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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 September 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 October 31, 2002, the registrant had 29,034,606 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)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net 14,892 26,450
Inventories 35,423 43,977
Prepaid expenses and other current assets 3,318 2,094
--------- ---------
Total current assets 53,633 72,521
Property, plant and equipment, net 34,884 46,854
Other assets 9,125 9,239
--------- ---------
TOTAL $ 97,642 $ 128,614
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 1,891 $ 2,241
Accounts payable 17,230 19,352
Accrued expenses and other current liabilities
(Notes 2, 3 and 12) 24,921 8,870
--------- ---------
Total current liabilities 44,042 30,463
Long-term debt, less current portion 58,349 77,129
--------- ---------
Total liabilities 102,391 107,592
--------- ---------
Commitments and contingencies (Note 12)
Shareholders' (Deficit) 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 29,034,606 outstanding as
of September 30, 2002 and 33,041,756 issued and 28,940,856
outstanding as of December 31, 2001 33,042 33,042
Additional paid-in capital 289,312 290,001
Accumulated deficit (291,150) (265,227)
--------- ---------
31,204 57,816
Treasury stock at cost; 4,007,150 shares and 4,100,900 shares,
respectively (35,953) (36,794)
--------- ---------
Total shareholders' (deficit) equity (4,749) 21,022
--------- ---------
TOTAL $ 97,642 $ 128,614
========= =========
2
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Net Sales (Note 2) $ 25,159 $53,980 $116,053 $155,668
Cost of Sales 20,119 35,181 78,201 101,532
-------- ------- -------- --------
Gross Profit 5,040 18,799 37,852 54,136
Operating Expenses (Note 3) 16,326 18,447 51,955 67,939
Restructuring Charges (Note 3) 6,006 - 6,006 -
Asset Impairment Charges (Note 3) 6,894 - 6,894 -
-------- ------- -------- --------
(Loss) Income from Operations (24,186) 352 (27,003) (13,803)
-------- ------- -------- --------
Other (Expense) Income:
Interest expense, net of interest income (1,880) (2,150) (5,951) (7,070)
Other 31 22 120 13
-------- ------- -------- --------
(1,849) (2,128) (5,831) (7,057)
-------- ------- -------- --------
Loss from Continuing Operations Before Income Taxes (26,035) (1,776) (32,834) (20,860)
Benefit from Income Taxes - - (6,911) (4,651)
-------- ------- -------- --------
Loss from Continuing Operations (26,035) (1,776) (25,923) (16,209)
-------- ------- -------- --------
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 Loss $(26,035) $(1,776) $(25,923) $(24,743)
======== ======= ======== ========
Basic and Diluted Loss Per Share:
Loss from continuing operations $ (0.90) $ (0.06) $ (0.90) $ (0.56)
Loss from discontinued operations - - - (0.30)
-------- ------- -------- --------
Net loss $ (0.90) $ (0.06) $ (0.90) $ (0.86)
======== ======= ======== ========
Basic and diluted weighted average shares outstanding 29,003 28,646 28,962 28,646
======== ======= ======== ========
3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
-----------------
SEPTEMBER 30,
-------------
2002 2001
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,923) $(24,743)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Loss from discontinued operations - 8,534
Depreciation and amortization 6,437 6,301
Asset impairment charges 6,894 -
Bad debt expense 764 1,665
Provision for excess and slow moving inventories 6,646 -
Deferred income taxes - (4,011)
Gain on sale of businesses and fixed assets (60) (971)
Other 40 448
Changes in operating assets and liabilities:
Accounts receivable 10,794 15,421
Inventories 1,908 4,344
Refundable income taxes - 11,692
Prepaid expenses and other current assets (1,224) (1,157)
Accounts payable (2,122) (4,795)
Accrued expenses and other current liabilities 14,360 (1,991)
-------- --------
Net cash provided by continuing operations 18,514 10,737
Net cash provided by discontinued operations - 1,168
-------- --------
Net cash provided by operating activities 18,514 11,905
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,093) (3,119)
Increase in other assets (212) (803)
Net proceeds from sales of businesses and fixed assets 2,121 4,714
-------- --------
Net cash provided by investing activities 816 792
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under revolving credit facilities (17,466) (14,074)
Payments of debt (1,664) (1,538)
Payments of debt issuance costs (200) (1,975)
-------- --------
Net cash used in financing activities (19,330) (17,587)
-------- --------
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 $ 3,795 $ 5,954
======== ========
Income taxes, net of cash refunds $ (6,732) $(11,721)
======== ========
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 September 30, 2002, and the results of its operations and
its cash flows for the three months and nine months ended September 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 nine months ended September 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. NET SALES
a. PRODUCT RATIONALIZATION
In connection with a continuing review of its operations, the Company
committed to a plan to rationalize product offerings to several key
customers in the retail segment. This plan was aimed at reducing the
number of active SKUs and achieving a more appropriate product mix. In
connection with this plan, the Company is allowing these customers to
return inventory resulting in an incremental charge for sales returns and
allowances of approximately $8,800 during the three months ended September
30, 2002.
