<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 March 31, 1998
Commission file number 0-21003
TWINLAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3317986
(State of incorporation) (I.R.S. Employer Identification No.)
150 Motor Parkway, Suite 210, Hauppauge, NY 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 April 30, 1998, the registrant had 31,551,049 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 March 31, 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 ended March 31, 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 except share and per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997(1)
-------------- --------------------
(unaudited)
(As restated,
see Note 6)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 8,045 $ 4,212
Accounts receivable, net of allowance for bad
debts of $423 at March 31, 1998 and $467 at
December 31, 1997 39,006 44,890
Inventories 50,093 37,525
Deferred tax assets 1,196 1,615
Prepaid expenses and other current assets 1,780 1,324
--------- ---------
Total current assets 100,120 89,566
Property, plant and equipment, net 14,376 14,263
Deferred tax assets 47,740 48,777
Other assets 22,442 20,404
--------- ---------
Total $ 184,678 $ 173,010
========= =========
Liabilities and shareholders' equity
Current Liabilities:
Current portion of long-term debt $ 10,174 $ 14,112
Accounts payable 20,835 17,172
Accrued expenses and other current liabilities 15,024 10,578
--------- ---------
Total current liabilities 46,033 41,862
Long-term debt, less current portion 100,259 100,267
--------- ---------
Total liabilities 146,292 142,129
--------- ---------
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; 28,471,900
shares
outstanding as of March 31, 1998 and 28,470,100 shares
outstanding as of
December 31, 1997 28,472 28,470
Additional paid-in capital 145,948 145,917
Accumulated deficit (136,034) (143,506)
--------- ---------
Total shareholders' equity 38,386 30,881
--------- ---------
Total $ 184,678 $ 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
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997(1)
---- ----
(unaudited)
(As restated, see Note 6)
<S> <C> <C>
NET SALES $ 74,716 $ 50,575
COST OF SALES 36,655 27,643
-------- --------
GROSS PROFIT 38,061 22,932
OPERATING EXPENSES 22,250 11,505
-------- --------
INCOME FROM OPERATIONS 15,811 11,427
OTHER (EXPENSE) INCOME:
Interest income 101 47
Interest expense (3,108) (3,046)
Other (71) 6
-------- --------
(3,078) (2,993)
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 12,733 8,434
PROVISION FOR INCOME TAXES 4,472 2,721
-------- --------
NET INCOME $ 8,261 $ 5,713
======== ========
BASIC NET INCOME PER SHARE $ 0.29 $ 0.20
======== ========
DILUTED NET INCOME PER SHARE $ 0.29 $ 0.20
======== ========
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING BASIC INCOME PER SHARE 28,471 28,150
======== ========
WEIGHTED AVERAGE COMMON SHARES USED IN
COMPUTING DILUTED INCOME PER SHARE 28,523 28,166
======== ========
Pro forma relating to change in tax status:
Historical income before provision
for income taxes $ 12,733 $ 8,434
Pro forma provision for income taxes 4,996 3,331
-------- --------
Pro forma net income $ 7,737 $ 5,103
======== ========
Basic net income per share $ 0.27 $ 0.18
======== ========
Diluted net income per share $ 0.27 $ 0.18
======== ========
</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.
4
<PAGE> 5
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands of dollars)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997(1)
---- ----
(unaudited)
(As restated, see Note 6)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,261 $ 5,713
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 744 483
Bad debt expense 6 222
Deferred income taxes 1,456 1,308
Changes in operating assets and liabilities:
Accounts receivable 5,878 1,598
Inventories (12,568) (8,407)
Prepaid expenses and other current assets (456) (191)
Accounts payable 3,663 4,693
Accrued expenses and other current liabilities 4,457 560
-------- --------
Net cash provided by operating activities 11,441 5,979
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (452) (2,323)
(Increase) decrease in other assets (2,443) 569
-------- --------
Net cash used in investing activities (2,895) (1,754)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt 400 --
Distributions to shareholders (789) (843)
Issuance of Common Stock 22 --
Payments of debt (4,310) (5,024)
Principal payments of capital lease obligations (36) (36)
-------- --------
Net cash used in financing activities (4,713) (5,903)
-------- --------
Net increase (decrease) in cash and cash equivalents 3,833 (1,678)
Cash and cash equivalents at beginning of period 4,212 3,955
-------- --------
Cash and cash equivalents at end of period $ 8,045 $ 2,277
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 375 $ 272
======== ========
Income taxes $ 1,544 $ 1,314
======== ========
</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.
