<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
(631) 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, 1999, the registrant had 30,979,133 shares of common stock
outstanding.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,738 $ 12,489
Accounts receivable, net of allowance for bad
debts of $667 at September 30, 1999 and $502 at
December 31, 1998 55,720 60,254
Inventories 66,240 72,355
Deferred tax assets 2,866 1,629
Prepaid expenses and other current assets 2,663 3,207
--------- ---------
Total current assets 141,227 149,934
Property, plant and equipment, net 43,103 29,551
Deferred tax assets 41,611 45,347
Other assets 60,031 65,186
--------- ---------
TOTAL $ 285,972 $ 290,018
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 5,525 $ 80
Accounts payable 18,910 30,959
Accrued expenses and other current liabilities 14,489 10,043
--------- ---------
Total current liabilities 38,924 41,082
Long-term debt, less current portion 47,412 43,451
--------- ---------
Total liabilities 86,336 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; 32,706,233 issued and
31,362,333 outstanding as of September 30, 1999 and
32,705,049 issued and outstanding as of
December 31, 1998 32,706 32,705
Additional paid-in capital 289,335 289,327
Accumulated deficit (110,261) (116,547)
Treasury stock; 1,343,900 shares (12,144) --
--------- ---------
Total shareholders' equity 199,636 205,485
--------- ---------
TOTAL $ 285,972 $ 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
-------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 81,921 $ 84,405 $ 227,613 $ 242,457
COST OF SALES 44,336 40,898 117,940 117,713
-------- -------- --------- ---------
GROSS PROFIT 37,585 43,507 109,673 124,744
OPERATING EXPENSES 32,140 27,322 95,785 76,766
MERGER EXPENSES -- 1,503 -- 1,503
-------- -------- --------- ---------
INCOME FROM OPERATIONS 5,445 14,682 13,888 46,475
-------- -------- --------- ---------
OTHER (EXPENSE) INCOME:
Interest income 121 345 338 1,271
Interest expense (867) (1,495) (3,843) (6,863)
Other 8 8 20 (47)
-------- -------- --------- ---------
(738) (1,142) (3,485) (5,639)
INCOME BEFORE PROVISION FOR
INCOME TAXES AND EXTRAORDINARY ITEM 4,707 13,540 10,403 40,836
PROVISION FOR INCOME TAXES 1,826 5,272 4,036 14,838
-------- -------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 2,881 8,268 6,367 25,998
EXTRAORDINARY ITEM, NET OF TAX (81) (2,076) (81) (4,941)
-------- -------- --------- ---------
NET INCOME $ 2,800 $ 6,192 $ 6,286 $ 21,057
======== ======== ========= =========
BASIC INCOME PER SHARE
Income Before Extraordinary Item $ 0.09 $ 0.25 $ 0.20 $ 0.84
Extraordinary Item -- (0.06) -- (0.16)
-------- -------- --------- ---------
Net Income $ 0.09 $ 0.19 $ 0.20 $ 0.68
======== ======== ========= =========
DILUTED INCOME PER SHARE
Income Before Extraordinary Item $ 0.09 $ 0.25 $ 0.20 $ 0.83
Extraordinary Item -- (0.06) -- (0.16)
-------- -------- --------- ---------
Net Income $ 0.09 $ 0.19 $ 0.20 $ 0.67
======== ======== ========= =========
Weighted Average Common Shares
Used In Computing Basic Income Per Share 31,802 32,705 32,121 31,084
======== ======== ========= =========
Weighted Average Common Shares
Used In Computing Diluted Income Per Share 31,834 32,792 32,142 31,229
======== ======== ========= =========
PRO FORMA RELATING TO CHANGE IN TAX STATUS:
Historical income before provision for income taxes
and extraordinary item $ 13,540 $ 40,836
Pro forma provision for income taxes 5,349 16,005
-------- ---------
Pro forma income before extraordinary item 8,191 24,831
Extraordinary item (2,076) (4,941)
-------- ---------
Pro forma net income $ 6,115 $ 19,890
======== =========
Basic income before extraordinary item per share $ 0.25 $ 0.80
======== =========
Diluted income before extraordinary item per share $ 0.25 $ 0.80
======== =========
Basic net income per share $ 0.19 $ 0.64
======== =========
Diluted net income per share $ 0.19 $ 0.64
======== =========
</TABLE>
3
<PAGE> 4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
-------- ---------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,286 $ 21,057
Adjustment to reconcile net income to net cash provided by
