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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, 2002
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 July 31, 2002, the registrant had 28,940,856 shares of common stock
outstanding.
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 22,572 26,450
Inventories 29,361 43,977
Prepaid expenses and other current assets 3,854 2,094
------------ ------------
Total current assets 55,787 72,521
Property, plant and equipment, net 42,272 46,854
Other assets 9,868 9,239
------------ ------------
TOTAL $ 107,927 $ 128,614
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 2,108 $ 2,241
Accounts payable 14,126 19,352
Accrued expenses and other current liabilities 14,297 8,870
------------ ------------
Total current liabilities 30,531 30,463
Long-term debt, less current portion 56,222 77,129
------------ ------------
Total liabilities 86,753 107,592
------------ ------------
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; 33,041,756 issued and 28,940,856 outstanding as
of June 30, 2002 and December 31, 2001
33,042 33,042
Additional paid-in capital 290,041 290,001
Accumulated deficit (265,115) (265,227)
------------ ------------
57,968 57,816
Treasury stock at cost; 4,100,900 shares (36,794) (36,794)
------------ ------------
Total shareholders' equity 21,174 21,022
------------ ------------
TOTAL $ 107,927 $ 128,614
============ ============
2
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
NET SALES $ 42,707 $ 48,957 $ 90,894 $ 101,688
COST OF SALES 28,032 33,640 58,082 66,351
------ ------ ------ -------
GROSS PROFIT 14,675 15,317 32,812 35,337
OPERATING EXPENSES 16,263 20,165 35,629 49,492
------ ------ ------ -------
LOSS FROM OPERATIONS (1,588) (4,848) (2,817) (14,155)
------ ------ ------ -------
OTHER (EXPENSE) INCOME:
Interest income 25 19 25 128
Interest expense (2,123) (2,223) (4,096) (5,048)
Other 61 (7) 89 (9)
------ ------ ------ -------
(2,037) (2,211) (3,982) (4,929)
------ ------ ------ -------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (3,625) (7,059) (6,799) (19,084)
BENEFIT FROM INCOME TAXES -- -- (6,911) (4,651)
------ ------ ------ -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,625) (7,059) 112 (14,433)
------ ------ ------ -------
DISCONTINUED OPERATIONS:
Income from discontinued operations, adjusted for income taxes of
$211 -- -- -- 164
Loss on disposal of subsidiary, adjusted for income taxes of $449 -- -- -- (8,698)
------ ------ ------ -------
-- -- -- (8,534)
------ ------ ------ -------
NET INCOME (LOSS) $ (3,625) $ (7,059) $ 112 $ (22,967)
====== ====== ====== =======
BASIC AND DILUTED LOSS PER SHARE:
Loss from continuing operations $ (0.13) $ (0.25) $ -- $ (0.50)
Loss from discontinued operations -- -- -- (0.30)
------ ------ ------ -------
Net loss $ (0.13) $ (0.25) $ -- $ (0.80)
====== ====== ====== =======
Basic and diluted weighted average shares outstanding 28,941 28,646 28,941 28,646
====== ====== ====== =======
3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2002 2001
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 112 $(22,967)
Adjustment to reconcile net income (loss) to net
cash provided by operating activities:
Loss from discontinued operations -- 8,534
Depreciation and amortization 4,322 4,038
Bad debt expense 300 1,380
Provision for excess and slow moving inventories 4,214 109
Deferred income taxes -- (4,011)
Gain on sale of businesses and fixed assets (60) (976)
Other 40 438
Changes in operating assets and liabilities:
Accounts receivable 3,578 25,644
Inventories 10,402 2,520
Refundable income taxes -- 11,627
Prepaid expenses and other current assets (1,760) (1,519)
Accounts payable (5,226) (6,742)
Accrued expenses and other current liabilities 3,784 (2,702)
-------- --------
Net cash provided by continuing operations 19,706 15,373
Net cash provided by discontinued operations -- 953
-------- --------
Net cash provided by operating activities 19,706 16,326
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (496) (2,672)
Increase in other assets (91) (215)
Net proceeds from sales of businesses and fixed assets 2,121 4,719
-------- --------
Net cash provided by investing activities 1,534 1,832
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under revolving credit facilities (19,941) (20,058)
Payments of debt (1,099) (1,015)
Payments of debt issuance costs (200) (1,975)
-------- --------
Net cash used in financing activities (21,240) (23,048)
-------- --------
Net decrease in cash and cash equivalents -- (4,890)
Cash and cash equivalents at beginning of period -- 4,890
-------- --------
Cash and cash equivalents at end of period $ -- $ --
======== ========
Supplemental disclosures of cash flow information- Cash paid during the
periods for:
Interest $ 3,412 $ 5,109
======== ========
Income taxes, net of cash refunds $ (6,820) $(11,609)
======== ========
4
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 (collectively, the
"Company") as of June 30, 2002, and the results of its operations and its
cash flows for the three months and six months ended June 30, 2002 and
2001, in conformity with accounting principles generally accepted in the
United States of America applied on a consistent basis. The results of
operations for the three months and six months ended June 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
Certain prior year balances have been reclassified to conform with current
year classifications.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been omitted.