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
March 31, 1998, the results of its operations for the three months and
nine months ended March 31, 1998 and 1997, and its cash flows for the
three months ended March 31, 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 ended March 31, 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 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. The following is a
reconciliation of certain restated amounts with amounts previously
reported:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------- ---------------------------------
<S> <C> <C>
Revenues:
As previously reported $73,451 $51,169
Effect of PR pooling-of-interest 5,062 4,455
------- -------
As restated (a) $78,513 $55,624
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------- ---------------------------------
<S> <C> <C>
Net Income:
As previously reported $ 7,987 $ 5,667
Effect of PR pooling-of-interest 1,308 1,499
------- -------
As restated(a) $ 9,295 $ 7,166
======= =======
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998 Three Months Ended March 31, 1997
--------------------------------- ---------------------------------
<S> <C> <C>
Diluted Income Per Share:
As previously reported $ 0.29 $ 0.21
Effect of PR pooling-of-interest 0.04 0.04
------- -------
As restated(a) $ 0.33 $ 0.25
======= =======
</TABLE>
(a) Restated amounts do not give effect to the "restatement" described
in Note 7.
6
<PAGE> 7
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 Corporation ("Twinlab") by any of 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 7, is as follows:
<TABLE>
<CAPTION>
Condensed Balance Sheets March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Assets
Cash $ 171 $ 169
Investment in subsidiaries 38,215 30,712
--------- ---------
$ 38,386 $ 30,881
========= =========
Shareholders' Equity
Preferred stock, $.01 par value
2,000,000 shares authorized; none issued
Common stock, $1.00 par value, $ -- $ --
75,000,000 shares authorized;28,471,900
outstanding as of March 31, 1998 and
28,470,100 outstanding as of
December 31, 1997 28,472 28,470
Additional paid-in capital 145,948 145,917
Accumulated deficit (136,034) (143,506)
--------- ---------
$ 38,386 $ 30,881
========= =========
</TABLE>
<TABLE>
<CAPTION>
Condensed Statements of Income Three Months Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
Equity interest in net income of subsidiaries $ 3,286 $ 5,812
Interest income 2 1
--------- ---------
Income before provision for income taxes 8,288 5,813
Provision for income taxes 27 100
--------- ---------
Net income $ 8,261 $ 5,713
========= =========
</TABLE>
Condensed Statements of Cash Flow
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,261 $ 5,713
CASH FLOWS USED IN INVESTING ACTIVITIES:
Equity investments in subsidiaries (8,281) (5,712)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 22 --
--------- ---------
Net increase in cash 2 1
Cash at beginning of period 169 162
--------- ---------
Cash at end of period $ 171 $ 163
========= =========
</TABLE>
Twin Laboratories Inc. ("Twin") is a direct wholly-owned subsidiary of
Twinlab. Advanced Research Press, Inc. ("ARP"),Changes International Inc.
of Fort Walton Beach ("Changes International") and PR are indirect
wholly-owned subsidiaries of Twinlab. Twinlab, ARP, Changes and PR are
guarantees of the senior subordinated notes of Twin.
7
<PAGE> 8
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 International and
PR. Twin has no direct or indirect subsidiaries other than ARP, Changes
International and PR; and Twin has no other stockholder than Twinlab.
Accordingly, the Company has determined that separate financial statements
of Twin, ARP, Changes International and PR would not be material to
investors and, therefore, are not included herein.