operating activities:
Extraordinary item 81 4,941
Depreciation and amortization 5,208 3,406
Bad debt expense 165 22
Deferred income taxes 2,499 2,829
Changes in operating assets and liabilities:
Accounts receivable 4,369 3,272
Inventories 6,115 (19,024)
Prepaid expenses and other current assets 544 (2,090)
Accounts payable (12,049) (284)
Accrued expenses and other current liabilities 4,496 2,680
-------- ---------
Net cash provided by operating activities 17,714 16,809
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business -- (56,105)
Acquisition of property, plant and equipment (11,581) (9,245)
Increase in other assets (2,113) (7,924)
-------- ---------
Net cash used in investing activities (13,694) (73,274)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facility 5,000 --
Proceeds from issuance of debt 8,000 700
Payments of debt (294) (14,606)
Purchase of treasury stock (12,144) --
Net proceeds from second common stock offering -- 147,506
Redemption of senior subordinated notes and related premium (3,333) (62,687)
Distributions to shareholders -- (2,352)
Proceeds from exercise of stock options -- 80
Principal payments of capital lease obligations -- (117)
-------- ---------
Net cash (used in) provided by financing activities (2,771) 68,524
-------- ---------
Net increase in cash and cash equivalents 1,249 12,059
Cash and cash equivalents at beginning of period 12,489 4,212
-------- ---------
Cash and cash equivalents at end of period $ 13,738 $ 16,271
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest, net of amounts capitalized $ 2,746 $ 6,667
======== =========
Income taxes $ 2,716 $ 12,134
======== =========
</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
September 30, 1999, the results of its operations for the three months and
nine months ended September 30, 1999 and 1998, and its cash flows for the
nine months ended September 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 nine months ended September 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'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>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
CONDENSED BALANCE SHEETS
- ------------------------
ASSETS
Cash $ 335 $ 323
Investment in subsidiaries 199,301 205,162
--------- ---------
$ 199,636 $ 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; 32,706,233 issued
and 31,362,333 outstanding as of September 30, 1999 and
32,705,049 issued and outstanding as of December 31, 1998 32,706 32,705
Additional paid-in capital 289,335 289,327
Accumulated deficit (110,261) (116,547)
Treasury stock; 1,343,900 shares (12,144) --
--------- ---------
$ 199,636 $ 205,485
========= =========
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
CONDENSED STATEMENTS OF INCOME SEPTEMBER 30, SEPTEMBER 30,
- ------------------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Equity interest in net income of subsidiaries $ 2,828 $ 6,136 $ 6,368 $20,558
Operating expenses (48) -- (144) --
Interest income 4 221 12 948
------- ------- ------- -------
Income before provision for income taxes 2,784 6,357 6,236 21,506
Provision for (benefit from) income taxes (16) 165 (50) 449
------- ------- ------- -------
Net income $ 2,800 $ 6,192 $ 6,286 $21,057
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
CONDENSED STATEMENTS OF CASH FLOW 1999 1998
- --------------------------------- -------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,286 $ 21,057
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Equity investments in subsidiaries 5,870 (165,523)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (12,144) --
Net proceeds from second common stock offering -- 147,506
Proceeds from the exercise of stock options -- 80
-------- ---------
Net cash (used in) provided by financing activities (12,144) 147,586
-------- ---------
Net increase in cash and cash equivalents 12 3,120
Cash and cash equivalents at beginning of period 323 169
-------- ---------
Cash and cash equivalents at end of period $ 335 $ 3,289
======== =========
</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. ("Health Factors"), 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.