These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in Twinlab's
Annual Report to Stockholders on Form 10-K for the fiscal year ended
December 31, 2001, as filed with the Securities and Exchange Commission.
2. DISPOSITION OF OPERATIONS
a. CHANGES INTERNATIONAL, INC.
On April 17, 2001, the Company sold the assets of its Changes
International, Inc. ("Changes International") subsidiary to Goldshield
Group plc for approximately $4,405. The Company received $3,524 upon
closing the transaction, $352 in October 2001 and $529 in April 2002. The
loss on the sale of the assets was $8,698. Changes International's results
of operations have been classified as discontinued operations.
Net sales and income from discontinued operations are as follows:
SIX MONTHS ENDED
JUNE 30, 2001
-------------
Net sales $8,407
Operating income 423
Provision for income taxes 211
Income from discontinued operations 164
Income from discontinued operations per diluted share 0.01
b. PR*NUTRITION, INC.
On April 17, 2001, the Company sold the assets of PR*Nutrition, Inc. to
Goldshield Group plc for approximately $595. The Company received $476
upon closing the transaction, $48 in October 2001 and $71 in April 2002.
The Company recorded a pre-tax gain of approximately $297 in connection
with the sale of these assets during the quarter ended June 30, 2001,
which has been included as a reduction of operating expenses in the
accompanying consolidated statements of operations.
5
c. ADVANCED RESEARCH PRESS, INC.
On June 1, 2001, the Company sold its publishing subsidiary, Advanced
Research Press, Inc. ("ARP"), to Steve Blechman, Executive Vice President
and a Director of Twinlab and President/CEO of ARP, for $1,000. Concurrent
with the sale of ARP, Steve Blechman elected to resign as an Executive
Vice President and employee of Twinlab. The Company recorded a pre-tax
gain of approximately $674 in connection with the sale during the quarter
ended June 30, 2001, which has been included as a reduction of operating
expenses in the accompanying consolidated statements of operations.
d. HEALTH FACTORS INTERNATIONAL, INC.
On May 22, 2002, the Company completed the sale of substantially all of
the fixed assets of its Health Factors International, Inc. ("Health
Factors") subsidiary for approximately $2,107 to Anabolic Laboratories,
Inc ("Anabolic"). The products manufactured by Health Factors were, in
significant part, transferred to other Twinlab manufacturing facilities.
Other production related to Bronson Laboratories, Inc. was outsourced to
Anabolic while the manufacture of certain private label products was
discontinued. The Company recorded a charge of approximately $994 in
connection with the sale of the facility during the quarter ended March
31, 2002, which has been included in operating expenses in the
accompanying consolidated statements of operations.
3. INVENTORIES
Inventories consist of the following:
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
Raw Materials $ 6,943 $ 10,324
Work in Process 6,018 6,787
Finished Goods 16,400 26,866
---------- ---------
Total $ 29,361 $ 43,977
========== =========
Reserves for excess and obsolete inventory totaled $9,969 and $14,556 as
of June 30, 2002 and December 31, 2001, respectively, and are included as
a component of the above amounts.
4. REVOLVING CREDIT FACILITY
In March 2002, the Company completed an amendment to its Revolving Credit
Facility which, among other things, revised the financial covenant
relating to EBITDA (as defined therein) and increased the interest rate on
borrowings by 0.25%. Borrowings outstanding under the Revolving Credit
Facility as of June 30, 2002 were approximately $10,527.
5. OPERATING EXPENSES
Included in operating expenses for the three months ended June 30, 2002 is
a net benefit of approximately $475 relating to litigation matters. Such
benefit relates to proceeds of $4,653 received from a litigation
settlement offset by the recording of reserves for litigation matters and
related costs (see Note 10).
