10,525 $ 80
Accounts payable 16,606 30,959
Accrued expenses and other current liabilities 6,682 10,043
--------- ---------
Total current liabilities 33,813 41,082
Long-term debt, less current portion 50,849 43,451
--------- ---------
Total liabilities 84,662 84,533
--------- ---------
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; 32,705,049 shares outstanding as of
June 30, 1999 and December 31, 1998 32,705 32,705
Additional paid-in capital 289,327 289,327
Accumulated deficit (113,061) (116,547)
Treasury stock; 845,000 shares (7,763) --
--------- ---------
Total shareholders' equity 201,208 205,485
--------- ---------
TOTAL $ 285,870 $ 290,018
========= =========
</TABLE>
2
<PAGE> 3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
----- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 74,229 $ 83,336 $ 145,692 $ 158,052
COST OF SALES 37,111 40,160 73,604 76,815
--------- --------- --------- ---------
GROSS PROFIT 37,118 43,176 72,088 81,237
OPERATING EXPENSES 32,789 27,194 63,645 49,444
--------- --------- --------- ---------
INCOME FROM OPERATIONS 4,329 15,982 8,443 31,793
--------- --------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income 109 825 217 926
Interest expense (1,540) (2,260) (2,976) (5,368)
Other 6 16 12 (55)
---------- --------- --------- ---------
(1,425) (1,419) (2,747) (4,497)
--------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES
AND EXTRAORDINARY ITEM 2,904 14,563 5,696 27,296
PROVISION FOR INCOME TAXES 1,100 5,094 2,210 9,566
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 1,804 9,469 3,486 17,730
EXTRAORDINARY ITEM, NET OF $1,816
PROVISION FOR INCOME TAXES -- (2,865) -- (2,865)
--------- --------- --------- ---------
NET INCOME $ 1,804 $ 6,604 $ 3,486 $ 14,865
========= ========= ========= =========
BASIC INCOME PER SHARE
Income Before Extraordinary Item $ 0.06 $ 0.30 $ 0.11 $ 0.59
Extraordinary Item -- (0.09) -- (0.09)
--------- --------- --------- ---------
Net Income $ 0.06 $ 0.21 $ 0.11 $ 0.50
========= ========= ========= =========
DILUTED INCOME PER SHARE
Income Before Extraordinary Item $ 0.06 $ 0.29 $ 0.11 $ 0.58
Extraordinary Item -- (0.09) -- (0.09)
--------- --------- --------- ---------
Net Income $ 0.06 $ 0.20 $ 0.11 $ 0.49
========= ========= ========= =========
Weighted Average Common Shares
Used In Computing Basic Income Per Share 31,914 32,031 32,303 30,261
========= ========= ========= =========
Weighted Average Common Shares
Used In Computing Diluted Income Per Share 31,944 32,327 32,319 30,435
========= ========= ========= =========
PRO FORMA RELATING TO CHANGE IN TAX STATUS:
Historical income before provision for income $ 14,563 $ 27,296
Taxes and extraordinary item 5,660 10,656
--------- ---------
Pro forma provision for income taxes
Pro forma income before extraordinary item per share 8,903 16,640
Extraordinary item (2,865) (2,865)
--------- ---------
Pro forma net income $ 6,038 $ 13,775
========= =========
Basic income before extraordinary item per share $ 0.28 $ 0.55
========= =========
Diluted income before extraordinary item per share $ 0.28 $ 0.55
========= =========
Basic net income per share $ 0.19 $ 0.46
========= =========
Diluted net income per share $ 0.19 $ 0.45
========= =========
</TABLE>
3
<PAGE> 4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,486 $ 14,865
Adjustment to reconcile net income to net cash provided by
operating activities:
Extraordinary item -- 2,865
Depreciation and amortization 3,279 1,957
Bad debt expense 35 22
Deferred income taxes 2,056 1,933
Changes in operating assets and liabilities:
Accounts receivable 13,461 6,912
Inventories (393) (15,317)
Prepaid expenses and other current assets (518) (1,356)
Accounts payable (14,353) (1,003)
Accrued expenses and other current liabilities (3,361) 283
--------- ---------
Net cash provided by operating activities 3,692 11,161
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business -- (56,105)
Acquisition of property, plant and equipment (10,087) (4,899)
Increase in other assets (1,253) (6,552)
--------- ---------
Net cash used in investing activities (11,340) (67,556)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 10,000 --
Proceeds from issuance of debt 8,000 700
Payments of debt (157) (14,102)
Purchase of treasury stock (7,763) --
Net proceeds from second common stock offering -- 147,506
Redemption of senior subordinated notes and related