6
<PAGE> 7
Summarized unaudited financial information as of September 30, 1999 and
December 31, 1998 and for the three and nine months ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
BRONSON
CHANGES LABORATORIES HEALTH
TWIN ARP INTERNATIONAL INC. FACTORS PR NUTRITION(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF SEPTEMBER 30, 1999
Current Assets $150,060 $ 1,268 $11,602 $ 9,336 $ 7,341 $ 3,265
Noncurrent assets 144,745 182 11,635 40,053 5,335 162
Current liabilities 38,924 438 4,043 3,310 942 591
Noncurrent liabilities 47,412 -- -- -- -- --
Shareholder's equity 208,469 1,012 19,194 46,079 11,734 2,836
AS OF DECEMBER 31, 1998
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
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $ 81,921 $ 848 $11,395 $ 3,665 $ 3,122 $ 1,455
Gross profit 37,585 (23) 9,325 1,941 409 1,052
Net income (loss) 2,828 (204) 34 183 56 (158)
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales $ 84,405 $ 933 $13,158 $ 4,558 $ 2,967 $ 5,185
Gross profit 43,507 46 10,972 2,805 486 3,686
Net income (loss) 6,136 (66) 870 556 122 521
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales $227,613 $ 3,245 $36,594 $11,785 $10,581 $ 11,780
Gross profit 109,673 521 30,668 6,426 1,506 7,792
Net income (loss) 6,368 (275) 1,241 650 304 961
NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales $242,457 $ 3,511 $39,206 $ 7,313 $ 4,778 $ 15,960
Gross profit 124,744 720 32,496 4,313 942 11,212
Net income 20,558 172 2,954 766 280 3,241
</TABLE>
- ----------------------------
(1) Effective July 1, 1999, the Ironman Triathlon bar product line was
transferred to Twin.
7
<PAGE> 8
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31,1998
------------------ ----------------
<S> <C> <C>
Raw Materials $34,911 $36,257
Work in Process 8,862 11,337
Finished Goods 22,467 24,761
------- -------
Total $66,240 $72,355
======= =======
</TABLE>
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>
NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------
<S> <C>
Net sales $252,474
Income before extraordinary item 27,245
Basic and diluted income before
extraordinary item per share 0.86
Diluted weighted average shares
outstanding (in thousands) 31,807
</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.
8
<PAGE> 9
The weighted average common shares outstanding for the computation of basic
net income per common share for the three months ended September 30, 1999
and 1998 were 31,802,000 and 32,705,000, respectively, and for the nine
months ended September 30, 1999 and 1998 were 32,121,000 and 31,084,000,
respectively.
Additionally, for the diluted calculation, 32,000 and 87,000 of potential
common shares were included for the three months ended September 30, 1999
and 1998, respectively, and 21,000 and 145,000 were included for the nine
months ended September 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.
7. LITIGATION
As previously reported, William Logue, Sheri Sears and Barry Nussbaum (the
"Plaintiffs"), the former owners of PR*Nutrition, commenced a lawsuit in
the United States District Court for the Southern District of New York (the
"Logue Litigation") against the Company, Twin and certain of its officers
and directors (collectively the "Defendants"). The Defendants have agreed
to settle the Logue Litigation for a cash payment to be made to Plaintiffs
of which the Company will contribute $4,000,000 with the balance of the
payment to be made through insurance proceeds. Further, the Company will
purchase 1,138,800 shares of the Company's common stock from the
Plaintiffs, representing all of the Company's shares owned by Plaintiffs,
at a price of $8.4375 per share for an aggregate purchase price of
$9,608,625. The purchase of such shares will constitute part of the five
million share repurchase program announced by the Company on February 25,
1999.