b. EPHEDRA PRODUCTS
A number of the Company's products include an herbal ingredient known as
"Ma Huang," also referred to as ephedra, which contains naturally-
occurring ephedrine alkaloids. The Company's products containing Ma Huang
are generally marketed for weight loss and other purposes, including
increased endurance and energy, generally in conjunction with diet or
exercise. Products containing Ma Huang accounted for approximately 17% of
the Company's net sales for the nine months ended September 30, 2002.
Ma Huang has been the subject of negative publicity in the United States
and other countries relating to alleged harmful or adverse effects. This
publicity has led to recent congressional hearings addressing the safety
of Ma Huang and several state governments have passed legislation
regulating the sale of products that contain Ma Huang.
The Company has been named as a defendant in a series of lawsuits alleging
that its Ma Huang products caused injury, death and/or damages, as well as
certain proceedings seeking class action certification for consumer fraud
related to the sale of such products. The Company is vigorously defending
these lawsuits. However, the Company is incurring, and expects to incur,
significant costs associated with this litigation activity. These costs
are due in part to: (i) greater costs for insurance premiums; (ii)
significant self-insured
5
retention limits for claims alleging injuries after December 31, 2000; and
(iii) legal fees that are not covered under certain of the Company's
insurance policies.
The Company believes in the safety and efficacy of its products that
contain Ma Huang based on the scientific evidence. Nevertheless, as a
result of the increasing costs that are negatively impacting the
profitability of these products, coupled with consumer demand for non-
ephedra weight loss products, the Company has decided to discontinue the
sale of products that contain Ma Huang effective March 31, 2003. The
Company expects to experience a reduction in net sales due to the
discontinuation of its products that contain Ma Huang. Based upon
anticipated costs savings expected to be achieved, however, the Company
does not believe that the decision to discontinue the sale of products
that contain Ma Huang should have a material adverse effect on the
profitability of the Company. The Company is committed to the Diet and
Energy category, specifically its Diet Fuel, Ripped Fuel and Metabolift
brands, and has launched a line of patented and clinically tested ephedra-
free products.
3. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
On July 24, 2002, the Company announced a comprehensive restructuring of
its operations designed to 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 that the consolidation of
the facilities will be completed during the first quarter of 2003.
Significant components of the restructuring charges recorded during the
three months ended September 30, 2002 and remaining accrual as of
September 30, 2002 include:
Total
Restructuring Restructuring
Charges Payments Accrual
------------- -------- -------------
Facility costs $3,137 $ 68 $3,069
Employee costs 2,011 117 1,894
Professional fees 754 544 210
Other 104 104 -
------ ------ ------
Total $6,006 $ 833 $5,173
====== ====== ======
Facility costs represent remaining lease payments for New York leased
properties and equipment, and holding and shutdown costs related to the
New York manufacturing and distribution facilities. Employee costs
primarily represent severance and related benefits associated with the
separation of approximately 300 New York employees. The majority of the
employees will be leaving during the fourth quarter of 2002, with the
balance leaving during the first quarter of 2003.