premium -- (38,325)
Distributions to shareholders -- (2,351)
Proceeds from exercise of stock options -- 75
Principal payments of capital lease obligations -- (77)
--------- ---------
Net cash provided by financing activities 10,080 93,426
--------- ---------
Net increase in cash and cash equivalents 2,432 37,031
Cash and cash equivalents at beginning of period 12,489 4,212
--------- ---------
Cash and cash equivalents at end of period $ 14,921 $ 41,243
========= =========
Supplemental disclosures of cash flow information: Cash paid during the
periods for:
Interest $ 2,674 $ 4,796
========= =========
Income taxes $ 2,079 $ 8,996
========= =========
</TABLE>
4
<PAGE> 5
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
June 30, 1999, the results of its operations for the three months and
six months ended June 30, 1999 and 1998, and its cash flows for the six
months ended June 30, 1999 and 1998 in conformity with generally
accepted accounting principles for the interim financial information
applied on a consistent basis. The results of operations for the three
months and six months ended June 30, 1999 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, 1998 Annual Report to Stockholders on Form 10-K as filed with the
Securities and Exchange Commission.
2. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
The Company's amended revolving credit facility and restrictive
covenants contained in the indenture governing the senior subordinated
notes restrict the payment of dividends and the making of loans,
advances or other distributions to Twinlab by any of its subsidiaries
except in certain limited circumstances. The condensed financial
information of Twinlab, on a stand-alone basis is as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash $ 331 $ 323
Investment in subsidiaries 200,877 205,162
--------- ---------
$ 201,208 $ 205,485
========= =========
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; 32,705,049 outstanding as
of June 30, 1999 and December 31, 1998 32,705 32,705
Additional paid-in capital 289,327 289,327
Accumulated deficit (113,061) (116,547)
Treasury stock; 845,000 shares (7,763) --
--------- ---------
$ 201,208 $ 205,485
========= =========
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
Equity interest in net income of subsidiaries $ 1,833 $ 6,136 $ 3,540 $14,422
Operating expenses (96) -- (96) --
Interest income 4 725 8 727
------- ------- ------- -------
Income before provision for income taxes 1,741 6,861 3,452 15,149
Provision for (benefit from) income taxes (63) 257 (34) 284
------- ------- ------- -------
Net income $ 1,804 $ 6,604 $ 3,486 $14,865
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
--------- ---------
<S> <C> <C>
CONDENSED STATEMENTS OF CASH FLOW
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,486 $ 14,865
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries 4,285 (129,871)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (7,763) --
Net proceeds from second common stock offering -- 147,506
Proceeds from the exercise of stock options -- 75
--------- ---------
Net cash (used in) provided by financing activities (7,763) 147,581
--------- ---------
Net increase in cash and cash equivalents 8 32,575
Cash and cash equivalents at beginning of period 323 169
--------- ---------
Cash and cash equivalents at end of period $ 331 $ 32,744
========= =========
</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; and Twin has no other 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 unaudited financial information as of June 30, 1999 and December 31,
1998 and for the three and six months ended June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
AS OF JUNE 30, 1999: TWIN ARP INTERNATIONAL INC. INC. NUTRITION
- -------------------- ---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 144,655 $1,491 $ 12,337 $ 9,034 $ 5,389 $ 5,033
Noncurrent assets 145,639 184 12,031 38,705 7,333 238
Current liabilities 33,813 459 5,208 1,844 1,044 2,278
Noncurrent liabilities 50,849 -- -- -- -- --
Shareholder's equity 205,632 1,216 19,160 45,895 11,678 2,993
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
AS OF DECEMBER 31, 1998: TWIN ARP INTERNATIONAL INC. INC. NUTRITION
- ------------------------ ---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Current assets $149,611 $ 1,571 $ 9,008 $ 7,279 $ 4,295 $ 3,373