8. RECENT ACCOUNTING PRONOUNCEMENTS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in 1998.
For the three and nine months ended September 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.
9
<PAGE> 10
9. 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 nine months ended September 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
SEPTEMBER 30, 1999
Net sales from external
Customers $ 55,721 $ 6,308 $11,395 $ 6,287 $ 2,210 $ -- $ 81,921
Intersegment net sales -- -- -- -- 92 (92) --
Income from operations 5,931 (257) 25 384 (638) -- 5,445
Total assets 174,302 69,799 23,237 59,241 5,212 (45,819) 285,972
THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales from external
Customers $ 46,667 $ 11,105 $13,158 $ 7,526 $ 5,949 $ -- $ 84,405
Intersegment net sales 594 23 -- -- 168 (785) --
Income from operations 8,465 3,100 1,369 1,106 642 -- 14,682
Total assets 155,899 54,218 20,409 60,158 11,942 (29,066) 273,560
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales from external
Customers $133,147 $ 23,453 $36,594 $19,749 $ 14,670 $ -- $227,613
Intersegment net sales 33 2,510 -- -- 354 (2,897) --
Income from operations 6,058 3,379 1,936 1,540 975 -- 13,888
NINE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales from external
Customers $117,221 $ 54,968 $39,206 $12,091 $ 18,971 $ -- $242,457
Intersegment net sales 3,930 31 -- -- 499 (4,460) --
Income from operations 18,420 17,861 4,712 1,708 3,774 -- 46,475
</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.
10
<PAGE> 11
ITEM 2.: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with
the response to Part I, Item 1 of this report. The Company operates 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. In addition, effective July 1, 1999, the TWINLAB division began
marketing nutritionally enhanced food bars under the Ironman Triathlon
trademark. 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 manufacturing basis. The
PR*Nutrition division markets nutritionally enhanced food bars under the
PR*Bar trademark. The Company's publishing activities are conducted through
ARP.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(Dollars in millions)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales:
TWINLAB Division $ 55.7 68.0% $ 46.6 55.3% $ 133.1 58.4% $ 117.2 48.3%
Herbal Supplements
and Teas Division 6.3 7.7 11.1 13.2 23.5 10.3 55.0 22.7
Changes Int'l Division 11.4 13.9 13.2 15.6 36.6 16.1 39.2 16.2
Bronson Division 6.3 7.7 7.5 8.9 19.8 8.7 12.1 5.0
PR*Nutrition Division 1.4 1.8 5.2 6.1 11.7 5.2 16.0 6.6
Publishing Division 0.8 0.9 0.8 0.9 2.9 1.3 3.0 1.2
------- ----- ------- ----- -------- ----- -------- -----
Total Net Sales 81.9 100.0 84.4 100.0 227.6 100.0 242.5 100.0
Gross Profit 37.6 45.9 43.5 51.5 109.7 48.2 124.8 51.4
Operating Expenses 32.2 39.2 28.8 34.1 95.8 42.1 78.3 32.2
------- ----- ------- ----- -------- ----- -------- -----
Income from Operations $ 5.4 6.7% $ 14.7 17.4% $ 13.9 6.1% $ 46.5 19.2%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES: Net sales for the nine months ended September 30, 1999 were
$227.6 million, a decrease of $14.9 million, or 6.1%, as compared to net
sales of $242.5 million for the nine months ended September 30, 1998. Net
sales at the TWINLAB division contributed $133.1 million, an increase of
$15.9 million, or 13.6% as compared to $117.2 million for the nine months
ended September 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 $23.5 million, a
decrease of $31.5 million or 57.3% as compared to $55.0 million for the
nine months ended September 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 nine months 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 $36.6
million to net sales for the nine months ended September 30, 1999 as
compared to $39.2 million in the nine months ended September 30, 1998. The
Bronson division, which was acquired effective April 30, 1998, contributed
$19.8 million to net sales for the nine months ended September 30, 1999 as
compared to $12.1 million for the nine months ended September 30, 1998. The
PR*Nutrition division contributed $11.7 million to net sales for the nine
months ended September 30, 1999, as compared to $16.0 million for the nine
months ended September 30, 1998. Effective July 1, 1999, the Ironman
Triathlon bar product line was transferred from the PR*Nutrition division
to the TWINLAB division and sales attributable to such product line are
reflected in the TWINLAB division subsequent to such date. Publishing
activities contributed $2.9 million as compared to $3.0 million for the
nine months ended September 30, 1998.