In addition, as a result of the consolidation of the facilities, certain
manufacturing and distribution assets were determined to be impaired
during the quarter resulting in asset impairment charges of $6,894. The
Company anticipates selling these assets during fiscal 2003.
6
The Company anticipates recording additional restructuring charges of up
to $4,000, substantially all of which are expected to be recorded in the
fourth quarter of 2002 and the first quarter of 2003.
In connection with its plan to consolidate the manufacturing and
distribution facilities, the Company incurred additional costs of
approximately $544 primarily relating to personnel costs associated with
preparing the Utah facility. These costs have been recorded in operating
expenses in the accompanying consolidated statements of operations.
4. 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:
NINE MONTHS ENDED
SEPTEMBER 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.
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
7
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.
5. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory, consist of
the following:
September 30, 2002 December 31, 2001
------------------ -----------------
Raw Materials $ 8,178 $10,324
Work in Process 7,320 6,787
Finished Goods 19,925 26,866
------- -------
Total $35,423 $43,977
======= =======
Reserves for excess and obsolete inventory totaled $8,919 and $14,556 as
of September 30, 2002 and December 31, 2001, respectively.
6. REVOLVING CREDIT FACILITY
In November 2002, the Company completed an amendment and waiver to its
Revolving Credit Facility which, among other things, reduced the total
facility from $60,000 to $50,000, revised the financial covenant relating
to EBITDA (as defined therein) and increased the commitment fee on the
unused portion of the facility from 0.375% to 0.5%. Borrowings outstanding
under the Revolving Credit Facility as of September 30, 2002 were
approximately $13,000.
7. OPERATING EXPENSES
Included in operating expenses for the nine months ended September 30,
2002 is a net benefit of approximately $500 relating to litigation
matters. Such benefit relates to proceeds of $5,427 received from
litigation settlements offset by the recording of reserves for litigation
matters and related costs (see Note 12).
8. 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. As of September 30, 2002, $94 has been paid and 93,750 shares
of common stock have been issued. 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.
Effective November 8, 2002, Brian Blechman and Neil Blechman, each an
Executive Vice President, retired as employees of the Company. In
connection with their retirement, the Company is obligated to make
payments to each for a period of three years at their current base salary.
8
9. 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 nine months ended September 30, 2002 as it is more
likely than not that such benefit will not be realized.
10. 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 2,116,000 and 1,881,000 for the three months ended
March 31, 2002 and 2001, respectively; 1,832,000 and 2,376,000 for the
three months ended June 30, 2002 and 2001, respectively; and 2,571,000 and
2,207,000 for the three months ended September 30, 2002 and 2001,
respectively, were excluded from the computation of diluted net income
(loss) per share because they were anti-dilutive.
11. 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 4, on May 22, 2002, the
Company sold substantially all of the fixed assets relating to its Health
Factors' operations.
Segment information for the three months and nine months ended September
30, 2002 and 2001 was as follows:
Direct-to- Intercompany
Retail Consumer Other(1) Elimination Total
- -------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales to external
customers $ 21,784 $ 3,375 $ - $ - $ 25,159
Intersegment net sales 25 - - (25) -
(Loss) income from operations (24,850) 716 (52) - (24,186)
Total assets 125,996 26,673 - (55,027) 97,642
THREE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales to external
customers $ 47,497 $ 6,483 $ - $ - $ 53,980
Intersegment net sales 25 906 - (931) -
Income (loss) from operations (325) 778 (101) - 352
Total assets 188,491 61,743 12,231 (60,240) 202,225
9
Direct-to- Intercompany
Retail Consumer Other(1) Elimination Total
- -------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 2002
Net sales to external
customers $101,888 $14,165 $ - $ - $116,053
Intersegment net sales 163 - - (163) -
(Loss) income from operations (28,348) 1,501 (156) - (27,003)
NINE MONTHS ENDED
SEPTEMBER 30, 2001
Net sales to external
customers $135,141 $17,843 $ 2,684 $ - $155,668
Intersegment net sales 25 906 114 (1,045) -
(Loss) income from operations (15,056) 628 625 - (13,803)
[1]The "other" column includes corporate-related items and, for the nine months
ended September 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.