Noncurrent assets 140,084 186 12,520 39,566 7,491 417
Current liabilities 44,152 470 3,575 1,417 356 1,916
Noncurrent liabilities 43,451 -- -- -- -- --
Shareholder's equity 202,092 1,287 17,953 45,428 11,430 1,874
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
TWIN ARP INTERNATIONAL INC. INC. NUTRITION
---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $74,229 $ 1,182 $12,933 $ 3,790 $ 3,865 $ 5,047
Gross profit 37,118 203 10,926 2,210 662 3,274
Net income (loss) 1,833 (92) 544 319 190 805
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
TWIN ARP INTERNATIONAL INC. INC. NUTRITION
---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $83,336 $ 1,235 $13,482 $ 2,755 $ 1,811 $ 5,713
Gross Profit 43,176 329 11,274 1,508 456 3,994
Net Income 6,136 109 1,124 210 158 1,411
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
TWIN ARP INTERNATIONAL INC. INC. NUTRITION
---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $145,692 $ 2,397 $ 25,199 $ 8,120 $ 7,459 $ 10,325
Gross profit 72,088 544 21,343 4,485 1,097 6,740
Net income (loss) 3,540 (71) 1,207 467 248 1,119
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998:
<TABLE>
<CAPTION>
BRONSON HEALTH
CHANGES LABORATORIES FACTORS PR
TWIN ARP INTERNATIONAL INC. INC. NUTRITION
---- --- ------------- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales $158,052 $ 2,578 $ 26,048 $ 2,755 $ 1,811 $ 10,775
Gross profit 81,237 674 21,524 1,508 456 7,526
Net income 14,422 238 2,084 210 158 2,719
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31,1998
------------- ----------------
<S> <C> <C>
Raw Materials $ 36,085 $ 36,257
Work in Process 7,945 11,337
Finished Goods 28,718 24,761
------------ ------------
Total $ 72,748 $ 72,355
============ ============
</TABLE>
7
<PAGE> 8
4. ACQUISITION
On April 30, 1998 the Company acquired substantially all of the assets
and assumed certain liabilities of the Bronson Division of Jones Medical
Industries, Inc. The purchase price was approximately $56.1 million,
including related fees and expenses. Bronson manufactures, markets and
distributes a line of over 350 vitamins, herbs, nutritional supplements
and health and beauty aids, which are sold under the Bronson(R) name
through catalogs and direct mailings to customers, including healthcare
and nutritional professionals and mail order and retail customers. This
transaction has been accounted for as a purchase.
The following unaudited pro forma information assumes that the
acquisition of Bronson had occurred as of January 1, 1998, including the
impact of the amortization expense associated with intangible assets
acquired, 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 acquisition, in fact, occurred on January 1, 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------
<S> <C>
Net sales $ 168,069
Income before extraordinary item $ 18,977
Basic and diluted income before
extraordinary item per share $ 0.61
Diluted weighted average shares
outstanding (in thousands) 31,302
</TABLE>
5. NET INCOME PER SHARE
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
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 June 30,
1999 and 1998 were 31,914,000 and 32,031,000, respectively, and for the
six months ended June 30, 1999 and 1998 were 32,303,000 and 30,261,000,
respectively.
Additionally, for the diluted calculation, 30,000 and 296,000 of
potential common shares were included for the three months ended June 30,
1999 and 1998, respectively and 16,000 and 174,000 were included for the
six months ended June 30, 1999 and 1998, respectively.
6. STOCK PLAN
On June 17, 1999, the shareholders of the Company approved the Twinlab
Corporation 1999 Stock Incentive Plan for Outside Directors (the "Stock
Plan"). The Stock Plan provides for the granting of up to an aggregate
of 65,000 shares of common stock, subject to adjustment in the event of
certain capital changes as defined in the Stock Plan. Shares issued
under the Stock Plan may either be authorized but unissued shares of
common stock or treasury shares of common stock. The Stock Plan provides
for the grant to participants of nonqualified stock options ("Options")
and restricted shares of common stock ("Restricted Stock", and
collectively with options, "Awards"). Awards will be granted each year
as of the day following the day the Company's annual meeting takes place
to individuals who qualify as participants as of such date.