6
6. RELATED PARTY TRANSACTIONS
In connection with the Revolving Credit Facility, certain current and
former members of senior management of the Company provided a letter of
credit amounting to $15,000 with respect to the Company's obligations
under the Revolving Credit Facility. In consideration for providing this
letter of credit, effective April 1, 2002, the Company agreed to pay an
aggregate annual fee of $375 and 375,000 shares of common stock (to be
issued from shares held in treasury), payable in quarterly installments
for the duration of the period that the letter of credit remains
outstanding. The fair value of the compensation for providing the letter
of credit, $1,643, has been recorded as deferred financing costs and is
being amortized over the remaining term of the Revolving Credit Facility.
7. INCOME TAXES
The Company recorded a federal benefit from income taxes of $6,911 during
the three months ended March 31, 2002 representing a refund received by
the Company as a result of the Job Creation and Worker Assistance Act of
2002. The Company did not record a benefit from income taxes for losses
incurred during the six months ended June 30, 2002 as it is more likely
than not that such benefit will not be realized.
8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share was determined by using the weighted
average number of common shares outstanding during the respective periods.
Diluted net income (loss) per share further assumes the issuance of common
shares for all dilutive outstanding stock options. Potentially dilutive
stock options totaling 1,832,000 and 2,116,000 as of June 30, 2002 and
March 31, 2002, respectively, and 2,376,000 and 1,881,000 as of June 30,
2001 and March 31, 2001, respectively, were excluded from the computation
of diluted net income (loss) per share because they were anti-dilutive.
9. OPERATING SEGMENTS
The Company reports its operations in two reportable segments: the retail
segment and the direct-to-consumer segment. Products sold by the retail
segment include vitamins, minerals, amino acids, herbs, sports nutrition
products and special formulas primarily under the Twinlab brand name; an
extensive line of herbal supplements and phytonutrients marketed under the
Nature's Herbs brand name; and a full line of herbal teas under the Alvita
brand name. The direct-to-consumer segment primarily markets vitamins,
herbs, nutritional supplements and health and beauty aids through its
Bronson catalog and it also manufactured, through Health Factors, private
label vitamins and supplements for a number of other companies on a
contract manufacturing basis. As discussed in Note 2, on May 22, 2002, the
Company sold substantially all of the fixed assets relating to its Health
Factors' operations.
7
Segment information for the three months and six months ended June 30, 2002
and 2001 was as follows:
DIRECT-TO- INTERCOMPANY
RETAIL CONSUMER OTHER(1) ELIMINATION TOTAL
------ -------- -------- ----------- -----
THREE MONTHS ENDED
JUNE 30, 2002
Net sales from external
customers $ 37,586 $ 5,121 $ -- $ -- $ 42,707
Intersegment net sales 34 -- -- (34) --
(Loss) income from operations (2,778) 1,242 (52) -- (1,588)
Total assets 135,738 26,555 -- (54,366) 107,927
THREE MONTHS ENDED
JUNE 30, 2001
Net sales from external
customers $ 41,717 $ 6,431 $ 809 $ -- 48,957
Intersegment net sales -- -- 34 (34) --
(Loss) income from operations (5,219) 245 126 -- (4,848)
Total assets 181,130 61,207 12,041 (58,610) 195,768
SIX MONTHS ENDED
JUNE 30, 2002
Net sales from external
customers $ 80,104 $ 10,790 $ -- $ -- $ 90,894
Intersegment net sales 138 -- -- (138) --
(Loss) income from operations (3,498) 785 (104) -- (2,817)
SIX MONTHS ENDED
JUNE 30, 2001
Net sales from external
customers $ 87,644 $ 11,360 $ 2,684 $ -- $ 101,688
Intersegment net sales -- -- 114 (114) --
(Loss) income from operations (14,454) (150) 449 -- (14,155)
[1]The "other" column includes corporate-related items and, for the three
months and six months ended June 30, 2001, the results of two former
operating segments, PR*Nutrition, Inc. and ARP, whose segment information
is below the reportable quantitative thresholds. The Company marketed
nutritionally enhanced food bars and other nutritional products through
PR*Nutrition, Inc. and published a sports fitness magazine and health and
fitness-related books, audios and newsletters through ARP.