Summarized financial information (information as of March 31, 1998 and for
the three months ended March 31, 1998 and 1997 restated for the matter
discussed in Note 7) of Twin is as follows:
<TABLE>
<CAPTION>
As of March 31, 1998 As of December 31, 1997
-------------------- -----------------------
<S> <C> <C>
Current assets $ 99,949 $ 89,398
Noncurrent assets 84,558 83,444
Current liabilities 50,128 45,952
Noncurrent liabilities 100,259 100,267
Shareholder's equity 34,120 26,623
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------- -------
<S> <C> <C>
Net sales $74,716 $50,575
Gross profit 38,061 22,932
Net income 8,286 5,812
</TABLE>
Summarized financial information of ARP is as follows:
<TABLE>
<CAPTION>
As of March 31, 1998 As of December 31, 1997
-------------------- -----------------------
<S> <C> <C>
Current assets $1,625 $1,399
Noncurrent assets 191 193
Current liabilities 664 568
Noncurrent liabilities -- --
Shareholder's equity 1,152 1,024
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------- -------
<S> <C> <C>
Net sales $1,343 $1,591
Gross profit 345 406
Net income 129 146
</TABLE>
8
<PAGE> 9
Summarized financial information of Changes International is as follows:
<TABLE>
<CAPTION>
As of March 31, 1998
--------------------
<S> <C>
Current assets $ 5,746
Noncurrent assets 12,891
Current liabilities 3,335
Noncurrent liabilities --
Shareholder's equity 15,302
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,1998
--------------------------------
<S> <C>
Net sales $12,566
Gross profit 10,250
Net income 960
</TABLE>
Summarized financial information of PR Nutrition:
<TABLE>
<CAPTION>
As of March 31, 1998 As of December 31, 1997
-------------------- -----------------------
<S> <C> <C>
Current assets $2,207 $1,321
Noncurrent assets 384 365
Current liabilities 1,519 1,127
Noncurrent liabilities 18 22
Shareholder's equity 1,054 537
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
------- -------
<S> <C> <C>
Net sales $5,062 $4,455
Gross profit 3,532 3,321
Net income 1,308 1,499
</TABLE>
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Raw materials $25,116 $16,340
Work in process 9,550 7,393
Finished goods 15,427 13,792
------- -------
Total $50,093 $37,525
======= =======
</TABLE>
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.
9
<PAGE> 10
The weighted average common shares outstanding for the computation of
basic net income per common share for the three months ended March 31,
1998 and 1997 were 28,471,000 and 28,150,000, respectively. Additionally
52,000 and 16,000 of potential common shares were included for the three
months ended March 31, 1998 and 1997, respectively, for the diluted
calculation.
6. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
1998. For the three months ended March 31, 1998 there were no items of
other 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.
7. RESTATEMENT
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 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 revenues
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 ended March 31, 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 As
Previously As Previously As
Reported(a) Restated Reported(a) Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
At March 31:
Accounts receivable $ 42,803 $ 39,006
Inventories 47,986 50,093
Accrued expenses and
other current
liabilities 15,680 15,024
Accumulated deficit (135,000) (136,034)
For the three months
ended March 31,:
Net sales 78,513 74,716 $ 55,624 $ 50,575
Cost of sales 38,762 36,655 30,317 27,643
Provision for income
taxes 5,128 4,472 3,643 2,721
Net income 9,295 8,261 7,166 5,713
Pro forma net income 8,771 7,737 6,556 5,103
Basic and diluted net
income per share $ 0.33 $ 0.29 $ 0.25 $ 0.20
Basic and diluted pro
forma net income per
share $ 0.31 $ 0.27 $ 0.23 $ 0.18
</TABLE>
(a) Amounts reflect the acquisition of PR Nutrition Inc., which was
accounted for as a pooling-of-interests
10
<PAGE> 11
8. SUBSEQUENT EVENTS
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 were approximately $147.5
million. Of the net proceeds to the Company, approximately $56.5 million
was used to pay the purchase price for the Bronson acquisition (discussed
below), including related fees and expenses; approximately $40.1 million
will be used to redeem $35.0 million of the Company's senior subordinated
notes (the "Notes")at a redemption price of 109-1/2 percent, plus accrued
and unpaid interest (the "Redemption"); and approximately $5.6 million was
used to reduce outstanding borrowings under the Company's revolving credit
facility, including accrued and unpaid interest. The remaining net
proceeds to the Company of approximately $45.2 million will be used for
working capital and other general corporate purposes. The Company is
currently considering the possibility of making an offer to purchase for
cash all Notes not otherwise purchased in the Redemption or purchasing
Notes in the open market.
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. Bronson's audited net sales and operating income for the
fiscal year ended December 31, 1997 were approximately $32.1 million and
$9.5 million, respectively. For the three months ended March 31, 1998,
Bronson's unaudited net sales and operating income were approximately $7.7
million and $1.9 million, respectively. The purchase price was $55 million
in cash (excluding related fees and expenses), subject to certain
adjustments.