8
<PAGE> 9
7. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
1998. For the three and six months ended June 30, 1999 and 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. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 is not expected to have a material impact on the Company's financial
statements.
8. OPERATING SEGMENTS
The Company has four reportable segments: TWINLAB division; Herbal
Supplements and Teas division; Changes International division; and
Bronson division. The Company manufactures and markets nutritional
products, including a complete line of vitamins, herbs, nutraceuticals,
antioxidants, fish and marine oils, and sports nutrition supplements
through its Twinlab division; a full line of herbs, phytonutrients, and
teas through its Herbal Supplements and Teas division; a line of
specially formulated nutritional supplements through its Changes
International division; and a line of vitamins, herbs, nutritional
supplements and health and beauty aids through its Bronson division.
Segment information for the three and six months ended June 30, 1999 and
1998 was as follows:
<TABLE>
<CAPTION>
HERBAL
SUPPLEMENTS CHANGES
TWINLAB AND TEAS INTERNATIONAL BRONSON INTERCOMPANY
DIVISION DIVISION DIVISION DIVISION OTHER (1) ELIMINATION TOTAL
-------- -------- -------- -------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
JUNE 30, 1999
Net sales from
external Customers $ 40,639 $ 8,017 $ 12,933 $ 6,537 $ 6,103 $ -- $ 74,229
Intersegment net sales -- -- -- -- 126 (126) --
Income from operations 232 1,350 855 823 1,069 0 4,329
Total assets 161,389 67,568 24,368 59,179 7,278 (33,910) 285,870
THREE MONTHS ENDED
JUNE 30, 1998
Net sales from
external customers $ 39,734 $ 18,775 $ 13,482 $ 4,565 $ 6,780 $ -- $ 83,336
Intersegment net sales 1,194 6 -- -- 168 (1,368) --
Income from operations 6,479 5,495 1,800 602 1,606 -- 15,982
Total assets 141,621 49,278 19,745 59,719 37,916 (21,702) 286,577
SIX MONTHS ENDED
JUNE 30, 1999
Net sales from
external customers $ 77,426 $ 17,145 $ 25,199 $ 13,462 $ 12,460 $ -- $ 145,692
Intersegment net sales 33 2,510 -- -- 262 (2,805) --
Income from operations 127 3,636 1,911 1,156 1,613 -- $ 8,443
SIX MONTHS ENDED
JUNE 30, 1998
Net sales from
external customers $ 70,554 $ 43,863 $ 26,048 $ 4,565 $ 13,022 $ -- $ 158,052
Intersegment net sales 3,336 8 -- -- 331 (3,675) --
Income from operations 9,955 14,761 3,343 602 3,132 -- 31,793
</TABLE>
[1] The "other" column includes corporate-related items and the results of two
divisions, PR Nutrition and ARP, whose segment information is below the
reportable quantitative thresholds. The Company markets nutritionally enhanced
food bars and other nutritional products through PR Nutrition and publishes a
sports fitness magazine and health and fitness-related books, audios and
newsletters through ARP.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report. The Company operates through five
primary business divisions: the TWINLAB division, the Herbal Supplements and
Teas division, the Changes International division, the Bronson division and the
PR*Nutrition division. Products sold by the TWINLAB division include vitamins,
minerals, amino acids, herbs, sports nutrition products and special formulas
primarily under the TWINLAB brand name. The Herbal Supplements and Teas division
produces and markets a full line of herbal supplements and phytonutrients
marketed under the Nature's Herbs and HealthCare Naturals brands and a full line
of herb teas marketed under the Alvita brand. The Company's network marketing
activities are conducted through Changes International. The Bronson division,
acquired effective April 30, 1998, markets vitamins, herbs, nutritional
supplements and health and beauty aids through its Bronson catalog, and also
manufactures through Health Factors, private label vitamins and supplements for
a number of other companies on a contract marketing basis. The PR* Nutrition
division markets nutritionally enhanced food bars marketed under the PR*Bar and
Ironman Triathlon trademarks. The Company's publishing activities are conducted