10. CONTINGENCIES
The Company has been named as a defendant in a number of pending product
liability lawsuits which the Company is vigorously defending. In reviewing
its potential exposure for product liability matters, the Company
considers, among other factors, recent and historical settlements and
judgments, if any, the incidence and trend of recent and historical
claims, the nature of any alleged injuries, the amount and availability of
insurance coverage and the status of litigation proceedings and settlement
discussions.
Based on this analysis, the Company has estimated a range of potential
liability in an amount it deems reasonable in connection with certain
product liability matters. The Company has established a reserve for
product liability matters that is primarily based on known claims and an
estimate of incurred but not reported claims that can be reasonably
estimated as of the balance sheet date. However, there are inherent
uncertainties involved in estimating product liability costs. Accordingly,
the Company has concluded that no amount within the range is more likely
than any other, and has recorded $2,800 (an amount within the range as of
June 30 2002) as a liability in the accompanying consolidated financial
statements. Management expects that any
8
payments relating to these matters will occur over a number of years and
has not discounted the potential liability as of June 30, 2002, because
the amounts and timing of any payments are not fixed or reliably
determinable at the present time.
Because of the uncertainties related to the number of potential future
claims, ultimate settlement amounts, dismissal of such claims or any
adverse judgments, it is difficult to obtain precise estimates of the
Company's ultimate liability for such claims. It is possible that the
total exposure to product liability claims may be less than or greater
than an amount within the Company's estimated range of potential liability
due to changes in facts or circumstances after the date of each estimate.
As additional experience is gained regarding the Company's product
liability claims, possible settlement discussions, litigation history and
insurance coverage, the Company will reassess its potential liability and
revise the amount of its reserve as appropriate.
11. RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets", effective January 1,
2002. In accordance with SFAS No. 142, goodwill and intangible assets with
indefinite lives are no longer subject to amortization, but are subject to
at least an annual assessment for impairment by applying a fair value
based test. The Company has performed a transitional fair value based
impairment test on its goodwill and deemed that no impairment loss was
necessary.
With the adoption of SFAS No. 142, the Company ceased the amortization of
goodwill with a book value of $352 as of January 1, 2002. The adoption did
not have a material effect on comparable financial results for the three
months and six months ended June 30, 2001. Had amortization of goodwill
and tradenames not been recorded during the three months and six months
ended June 30, 2001, the net loss would have been reduced by approximately
$202 and $470, net of taxes, respectively, and basic and diluted net loss
per share would have decreased by $0.01 for both periods.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, "Accounting for Asset Retirement Obligations", which is
effective for fiscal years beginning after June 15, 2002. SFAS No. 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. The adoption of SFAS No. 143 is not expected to have a
significant impact on the Company's financial statements.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective January 1, 2002. The adoption of
SFAS No. 144 did not have a significant impact on the Company's financial
statements.
Effective January 1, 2002, the Company adopted EITF No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of
the Vendor's Products," which required that consideration paid to a
distributor or retailer to promote the vendor's products, such as slotting
fees or buydowns, generally be characterized as a reduction of revenue
when recognized in the vendor's income statement. Accordingly, the Company
reported such costs as a reduction of net sales rather than as operating
expenses during the three months and six months ended June 30, 2002 and
reclassified costs totaling $624 and $1,051 for the three months and six
months ended June 30, 2001, respectively.
9
12. SUBSEQUENT EVENT
On July 24, 2002, the Company announced a comprehensive restructuring of
its operations designed to further improve the Company's financial
performance and operating results. The restructuring, designed to reduce
costs and better align the Company's operational infrastructure to its
sales volume, will result in the consolidation of the New York
manufacturing and distribution facilities into the Company's modern
FDA-registered facility located in American Fork, Utah. The Company's
corporate offices and certain operational functions relating to
purchasing, research and development will remain in New York. The Company
anticipates incurring restructuring and related charges of up to $20,000
($10,000 of which will be non-cash), substantially all of which are
expected to be recorded during the third and fourth quarters of 2002.
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 reports its operations in
two reportable segments: the retail segment and the direct-to-consumer segment.