GROSS PROFIT: Gross profit for the nine months ended September 30, 1999 was
$109.7 million, which represented a decrease of $15.1 million, or 12.1%, as
compared to $124.8 million for the nine months ended September 30, 1998.
Gross profit margin was 48.2% for the nine months ended September 30, 1999
as compared to 51.4% for the nine months ended September 30, 1998. The
overall decline in YTD 1999 gross profit dollars was attributable primarily
to the Company's lower sales volumes, particularly in the herbal category,
increased inventory reserves, and the write-off of certain obsolete
inventory.
OPERATING EXPENSES: Operating expenses were $95.8 million for the nine
months ended September 30, 1999, representing an increase of $17.5 million,
or 22.4%, as compared to $78.3 million for the nine months ended September
30, 1998. As a percent of net sales, operating expenses increased from
32.2% for the nine months ended September 30, 1998 to 42.1% for the nine
months ended September 30, 1999. The increase in operating expenses was
primarily attributable to increased selling and marketing expenses,
comprised primarily of an increase in the Company's advertising and
promotional expenses as a result of the Company adding to its marketing and
sales infrastructure to support its entry into new retail distribution
channels.
INCOME FROM OPERATIONS: Income from operations was $13.9 million for the
nine months ended September 30, 1999, representing a decrease of $32.6
million, or 70.1%, as compared to $46.5 million for the nine months ended
September 30, 1998. Income from operations margin decreased to 6.1% of net
sales for the nine months ended September 30, 1999, as compared to 19.2% of
net sales for the nine months ended September 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.
12
<PAGE> 13
OTHER EXPENSE: Other expense was $3.5 million for the nine months ended
September 30, 1999, as compared to $5.6 million for the nine months ended
September 30, 1998. The net decrease of $2.1 million is primarily due to
decreased interest expense of $3.0 million, as a result of reduced debt
levels offset by a decrease in interest income of $0.9 million.
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
NET SALES: Net sales for the three months ended September 30, 1999 were
$81.9 million, a decrease of $2.5 million, or 2.9%, as compared to net
sales of $84.4 million for the three months ended September 30, 1998. Net
sales at the TWINLAB division contributed $55.7 million, an increase of
$9.1 million, or 19.4% as compared to $46.6 million for the three months
ended September 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 $6.3 million, a
decrease of $4.8 million or 43.2% as compared to $11.1 million for the
three months ended September 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 Changes
International division contributed $11.4 million to net sales for the three
months ended September 30, 1999 as compared to $13.2 million in the three
months ended September 30, 1998. The Bronson division contributed $6.3
million to net sales for the three months ended September 30, 1999 as
compared to $7.5 million in the three months ended September 30, 1998. The
PR*Nutrition division contributed $1.4 million to net sales for the three
months ended September 30, 1999 as compared to $5.2 million for the three
months ended September 30, 1998. Effective July 1, 1999, the Ironman
Triathlon bar product line was transferred from the PR*Nutrition division
to the TWINLAB division and sales attributable to such product line are
reflected in the TWINLAB division subsequent to such date. Publishing
activities contributed $0.8 million for the three months ended September
30, 1999 and 1998.
GROSS PROFIT: Gross profit for the three months ended September 30, 1999
was $37.6 million, which represented a decrease of $5.9 million, or 13.6%,
as compared to $43.5 million for the three months ended September 30, 1998.