11
<PAGE> 12
TWINLAB CORPORATION AND SUBSIDIARIES
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 manufacture and
marketing of brand name nutritional supplements. Within this segment, the
Company operates in four primary business areas: the Twinlab division, the
herbal products division, the network marketing division and the 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. 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 herb 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 powered drinks under the PR and
Ironman Triathlon brands. The Company's network marketing activities are
conducted through Changes International, which was acquired in November 1997. In
addition, the Company's publishing activities are conducted through its
subsidiary, Advanced Research Press, Inc.
Subsequent to the issuance of the Company's Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 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 ended March 31, 1998 and 1997 have
been restated from the amounts previously reported to reflect the timing of
certain sales between quarters.
Results of Operations
Three Months Ended March 31, 1998 Compared to
Three Months Ended March 31, 1997
Net Sales. Net sales for the three months ended March 31, 1998 were $74.7
million, an increase of $24.1 million, or 47.7%, as compared to net sales of
$50.6 million for the three months ended March 31, 1997. The 47.7% increase was
attributable to increases in gross sales, which were due to the Company's
increased sales volume. During the first quarter of 1998 the Company received a
substantial increase in orders for its herbal supplement products, particularly
from a mass market retailer. The increase was due to strong demand at the retail
level and to the fact that that the Company's number of SKU's in this category
more than doubled during the first quarter. As a result, the Company's
production and sales mix changed in the first quarter of 1998 versus the first
quarter of 1997, as herbal supplements represented a greater portion of the
Company's total net sales. Net sales of Twinlab products were $30.8 million, a
decrease of $5.7 million; or 15.5%, as compared to $36.5 million for the three
months ended March 31, 1997. This decrease in net sales of Twinlab products was
primarily due to the production and sales mix change discussed above. Herbal
products contributed $25.0 million, an increase of $16.8 million, or 205.6%,
from the $8.2 million in sales for the three months ended March 31, 1997. The
herbal category continued to benefit from the factors discussed above and the
strong demand for St. John's Wort, Gingko, Saw Palmetto and Echinacea.
Publishing contributed $1.2 million as compared to $1.4 million for the three
months ended March 31, 1997. The network marketing line, which was acquired in
the fourth quarter of the calendar year 1997, contributed $12.6 million in net
sales during the three months ended March 31, 1998. The PR bar and powered drink
products contributed $ 5.1 million, an increase of $0.6 million, from the $ 4.5
million in sales for the three months ended March 31, 1997.
12
<PAGE> 13
Gross Profit. Gross profit for the three months ended March 31, 1998 was $38.1
million, which represented an increase of $15.2 million, or 66.0%, as compared
to $22.9 million for the three months ended March 31, 1997. Gross profit margin
was 50.9% for the three months ended March 31, 1998 as compared to 45.3% for the
three months ended March 31, 1997. The overall increase in gross profit dollars
was attributable to the Company's higher sales volume for the three months ended
March 31, 1998. The increase in gross profit margin for the three months ended
March 31, 1998 as compared to the three months ended March 31, 1997 was
primarily due to higher gross profit margins of the network marketing business.
Operating Expenses. Operating expenses were $22.3 million for the three months
ended March 31, 1998, representing an increase of $10.8 million, or 93.4%, as
compared to $11.5 million for the three months ended March 31, 1997. As a
percent of net sales, operating expenses increased from 22.7% for the three
months ended March 31, 1997 to 29.8% for the three months ended March 31, 1998.
The increase in operating expenses was primarily attributable to increased
selling and marketing expenses, primarily commissions, and to a lesser extent to
general and administrative expenses associated with the network marketing
operations.
Income from Operations. Income from operations was $15.8 million for the three
months ended March 31, 1998, representing an increase of $4.4 million, or 38.4%,
as compared to $11.4 million for the three months ended March 31, 1997. Income
from operations margin decreased to 21.2% of net sales for the three months
ended March 31, 1998, as compared to 22.6% of net sales for the three months
ended March 31, 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 due to higher operating expenses
for the three months ended March 31, 1998, due primarily to increased selling
and marketing costs, and commission expenses associated with the network
marketing operations.
Other Expense. Other expense was $3.1 million for the three months ended March
31, 1998, as compared to $3.0 million for the three months ended March 31, 1997.