Products sold by the retail segment include vitamins, minerals, amino acids,
herbs, sports nutrition products and special formulas primarily under the
Twinlab brand name; an extensive line of herbal supplements and phytonutrients
marketed under the Nature's Herbs brand name; and a full line of herbal teas
under the Alvita brand name. The direct-to-consumer segment primarily markets
vitamins, herbs, nutritional supplements and health and beauty aids through its
Bronson catalog and it also manufactured, through Health Factors, private label
vitamins and supplements for a number of other companies on a contract
manufacturing basis. On May 22, 2002, the Company sold substantially all of the
fixed assets relating to the Health Factors' operation. The products
manufactured by Health Factors were, in significant part, transferred to other
Twinlab manufacturing facilities. Other production related to Bronson
Laboratories, Inc. was outsourced to a third-party contractor while the
manufacture of certain private label products was discontinued. The Company also
marketed nutritionally enhanced food bars and other nutritional products under
the PR*Bar trademark through PR*Nutrition, Inc. and conducted its publishing
activities through Advanced Research Press, Inc. ("ARP"). On April 17, 2001, the
Company sold the assets of its Changes International and PR*Nutrition, Inc.
subsidiaries and on June 1, 2001, the Company sold ARP. Changes International's
results of operations have been classified as discontinued operations.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
Retail segment $ 37.6 88.0% $ 41.7 85.2% $ 80.1 88.1% $ 87.6 86.2%
Direct-to-consumer segment 5.1 12.0 6.5 13.1 10.8 11.9 11.4 11.2
PR*Nutrition division -- -- 0.1 0.3 -- -- 0.9 0.8
Publishing division -- -- 0.7 1.4 -- -- 1.8 1.8
------- ---- ------- ---- ------- ---- -------- -----
Total Net Sales 42.7 100.0 49.0 100.0 90.9 100.0 101.7 100.0
------- ---- ------- ---- ------- ---- -------- -----
Gross Profit 14.7 34.4 15.3 31.3 32.8 36.1 35.3 34.8
Operating Expenses 16.3 38.1 20.2 41.2 35.6 39.2 49.5 48.7
------- ---- ------- ---- ------- ---- -------- -----
Loss from Operations $ (1.6) (3.7)% $ (4.9) (9.9)% $ (2.8) (3.1)% $ (14.2) (13.9)%
======= ==== ======= ==== ======= ==== ======== =====
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
NET SALES: Net sales for the three months ended June 30, 2002 were $42.7
million, a decrease of $6.3 million, or 12.8%, as compared to net sales of $49.0
million for the three months ended June 30, 2001. Net sales from the retail
segment were $37.6 million for the three months ended June 30, 2002, a decrease
of $4.1 million, or 9.9% as compared to $41.7 million for the three months ended
June 30, 2001. Net sales from the retail segment were primarily impacted by a
reduction in sales to a major customer that was offset in part by an increase in
sales to other distributors in the health and natural food store channel. Net
sales from the direct-to-consumer segment were $5.1 million for the three months
ended June 30, 2002, a decrease of $1.4
11
million, or 20.4%, as compared to $6.5 million for the three months ended June
30, 2001. The decrease in direct-to-consumer net sales was primarily
attributable to the sale of the HFI facility in May 2002. Net sales from PR
Nutrition and ARP were $0.1 million and $0.7 million, respectively, for the
three months ended June 30, 2001.
GROSS PROFIT: Gross profit for the three months ended June 30, 2002 was $14.7
million, which represented a decrease of $0.6 million, or 4.2%, as compared to
$15.3 million for the three months ended June 30, 2001. Gross profit margin was
34.4% for the three months ended June 30, 2002 as compared to 31.3% for the
three months ended June 30, 2001. The gross profit margin for the three months
ended June 30, 2001 was negatively impacted by the Company's implementation of
its Enterprise Resource Planning ("ERP") system. The overall decrease in gross
profit dollars was primarily attributable to the Company's lower sales volume
and the recording of a provision for excess and slow moving inventories of $2.6
million.
OPERATING EXPENSES: Operating expenses were $16.3 million for the three months
ended June 30, 2002, representing a decrease of $3.9 million, or 19.4%, as
compared to $20.2 million for the three months ended June 30, 2001. As a percent
of net sales, operating expenses decreased from 41.2% for the three months ended
June 30, 2001 to 38.1% for the three months ended June 30, 2002. The decrease in
operating expenses was primarily attributable to the elimination of ERP
implementation costs, a reduction in personnel related costs and the sale of ARP
and Health Factors, partially offset by an increase in insurance costs.