through ARP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
TWINLAB Division $ 40.6 54.8% $ 39.7 47.7% $ 77.4 53.1% $ 70.6 44.6%
Herbal Supplements
And Teas Division 8.0 10.8 18.8 22.5 17.2 11.8 43.9 27.8
Changes Int'l Division 12.9 17.4 13.4 16.1 25.2 17.3 26.0 16.5
Bronson Division 6.5 8.8 4.6 5.5 13.5 9.2 4.6 2.9
PR Nutrition Division 5.1 6.8 5.7 6.9 10.3 7.1 10.8 6.8
Publishing Division 1.1 1.4 1.1 1.3 2.1 1.5 2.2 1.4
------ ------ ------ ------ ------ ------ ------ ------
Total Net Sales 74.2 100.0 83.3 100.0 145.7 100.0 158.1 100.0
Gross Profit 37.1 50.0 43.2 51.8 72.1 49.5 81.2 51.4
Operating Expenses 32.8 44.2 27.2 32.6 63.7 43.7 49.4 31.3
------ ------ ------ ------ ------ ------ ------ ------
Income from Operations $ 4.3 5.8% $ 16.0 19.2% $ 8.4 5.8% $ 31.8 20.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET SALES: Net sales for the six months ended June 30, 1999 were $145.7 million,
a decrease of $12.4 million, or 7.8%, as compared to net sales of $158.1 million
for the six months ended June 30, 1998. Net sales at the TWINLAB division
contributed $77.4 million, an increase of $6.8 million, or 9.7% as compared to
$70.6 million for the six months ended June 30, 1998. The increase in net sales
was primarily due to an increase in sports nutrition and special formula product
sales. Sales of the Herbal Supplements and Teas division contributed $17.2
million, a decrease of $26.7 million or 60.9 % as compared to $43.9 million for
the six months ended June 30, 1998. The Herbal Supplements and Teas division was
impacted by the weakness of the herbal category in both the mass market and
health and natural food store channels. The herbal category for the first half
of 1999 cycled against a particularly tough 1998 comparison, which benefited
from substantial sales of St. John's Wort and other herbal products. The Changes
International division contributed $25.2 million to net sales for the six months
ended June 30, 1999 as compared to $26.0 million in the six months ended June
30, 1998. The Bronson division, which was acquired effective April 30, 1998,
contributed $13.5 million to net sales for the six months
10
<PAGE> 11
ended June 30, 1999 as compared to $4.6 million for the six months ended June
30, 1998. The PR Nutrition division contributed $10.3 million, as compared to
$10.8 million for the six months ended June 30, 1998. Publishing activities
contributed $2.1 million as compared to $2.2 million for the six months ended
June 30, 1998.
GROSS PROFIT: Gross profit for the six months ended June 30, 1999 was $72.1
million, which represented a decrease of $9.1 million, or 11.3%, as compared to
$81.2 million for the six months ended June 30, 1998. Gross profit margin was
49.5% for the six months ended June 30, 1999 as compared to 51.4% for the six
months ended June 30, 1998. The overall decrease in gross profit dollars was
attributable to the Company's lower sales volume for the six months ended June
30, 1999. The decrease in gross profit margin for the six months ended June 30,
1999, as compared to the six months ended June 30, 1998, was due primarily to a
decline in gross margins on sales of herbal products and lower average selling
prices and higher product costs on certain vitamins, minerals and supplements.
In addition, in the first quarter of 1999, the Company wrote-off approximately
$1.2 million in product labels made obsolete by new federal regulations.
OPERATING EXPENSES: Operating expenses were $63.7 million for the six months
ended June 30, 1999, representing an increase of $14.3 million, or 28.7%, as
compared to $49.4 million for the six months ended June 30, 1998. As a percent
of net sales, operating expenses increased from 31.3% for the six months ended
June 30, 1998 to 43.7% for the six months ended June 30, 1999. The increase in
operating expenses and operating expenses as a percent of net sales was
primarily attributable to increased selling and marketing expenses, comprised
primarily of an increase in the Company's advertising and promotional expenses
and higher general and administrative expenses as a result of the Company adding
to its infrastructure.