Liquidity and Capital Resources. For the three months ended March 31, 1998, cash
provided by operating activities was $11.4 million, as compared to $6.0 million
for the three months ended March 31, 1997. Cash used in financing activities was
$4.7 million for the three months ended March 31, 1998, and $5.9 million for the
three months ended March 31, 1997 and in both periods primarily represented the
repayment of outstanding indebtedness.
Capital expenditures were $0.5 million and $2.3 million for the three months
ended March 31, 1998 and 1997, respectively. Capital expenditures were primarily
for the purchase or production equipment to expand capacity or improve
manufacturing efficiency. Capital expenditures are expected to be approximately
$17.0 million during the calendar year 1998, $13.3 million of which will be used
for the expansion of the Utah facility and the remainder for the purchase of
manufacturing 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 to house its executive and
administrative personnel. Management believes that it will be able to lease,
purchase, or construct additional facilities to the extent necessary to meet the
Company's future expansion requirements.
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, 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.
13
<PAGE> 14
TWINLAB CORPORATION AND SUBSIDIARIES
In April 1998, the Company completed its 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 are estimated at approximately $147.4 million. Of the
net proceeds to the Company, approximately $56.5 million was used to pay the
purchase price for the Bronson acquisition (discussed in sub paragraph below),
including related fees and expenses; approximately $40.1 million will be used to
exercise the Company's option 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; and approximately $5.6 million were used to reduce outstanding
borrowings under the Company's revolving credit facility, including accrued and
unpaid interest. The remaining net proceeds to the Company of approximately
$45.2 million will be used for working capital and other general corporate
purposes. The Company is currently considering an offer to purchase for cash all
Notes not otherwise purchased in the Redemption or purchasing Notes in the open
market.
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. Bronson's audited net sales and operating income for the fiscal year ended
December 31, 1997 were approximately $32.1 million and $9.5 million,
respectively. For the three months ended March 31, 1998 Bronson's unaudited net
sales and operating income were approximately $7.7 million and $1.9 million
respectively. The purchase price was $55 million in cash (excluding related fees
and expenses), subject to certain adjustments.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and actively pursue its business strategy for the next 18 to 24
months. The Company's capital resources and liquidity are expected to be
provided by the Company's cash flow from operations, borrowings under its
amended revolving credit facility and approximately $45.2 million of proceeds
from its second public offering. As of April 30, 1998, approximately $50 million
of borrowings were available under the amended revolving credit facility for
working capital requirements and general corporate purposes.
One of the Company's business strategies is to actively pursue acquisition
opportunities, including product line acquisitions, that complement or extend
existing products, expand its distribution channels or are compatible with its
business philosophy and strategic goals. Future acquisitions could be financed
by internally generated funds, bank borrowings, public offerings or private
placements of equity or debt securities, or a combination of the foregoing. Up
to $35 million of borrowings under the amended revolving credit facility,
subject to certain conditions and reductions, will be available to fund future
acquisitions. There can be no assurance that the Company will be able to make
acquisitions on terms favorable to the Company or that funds to finance an
acquisition will be available or permitted under the Company's financing
instruments.
Year 2000. The Company recognizes the importance of ensuring that neither its
customers nor its business operations are disrupted as a result of Year 2000
software failures. The Company is communicating with customers, suppliers,
financial institutions and other vendors with which it does business to
coordinate Year 2000 conversion efforts. Based on the results of this survey,
the Company will identify any existing risks to be addressed. At this time, the
Company believes that any risks are minimal. At the present time, the Company
believes that its systems are substantially Year 2000 compliant. Plans are in
place to bring all Company systems into compliance by mid-year 1999 with a total
cost estimated to be in the range of $50,000-$200,000. The Company does not
expect Year 2000 issues to materially effect its products, services, competitive
position or financial performance. However, there can be no assurance that this
will be the case. The ability of third parties with whom the Company transacts
business to adequately address their Year 2000 issues is outside the Company's
control. There can be no assurance that the failure of such third parties to
adequately address their respective Year 2000 issues will not have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
14
<PAGE> 15
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 of other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results covered
by the forward-looking statements will be achieved, and other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
15
<PAGE> 16
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
There have been no matters submitted to a vote of security holders during the
quarter ended March 31, 1998.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on May 12, 1998, reporting the
Bronson Acquisition.
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
Dated: March 30, 1999 By: /s/ John McCusker
---------------------------------------
John McCusker
Chief Financial Officer,
(Principal Financial Officer)
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