Included in operating expenses for the three months ended June 30, 2002 is a net
benefit of approximately $0.5 million relating to litigation matters. Such
benefit relates to proceeds of $4.7 million received from a litigation
settlement offset by the recording of reserves for litigation matters and
related costs.
LOSS FROM OPERATIONS: The Company recorded a loss from operations of $(1.6)
million for the three months ended June 30, 2002, as compared to $(4.9) million
for the three months ended June 30, 2001. The loss from operations margin was
(3.7)% of net sales for the three months ended June 30, 2002, as compared to
(9.9)% of net sales for the three months ended June 30, 2001.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $2.0 million
for the three months ended June 30, 2002, as compared to $2.2 million for the
three months ended June 30, 2001. The net decrease of $0.2 million was
attributable to a decrease in interest expense of $0.1 million and an increase
in other income of $0.1 million.
INCOME TAXES: The Company did not record a benefit from income taxes for the
three months ended June 30, 2002 as it is more likely than not that such benefit
will not be realized.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
NET SALES: Net sales for the six months ended June 30, 2002 were $90.9 million,
a decrease of $10.8 million, or 10.6%, as compared to net sales of $101.7
million for the six months ended June 30, 2001. Net sales from the retail
segment were $80.1 million for the six months ended June 30, 2002, a decrease of
$7.5 million, or 8.6%, as compared to $87.6 million for the six months ended
June 30, 2001. Net sales for the six months ended June 30, 2002 were primarily
impacted by a reduction in sales to a major customer. Net sales from the
direct-to-consumer segment were $10.8 million for the six months ended June 30,
2002, a decrease of $0.6 million, or 5.0%, as compared to $11.4 million for the
six months ended June 30, 2001. The decrease in direct-to-consumer net sales was
primarily attributable to the sale of the HFI
12
facility in May 2002. Net sales from PR Nutrition and ARP were $0.9 million and
$1.8 million, respectively, for the six months ended June 30, 2001.
GROSS PROFIT: Gross profit for the six months ended June 30, 2002 was $32.8
million, which represented a decrease of $2.5 million, or 7.1%, as compared to
$35.3 million for the six months ended June 30, 2001. Gross profit margin was
36.1% for the six months ended June 30, 2002 as compared to 34.8% for the six
months ended June 30, 2001. The overall decrease in gross profit dollars was
primarily attributable to the Company's lower sales volume and the recording of
a provision for excess and slow moving inventories of $4.2 million.
OPERATING EXPENSES: Operating expenses were $35.6 million for the six months
ended June 30, 2002, representing a decrease of $13.9 million, or 28.0%, as
compared to $49.5 million for the six months ended June 30, 2001. As a percent
of net sales, operating expenses decreased from 48.7% for the six months ended
June 30, 2001 to 39.2% for the six months ended June 30, 2002. The decrease in
operating expenses was primarily attributable to a reduction in advertising and
promotional expenses, the elimination of ERP implementation costs and a
reduction in personnel related costs, partially offset by an increase in
insurance costs.
LOSS FROM OPERATIONS: The Company recorded a loss from operations of $(2.8)
million for the six months ended June 30, 2002, as compared to $(14.2) million
for the six months ended June 30, 2001. The loss from operations margin was
(3.1)% of net sales for the six months ended June 30, 2002, as compared to
(13.9)% of net sales for the six months ended June 30, 2001.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $4.0 million
for the six months ended June 30, 2002, as compared to $4.9 million for the six
months ended June 30, 2001. The net decrease of $0.9 million was primarily
attributable to a decrease in interest expense as a result of reduced borrowings
and lower interest rates.
INCOME TAXES: The Company recorded a federal benefit from income taxes of $6.9
million for the six months ended June 30, 2002. The benefit recorded represented
a refund received by the Company as a result of the recently enacted Job
Creation and Worker Assistance Act of 2002.
DISCONTINUED OPERATIONS: On April 17, 2001, the Company sold the assets of its
Changes International subsidiary to Goldshield Group plc for approximately $4.9
million. The loss on the sale of the assets was $8.7 million. Changes
International's results of operations have been classified as discontinued
operations.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2002, cash provided by operating activities
was $19.7 million as compared to $16.3 million for the six months ended June 30,
2001. Cash provided by operating activities for the six months ended June 30,
2002 was primarily attributable to the collection of an income tax refund of
$6.9 million in addition to reductions in accounts receivable and inventories.