INCOME FROM OPERATIONS: Income from operations was $8.4 million for the six
months ended June 30, 1999, representing a decrease of $23.4 million, or 73.4%,
as compared to $31.8 million for the six months ended June 30, 1998. Income from
operations margin decreased to 5.8% of net sales for the six months ended June
30, 1999, as compared to 20.1% of net sales for the six months ended June 30,
1998. The decrease in income from operations and income from operations margin
was primarily due to higher operating expenses as well as the Company's lower
sales and gross margins. Income from operations was also impacted by one-time
charges in the first half of 1999, consisting of a $1.2 million charge relating
to the write-off of label inventory and a $0.5 million charge for severance
costs.
OTHER EXPENSE: Other expense was $2.7 million for the six months ended June 30,
1999, as compared to $4.5 million for the six months ended June 30, 1998. The
net decrease of $1.8 million is primarily due to decreased interest expense of
$2.4 million, as a result of reduced debt levels offset by a decrease in
interest income of $0.7 million.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES: Net sales for the three months ended June 30, 1999 were $74.2
million, a decrease of $9.1 million, or 10.9%, as compared to net sales of $83.3
million for the three months ended June 30, 1998. Net sales at the TWINLAB
division contributed $40.6 million, an increase of $0.9 million, or 2.2% as
compared to $39.7 million for the three months ended June 30, 1998. The increase
in net sales was primarily due to an increase in sports nutrition and special
formula product sales. Sales of the Herbal Supplements and Teas division
contributed $8.0 million, a decrease of $10.8 million or 57.3% as compared to
$18.8 million for the three months ended June 30, 1998. The Herbal Supplements
and Teas division was impacted by the weakness of the herbal category in both
the mass market and health and natural food store channels. The herbal category
for the three months ended June 30, 1999 cycled against a particularly tough
1998 comparison, which benefited from substantial sales of St. John's Wort and
other herbal products. The Changes International division contributed $12.9
million to net sales for the three months ended June 30, 1999 as compared to
$13.4 million in the three months ended June 30, 1998. The Bronson division,
which was acquired effective April 30, 1998, contributed $6.5 million to net
sales for the three months ended June 30, 1999 as compared to $4.6 million in
the three months ended June 30, 1998. The PR Nutrition division contributed $5.1
million as compared to $5.7 million for the three months ended June 30, 1998.
Publishing activities contributed $1.1 million for the three months ended June
30, 1999 and 1998.
11
<PAGE> 12
GROSS PROFIT: Gross profit for the three months ended June 30, 1999 was $37.1
million, which represented a decrease of $6.1 million, or 14.0%, as compared to
$43.2 million for the three months ended June 30, 1998. Gross profit margin was
50.0% for the three months ended June 30, 1999, as compared to 51.8% for the
three months ended June 30, 1998. The overall decrease in gross profit dollars
was primarily attributable to the Company's lower sales volume for the three
months ended June 30, 1999. The decrease in gross profit margin for the three
months ended June 30, 1999 as compared to the three months ended June 30, 1998
was due primarily to a decline in gross margins on sales of herbal products and
lower average selling prices and higher product costs on certain vitamins,
minerals and supplements.
OPERATING EXPENSES: Operating expenses were $32.8 million for the three months
ended June 30, 1999, representing an increase of $5.6 million, or 20.6%, as
compared to $27.2 million for the three months ended June 30, 1998. As a percent
of net sales, operating expenses increased from 32.6% for the three months ended
June 30, 1998 to 44.2% for the three months ended June 30, 1999. The increase in
operating expenses and operating expenses as a percent of net sales was
primarily attributable to increased selling and marketing expenses comprised
primarily of an increase in the Company's advertising and promotional expenses.
INCOME FROM OPERATIONS: Income from operations was $4.3 million for the three
months ended June 30, 1999, representing a decrease of $11.7 million, or 72.9%
as compared to $16.0 million for the three months ended June 30, 1998. Income
from operations margin decreased to 5.8% of net sales for the three months ended
June 30, 1999, as compared to 19.2% of net sales for the three months ended June
30, 1998. The decrease in income from operations and income from operations
margin was primarily due to higher operating expenses as well as the Company's
lower sales and gross margin.