12. 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. Accordingly, the Company has established a
reserve of approximately $3,600 for product liability matters that is
primarily based on known claims and an estimate of unasserted claims that
are probable of assertion and can be reasonably estimated as of the
balance sheet date. 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 September 30, 2002, because the 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.
13. 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
10
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 nine months ended September 30, 2001. Had amortization of
goodwill and tradenames not been recorded during the three months and nine
months ended September 30, 2001, the net loss would have been reduced by
approximately $186 and $656, net of taxes, respectively, and basic and
diluted net loss per share would have been unchanged for the three months
ended September 30, 2001 and would have decreased by $0.02 for the nine
months ended September 30, 2001.
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 Emerging Issues Task Force
("EITF") No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including 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 nine months ended September 30, 2002 and reclassified costs
totaling $68 and $1,119 for the three months and nine months ended
September 30, 2001, respectively.
In April 2002, the FASB issued SFAS No.145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". This statement provides guidance on the classification of
gains and losses from the extinguishment of debt and on the accounting for
certain specified lease transactions. The adoption of SFAS No. 145 is not
expected to have a significant impact on the Company's financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". This statement provides
guidance on the recognition and measurement of liabilities associated with
disposal activities and will be adopted by the Company on January 1, 2003.
The Company currently accounts for costs associated with exit or disposal
activities in accordance with EITF 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)".
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 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 September 30, Nine Months Ended September 30,
------------------------------------- ----------------------------------------
(Dollars in millions) (Dollars in millions)
2002 2001 2002 2001
---- ---- ---- ----
Net Sales:
Retail segment $ 21.8 88.0% $47.5 88.0% $101.9 87.8% $135.2 86.8%
Direct-to-consumer segment 3.4 12.0 6.5 12.0 14.2 12.2 17.8 11.5
PR*Nutrition division - - - - - - 0.9 0.5
Publishing division - - - - - - 1.8 1.2
------ ----- ----- ----- ------ ----- ------ -----
Total Net Sales 25.2 100.0 54.0 100.0 116.1 100.0 155.7 100.0
------ ----- ----- ----- ------ ----- ------ -----
Gross Profit 5.0 20.0 18.8 34.8 37.9 32.6 54.1 34.8
Operating Expenses 16.3 64.9 18.4 34.2 52.0 44.8 67.9 43.6
Restructuring Charges 6.0 23.8 - - 6.0 5.2 - -
Asset Impairment Charges 6.9 27.4 - - 6.9 5.9 - -
------ ----- ----- ----- ------ ----- ------ -----
Loss from Operations $(24.2) (96.1)% $ 0.4 0.6% $(27.0) (23.3)% $(13.8) (8.9)%
====== ===== ===== ===== ====== ===== ====== =====
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES: In connection with a continuing review of its operations, the Company
committed to a plan to rationalize product offerings to several key customers in
the retail segment. This plan was aimed at reducing the number of active SKUs
and achieving a more appropriate product mix. In connection with this plan, the
Company is allowing these customers to return inventory
12
resulting in an incremental charge for sales returns and allowances of
approximately $8.8 million (the "Product Rationalization Charge") during the
three months ended September 30, 2002. Net sales for the three months ended
September 30, 2002 were $25.2 million ($34.0 million excluding the Product
Rationalization Charge). Excluding this charge, net sales decreased $20.0
million, or 37.1%, as compared to net sales of $54.0 million for the three
months ended September 30, 2001. Net sales from the retail segment were $21.8
million ($30.6 million excluding the Product Rationalization Charge) for the
three months ended September 30, 2002. Excluding this charge, net sales to the
retail segment decreased $16.9 million, or 35.6% as compared to $47.5 million
for the three months ended September 30, 2001. In addition, net sales to the
retail segment were negatively impacted by reduced promotional allowances to
customers in the Health and Natural Food Store Channel as well as some
disruption in customer service as a result of the consolidation of the
facilities. Net sales from the direct-to-consumer segment were $3.4 million for
the three months ended September 30, 2002, a decrease of $3.1 million, or
47.9%, as compared to $6.5 million for the three months ended September 30,
2001. The decrease in direct-to-consumer net sales was primarily attributable
to the sale of the HFI facility in May 2002.