Cash provided by operating activities for the six months ended June 30, 2001 was
primarily attributable to a reduction in accounts receivable and inventories
partially offset by the timing of payments of accounts payable and accrued
expenses.
Capital expenditures were $0.5 million and $2.7 million for the six months ended
June 30, 2002 and 2001, respectively. Capital expenditures are expected to be
approximately $1.0 million during fiscal 2002.
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On May 22, 2002, the Company sold substantially all of the fixed assets relating
to the Health Factors' operation for approximately $2.1 million.
Net cash used in financing activities was $21.2 million and $23.0 million for
the six months ended June 30, 2002 and 2001, respectively, and represented the
repayment of outstanding debt and the payment of debt issuance costs.
In March 2002, the Company completed an amendment to its Revolving Credit
Facility which, among other things, revised the financial covenant relating to
EBITDA (as defined therein) and increased the interest rate on borrowings by
0.25%. Borrowings outstanding under the Revolving Credit Facility as of July 31,
2002 were approximately $8.3 million. As of July 31, 2002, approximately $20
million of borrowings were available under the Revolving Credit Facility.
In connection with the Revolving Credit Facility, certain current and former
members of senior management of the Company provided a letter of credit
amounting to $15 million with respect to the Company's obligations under the
Revolving Credit Facility. In consideration for providing this letter of credit,
effective April 1, 2002, the Company agreed to pay an aggregate annual fee of
$0.4 million and 375,000 shares of common stock (to be issued from shares held
in treasury), payable in quarterly installments for the duration of the period
that the letter of credit remains outstanding. The fair value of the
compensation for providing the letter of credit, $1.6 million, has been recorded
as deferred financing costs and is being amortized over the remaining term of
the Revolving Credit Facility.
On July 24, 2002, the Company announced a comprehensive restructuring of its
operations designed to further improve the Company's financial performance and
operating results. The restructuring, designed to reduce costs and better align
the Company's operational infrastructure to its sales volume, will result in the
consolidation of the New York manufacturing and distribution facilities into the
Company's modern FDA-registered facility located in American Fork, Utah. The
Company's corporate offices and certain operational functions relating to
purchasing, research and development will remain in New York. The Company
anticipates incurring restructuring and related charges of up to $20 million
($10 million of which will be non-cash), substantially all of which are expected
to be recorded during the third and fourth quarters of 2002.
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
relating to the Company's senior subordinated notes and the Revolving Credit
Facility impose upon the Company certain financial and operating covenants,
including, among others, requirements that the Company 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 pursue its business strategy for at least the next 12 months.
The Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations and borrowings under its Revolving Credit
Facility.
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The Company has been named as a defendant in a number of pending product
liability lawsuits which the Company is vigorously defending. In reviewing its
potential exposure for product liability matters, the Company considers, among
other factors, recent and historical settlements and judgments, if any, the
incidence and trend of recent and historical claims, the nature of any alleged
injuries, the amount and availability of insurance coverage and the status of
litigation proceedings and settlement discussions.
Based on this analysis, the Company has estimated a range of potential liability
in an amount it deems reasonable in connection with certain product liability
matters. The Company has established a reserve for product liability matters
that is primarily based on known claims and an estimate of incurred but not
reported claims that can be reasonably estimated as of the balance sheet date.
However, there are inherent uncertainties involved in estimating product
liability costs. Accordingly, the Company has concluded that no amount within
the range is more likely than any other, and has recorded $2.8 million (an
amount within the range as of June 30, 2002) as a liability in the accompanying
consolidated financial statements. Management expects that any payments relating
to these matters will occur over a number of years and has not discounted the
potential liability as of June 30, 2002, because the amounts and timing of any
payments are not fixed or reliably determinable at the present time.
Because of the uncertainties related to the number of potential future claims,
ultimate settlement amounts, dismissal of such claims or any adverse judgments,
it is difficult to obtain precise estimates of the Company's ultimate liability
for such claims. It is possible that the total exposure to product liability
claims may be less than or greater than an amount within the Company's estimated
range of potential liability due to changes in facts or circumstances after the
date of each estimate. As additional experience is gained regarding the
Company's product liability claims, possible settlement discussions, litigation
history and insurance coverage, the Company will reassess its potential
liability and revise the amount of its reserve as appropriate.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
142, "Goodwill and Other Intangible Assets" and SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets", effective January 1, 2002. The
adoption of SFAS No. 142 and SFAS No. 144 did not have a significant impact on
the Company's financial statements. See Note 11 to the Notes to the Consolidated
Unaudited Financial Statements.