Gross profit margin was 45.9% for the three months ended September 30,
1999, as compared to 51.5% for the three months ended September 30, 1998.
The overall decline in gross profit dollars for the third quarter of 1999
was primarily attributable to lower sales volumes in the herbal category as
well as lower sales at the Changes International network marketing division
which generates higher margins, increased inventory reserves, and the
write-off of certain obsolete inventory.
OPERATING EXPENSES: Operating expenses were $32.2 million for the three
months ended September 30, 1999, representing an increase of $3.4 million,
or 11.5%, as compared to $28.8 million for the three months ended September
30, 1998. As a percent of net sales, operating expenses increased from
34.1% for the three months ended September 30, 1998 to 39.2% for the three
months ended September 30, 1999. The increase in operating expenses was
primarily attributable to increased selling and marketing expenses,
comprised primarily of an increase in the Company's advertising and
promotional expenses as well as increased infrastructure to support sales
in the mass market retail channel.
INCOME FROM OPERATIONS: Income from operations was $5.4 million for the
three months ended September 30, 1999, representing a decrease of $9.3
million, or 62.9% as compared to $14.7 million for the three months ended
September 30, 1998. Income from operations margin
13
<PAGE> 14
decreased to 6.7% of net sales for the three months ended September 30,
1999, as compared to 17.4% of net sales for the three months ended
September 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 $0.7 million for the three months ended
September 30, 1999 as compared to $1.1 million for the three months ended
September 30, 1998. The net decrease of $0.4 million is primarily due to
decreased interest expense of $0.6 million, as a result of reduced debt
levels offset by a decrease in interest income of $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1999, cash provided by operating
activities was $17.7 million as compared to $16.8 million for the nine
months ended September 30, 1998.
Capital expenditures were $11.6 million and $9.2 million for the nine
months ended September 30, 1999 and 1998, respectively. In addition, during
the nine months ended September 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 $5.2 million for the expansion of the Utah facility.
Capital expenditures are expected to be approximately $13.0 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 used in financing activities was $2.8 million for the nine months
ended September 30, 1999. The Company purchased $12.1 million of treasury
stock and repurchased $3.3 million of senior subordinated notes which was
offset by borrowings under the Company's Revolving Credit Facility ($5
million) and mortgage financing of the Utah plant expansion ($8 million).
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 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 September 30,
1999, approximately $45.0 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 intends to use funds
available under the $50 million Revolving
14
<PAGE> 15
Credit 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 October 31, 1999, the Company had purchased 1,727,100 shares at a total
cost of $15.8 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 September 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 a year other than 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 is conducting a Company-wide program to prepare the Company's
internal computer systems for Year 2000 compliance that is anticipated to
be completed by November 30, 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 has both replaced some systems and
expects to upgrade others. The total cost of this effort is estimated to be
in the range of $350,000 - $450,000. 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. However, a significant effort has been made to
inquire and document any potential non-compliance. 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
15
<PAGE> 16
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 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.
16
<PAGE> 17
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDING
As previously reported, William Logue, Sheri Sears and Barry Nussbaum (the
"Plaintiffs"), the former owners of PR*Nutrition, commenced a lawsuit in the
United States District Court for the Southern District of New York (the "Logue
Litigation") against the Company, Twin and certain of its officers and directors
(collectively the "Defendants"). The Defendants have agreed to settle the Logue
Litigation for a cash payment to be made to Plaintiffs of which the Company will
contribute $4,000,000 with the balance of the payment to be made through
insurance proceeds. Further, the Company will purchase 1,138,800 shares of the
Company's common stock from the Plaintiffs, representing all of the Company's
shares owned by Plaintiffs, at a price of $8.4375 per share for an aggregate
purchase price of $9,608,625. The purchase of such shares will constitute part
of the five million share repurchase program announced by the Company on
February 25, 1999.
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 September
30, 1999.
17
<PAGE> 18
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: November 15, 1999
------------------------------------
18
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