A number of the Company's products include an herbal ingredient known as "Ma
Huang," also referred to as ephedra, which contains naturally-occurring
ephedrine alkaloids. The Company's products containing Ma Huang are generally
marketed for weight loss and other purposes, including increased endurance and
energy, generally in conjunction with diet or exercise. Products containing Ma
Huang accounted for approximately 17% of the Company's net sales for the nine
months ended September 30, 2002.
Ma Huang has been the subject of negative publicity in the United States and
other countries relating to alleged harmful or adverse effects. This publicity
has led to recent congressional hearings addressing the safety of Ma Huang and
several state governments have passed legislation regulating the sale of
products that contain Ma Huang.
The Company has been named as a defendant in a series of lawsuits alleging that
its Ma Huang products caused injury, death and/or damages, as well as certain
proceedings seeking class action certification for consumer fraud related to
the sale of such products. The Company is vigorously defending these lawsuits.
However, the Company is incurring, and expects to incur, significant costs
associated with this litigation activity. These costs are due in part to: (i)
greater costs for insurance premiums; (ii) significant self-insured retention
limits for claims alleging injuries after December 31, 2000; and (iii) legal
fees that are not covered under certain of the Company's insurance policies.
The Company believes in the safety and efficacy of its products that contain Ma
Huang based on the scientific evidence. Nevertheless, as a result of the
increasing costs that are negatively impacting the profitability of these
products, coupled with consumer demand for non-ephedra weight loss products,
the Company has decided to discontinue the sale of products that contain Ma
Huang effective March 31, 2003. The Company expects to experience a reduction
in net sales due to the discontinuation of its products that contain Ma Huang.
Based upon anticipated costs savings expected to be achieved, however, the
Company does not believe that the decision to discontinue the sale of products
that contain Ma Huang should have a material adverse effect on the
profitability of the Company. The Company is committed to the Diet and Energy
category, specifically its Diet Fuel, Ripped Fuel and Metabolift brands, and
has launched a line of patented and clinically tested ephedra-free products.
GROSS PROFIT: Gross profit for the three months ended September 30, 2002 was
$5.0 million (approximately $12.2 million excluding the effect of the Product
Rationalization Charge). Excluding this charge, gross profit decreased $6.6
million, or 34.9%, as compared to $18.8 million for the three months ended
September 30, 2001 and gross profit margin was 36.0% for the three months
13
ended September 30, 2002 as compared to 34.8% for the three months ended
September 30, 2001. The overall decrease in gross profit dollars was primarily
attributable to the lower sales volume and the recording of a provision for
excess and slow moving inventories of $2.4 million. The increase in the gross
profit margin was primarily attributable to a reduction in overhead costs
associated with cost reduction initiatives.
OPERATING EXPENSES: Operating expenses were $16.3 million for the three months
ended September 30, 2002, representing a decrease of $2.1 million, or 11.5%, as
compared to $18.4 million for the three months ended September 30, 2001. As a
percent of net sales, operating expenses increased from 34.2% for the three
months ended September 30, 2001 to 48.1% (excluding the Product Rationalization
Charge) for the three months ended September 30, 2002. The decrease in operating
expenses was primarily attributable to the elimination of Enterprise Resource
Planning ("ERP") implementation costs, a reduction in personnel related costs
associated with cost reduction initiatives and the elimination of operating
costs related to sold and discontinued businesses, partially offset by an
increase in insurance costs, advertising expenditures and additional costs
related to the consolidation of the manufacturing and distribution facilities.
RESTRUCTURING AND ASSET IMPAIRMENT CHARGES: 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 that
the consolidation of the facilities will be completed during the first quarter
of 2003.