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations", which is effective for
fiscal years beginning after June 15, 2002. SFAS No. 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
adoption of SFAS No. 143 is not expected to have a significant impact on the
Company's financial statements.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q may contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements can
be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy. Forward-looking statements involve substantial risks and uncertainties
and represent the Company's expectations or beliefs, including, but not limited
to, statements concerning industry performance, the Company's operations,
performance, financial condition, growth and
15
acquisition strategies, margins and growth in sales of the Company's products.
Such forward-looking statements by their nature involve known and unknown risks,
uncertainties and contingencies, many of which are beyond the Company's control,
which may cause actual results, performance or achievements to differ materially
from those projected or implied in such forward-looking statements. As a result,
no assurance can be given that the future results covered by such
forward-looking statements will be achieved. Factors that might cause actual
results, performance or achievements to differ materially from those projected
or implied in such forward-looking statements include, among other things: (i)
the impact of competitive products; (ii) changes in law and regulations; (iii)
adequacy and availability of insurance coverage; (iv) limitations on future
financing; (v) increases in the cost of borrowings and unavailability of debt or
equity capital; (vi) the effect of adverse publicity regarding nutritional
supplements; (vii) uncertainties relating to acquisitions; (viii) the inability
of the Company to gain and/or hold market share; (ix) exposure to and expense of
resolving and defending product liability claims and other litigation; (x)
consumer acceptance of the Company's products; (xi) managing and maintaining
growth; (xii) customer demands; (xiii) the inability to integrate and
consolidate the manufacturing and distribution facilities and achieve cost
savings and operational efficiencies; (xiv) dependence on individual products;
(xv) dependence on individual customers, (xvi) market and industry conditions
including pricing, demand for products, levels of trade inventories and raw
materials availability, (xvii) the success of product development and new
product introductions into the marketplace; (xviii) lack of available product
liability insurance for ephedra-containing products; (xix) slow or negative
growth in the nutritional supplement industry; (xx) the departure of key members
of management; (xxi) the absence of clinical trials for many of the Company's
products; (xxii) the ability of the Company to efficiently manufacture its
products; as well as other risks and uncertainties that are described from time
to time in the Company's filings with the Securities and Exchange Commission.
For the purpose of this periodic report on Form 10-Q, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. The Company accepts no obligation to update any
forward-looking statements and does not intend to do so.
ITEM 3.: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk and exposure from December
31, 2001, a description of which may be found in the Annual Report on Form 10-K.
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PART II
OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders of the Company was held on May 14,
2002, at which meeting the stockholders voted to elect ten directors of
the Company and ratify the appointment of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31,
2002.
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:
NOMINEE FOR AGAINST WITHHELD NON-VOTING
------- --- ------- -------- ----------
Brian Blechman 25,221,368 0 1,382,573 2,336,915
Dean Blechman 26,159,013 0 444,928 2,336,915
Neil Blechman 26,138,011 0 465,930 2,336,915
Ross Blechman 25,221,193 0 1,382,748 2,336,915
Steve Blechman 26,136,138 0 467,803 2,336,915
Stephen L. Welling 26,176,491 0 427,450 2,336,915
John G. Danhakl 26,172,668 0 431,273 2,336,915
Jonathan D. Sokoloff 26,168,668 0 435,273 2,336,915
William U. Westerfield 26,173,641 0 430,300 2,336,915
Leonard Schutzman 26,179,791 0 424,150 2,336,915
(c) Other matters voted upon at the meeting and the results of those votes are
as follows:
FOR AGAINST ABSTAIN NON-VOTING
--- ------- ------- ----------
Ratification of Deloitte & Touche LLP 26,259,925 307,449 36,567 2,336,915
as the Company's independent auditors
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.63 - Asset Purchase Agreement dated as of May 22, 2002 by and among
Anabolic Laboratories, Inc., Health Factors International, Inc. and Twin
Laboratories Inc.
10.64 - Manufacturing and Supply agreement dated as of May 22, 2002 by and
between Anabolic Laboratories, Inc. and Twin Laboratories Inc.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended June 30,
2002.
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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/ Joseph Sinicropi
------------------------------
Joseph Sinicropi
Chief Financial Officer
DATED: August 9, 2002
- ---------------------------------------------
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