OTHER EXPENSE: Other expense was $1.4 million for the three months ended June
30, 1999 and 1998. Interest expense decreased $0.7 million as a result of
reduced debt levels which was offset by a decrease of $0.7 million in interest
income.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1999, cash provided by operating activities
was $3.7 million as compared to $11.2 million for the six months ended June 30,
1998.
Capital expenditures were $10.1 million and $4.9 million for the six months
ended June 30, 1999 and 1998, respectively. In addition, during the six months
ended June 30, 1999 approximately $4.8 million of deposits on equipment expended
in 1998 (included in other assets) were transferred into property, plant and
equipment as the related assets were placed into service. Capital expenditures
were primarily for the purchase of production equipment to expand capacity or
improve manufacturing efficiency and include $4.5 million for the expansion of
the Utah facility. Capital expenditures are expected to be approximately $12.0
million during 1999. The Company estimates that its historical level of
maintenance capital expenditures has been approximately $0.5 million per fiscal
year.
Net cash provided by financing activities was $10.1 million for the six months
ended June 30, 1999 and resulted primarily from borrowings under the Company's
Revolving Credit Facility ($10 million) and mortgage financing of the Utah plant
expansion ($8 million) offset by $7.8 million of treasury stock purchases.
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.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and actively pursue its business strategy for the next 18
12
<PAGE> 13
to 24 months. The Company's capital resources and liquidity are expected to be
provided by the Company's cash flow from operations, and borrowings under the
existing $50 million Revolving Credit Facility. As of June 30, 1999,
approximately $40.0 million of borrowings were available under the Revolving
Credit Facility for working capital requirements and general corporate purposes.
On February 25, 1999, the Company announced that its Board of Directors had
approved a share repurchase program authorizing the Company to buy up to 5
million shares of its Common Stock. The Company has obtained the required
waivers under its $50 million Revolving Credit Agreement to engage in purchases
and intends to use funds available under the agreement and internally generated
cash to purchase such shares. The Company may purchase Common Stock from time to
time in the open market and in individually negotiated transactions. The amount
and timing of any purchase will be dependent upon a number of factors, including
the price and availability of the Company's shares and general market
conditions. As of June 30, 1999, the Company had purchased 845,000 shares at a
total cost of $7.8 million.
One of the Company's business strategies is to pursue acquisition opportunities
that complement or extend its existing products or product lines, 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. As of June 30, 1999 up to $35.0 million of borrowings under
the Revolving Credit Facility was available to fund acquisitions. There can be
no assurance that the Company will be able to make acquisitions on terms
favorable to the Company and that funds to finance an acquisition will be
available or permitted under the Company's financing instruments.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define a specific year. Absent corrective actions, a
computer program that has date sensitive software may recognize a date using
"00" as the year 1900 instead of the year 2000. This could result in system
failures or miscalculations causing disruptions to various activities and
operations.
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 has surveyed, and continues to communicate 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 ongoing information exchange, the Company believes it has identified
substantially all 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. Management has initiated a Company-wide
program to prepare the Company's internal computer systems for Year 2000
compliance which is currently anticipated to be completed by September 1, 1999.
The Company expects to incur internal staff costs as well as other expenses
necessary during the course of such compliance efforts and the Company expects
to both replace some systems and upgrade others. The total cost of this effort
is estimated to be in the range of $150,000 - $250,000. 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 which the Company transacts
business to adequately address their internal 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. These forward-looking statements involve certain
significant risks and uncertainties, and actual results may differ materially
from the forward-looking statements. For further details and discussion of these
risks and uncertainties see Twinlab Corporation's SEC filings including, but not
limited to, its annual report on Form 10-K. 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
13
<PAGE> 14
results covered in such forward-looking statements. The Company does not
undertake to publicly update or revise any of its forward-looking statements
even if experience or future changes show that the indicated results or events
will not be realized.
14
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDING
In late 1998 and early 1999, several shareholder class action lawsuits were
filed in the United States District Court for the Eastern District of New York
against the Company, certain of its officers and directors,and others. The
plaintiffs generally alleged that the Company and the other defendants violated
various provisions of the federal securities laws by making material
misstatements and failing to state material facts about the Company's business
and financial condition, among other things, in securities filings and public
statements. On May 12, 1999, the complaints were consolidated into a single
action that is currently pending in the United States District Court for the
Eastern District of New York purported on behalf of all buyers of the Company's
stock from April 8, 1998 through February 24, 1999, other than the defendants,
their families and entities controlled by or affiliated with the defendants.
The Company intends to vigorously defend itself against these securities law
litigations. It is premature, however, to determine the effect, if any, such
actions may have on the Company's consolidated financial position, results of
operations or liquidity.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on June
17,1999, at which meeting the stockholders voted to elect directors of the
Company, approve the Twinlab Corporation 1999 Stock Incentive Plan For
Outside Directors and ratify the appointment of Deloitte & Touche LLP as
the Company's independent auditors for the fiscal year ending December 31,
1999.
The results of the matters voted on the Annual Meeting are shown below.
(b) The nominees for election as directors of the Company are listed below,
together with the number of votes cast for, against, and withheld with
respect to each such nominee, as well as the number of non-votes with
respect to each such nominee:
<TABLE>
<CAPTION>
NOMINEE FOR AGAINST WITHHELD NON-VOTING
------- --- ------- -------- ----------
<S> <C> <C> <C> <C>
Brian Blechman 26,821,797 0 472,371 5,410,881
Dean Blechman 26,819,777 0 474,391 5,410,881
Neil Blechman 26,819,977 0 474,191 5,410,881
Ross Blechman 26,823,682 0 470,486 5,410,881
Steve Blechman 26,821,797 0 472,371 5,410,881
John G. Danhakl 26,854,037 0 440,131 5,410,881
Jonathan D. Sokoloff 26,852,987 0 441,181 5,410,881
Stephen Welling 26,852,477 0 441,691 5,410,881
</TABLE>
c) Other matters voted upon at the meeting and the results of those votes are as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTING
--- ------- ------- ----------
<S> <C> <C> <C> <C>
Approval of the Twinlab Corporation 1999
Stock Incentive Plan for Outside Directors 24,476,740 2,733,674 83,754 5,410,881
Ratification of Deloitte & Touche LLP as
the Company's independent auditors 27,209,986 53,572 30,610 5,410,881
</TABLE>
15
<PAGE> 16
ITEM 5: OTHER INFORMATION
On July 27, 1999, the Company announced the appointment of John H. Bolt,
age 46, as Chief Financial Officer. Mr. Bolt spent 14 years at Kellogg
Company where he was most recently, Vice President and Corporate
Treasurer.
Also on July 27, 1999, the Company announced the election of two new
outside members to the Board of Directors. William U. Westerfield age 68,
will serve as Chairman of the Company's Audit Committee. Until his
retirement, Mr. Westerfield served as an auditing partner at Price
Waterhouse LLP (now PriceWaterhouseCoopers).
Robert Apatoff, age 41, was also elected to the Twinlab Board on
July 27, 1999. Mr. Apatoff is currently Vice President of Corporate
Marketing for Aetna, Inc.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June 30,
1999.
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 H. Bolt
-----------------------------------------------
John H. Bolt
Chief Financial Officer
DATED: August 13, 1999
------------------
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,921
<SECURITIES> 0
<RECEIVABLES> 47,295
<ALLOWANCES> 537
<INVENTORY> 72,748
<CURRENT-ASSETS> 140,231
<PP&E> 54,628
<DEPRECIATION> 11,983
<TOTAL-ASSETS> 285,870
<CURRENT-LIABILITIES> 33,813
<BONDS> 0
0
0
<COMMON> 32,705
<OTHER-SE> 168,503
<TOTAL-LIABILITY-AND-EQUITY> 285,870
<SALES> 145,692
<TOTAL-REVENUES> 145,692
<CGS> 73,604
<TOTAL-COSTS> 73,604
<OTHER-EXPENSES> 63,645
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,976
<INCOME-PRETAX> 5,696
<INCOME-TAX> 2,210
<INCOME-CONTINUING> 3,486
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,486
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