Restructuring charges recorded in the three months ended September 30, 2002
totaled $6.0 million and primarily represented facility and employee costs,
professional fees and other incremental costs. Facility costs represent
remaining lease payments for New York leased properties and equipment, and
holding and shutdown costs related to the New York manufacturing and
distribution facilities. Employee costs primarily represent severance and
related benefits associated with the separation of approximately 300 New York
employees. The majority of the employees will be leaving during the fourth
quarter of 2002, with the balance leaving during the first quarter of 2003.
In addition, as a result of the consolidation of the facilities, certain
manufacturing and distribution assets were determined to be impaired during the
quarter resulting in asset impairment charges of $6.9 million. The Company
anticipates selling these assets during fiscal 2003.
The consolidation of the manufacturing and distribution facilities is expected
to generate additional annualized cost reductions in excess of $6.0 million,
commencing in the first quarter of 2003. The Company anticipates recording
additional restructuring charges of up to $4.0 million, substantially all of
which are expected to be recorded in the fourth quarter of 2002 and the first
quarter of 2003.
LOSS FROM OPERATIONS: The Company recorded a loss from operations of $(24.2)
million for the three months ended September 30, 2002, as compared to income
from operations of $0.4 million for the three months ended September 30, 2001.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $1.8
million for the three months ended September 30, 2002, as compared to $2.1
million for the three months
14
ended September 30, 2001. The net decrease of $0.3 million was attributable to
a decrease in interest expense as a result of reduced borrowings and lower
interest rates.
INCOME TAXES: The Company did not record a benefit from income taxes for the
three months ended September 30, 2002 as it is more likely than not that such
benefit will not be realized.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES: Net sales for the nine months ended September 30, 2002 were $116.1
million ($124.9 million excluding the Product Rationalization Charge).
Excluding this charge, net sales decreased $30.8 million, or 19.8%, as compared
to net sales of $155.7 million for the nine months ended September 30, 2001.
Net sales from the retail segment were $101.9 million ($110.7 million excluding
the Product Rationalization Charge) for the nine months ended September 30,
2002. Excluding this charge, net sales to the retail segment decreased by
$24.5 million, or 18.1%, as compared to $135.2 million for the nine months
ended September 30, 2001. In addition to the Product Rationalization Charge,
net sales for the nine months ended September 30, 2002 were primarily impacted
by a reduction in sales to a major customer as well as reduced promotional
allowances to customers in the Health and Natural Food Store Channel. Net sales
from the direct-to-consumer segment were $14.2 million for the nine months
ended September 30, 2002, a decrease of $3.6 million, or 20.6%, as compared to
$17.8 million for the nine months ended September 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 $0.9 million and
$1.8 million, respectively, for the nine months ended September 30, 2001.
GROSS PROFIT: Gross profit for the nine months ended September 30, 2002 was
$37.9 million (approximately $45.1 million excluding the Product
Rationalization Charge). Excluding this charge, gross profit decreased by $9.0
million, or 16.8%, as compared to $54.1 million for the nine months ended
September 30, 2001 and gross profit margin was 36.1% for the nine months ended
September 30, 2002 as compared to 34.8% for the nine months ended September 30,
2001. The overall decrease in gross profit dollars was primarily attributable
to the lower sales volume and the recording of a provision for excess and slow
moving inventories of $6.6 million. The increase in the gross profit margin was
primarily attributable to a reduction in overhead costs associated with cost
reduction initiatives.
OPERATING EXPENSES: Operating expenses were $52.0 million for the nine months
ended September 30, 2002, representing a decrease of $15.9 million, or 23.5%,
as compared to $67.9 million for the nine months ended September 30, 2001. As a
percent of net sales, operating expenses decreased from 43.6% for the nine
months ended September 30, 2001 to 41.6% (excluding the Product Rationalization
Charge) for the nine months ended September 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 $(27.0)
million for the nine months ended September 30, 2002, as compared to $(13.8)
million for the nine months ended September 30, 2001.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $5.8
million for the nine months ended September 30, 2002, as compared to $7.1
million for the nine months ended September 30, 2001. The net decrease of $1.3
million was primarily attributable to a decrease in interest expense as a
result of reduced borrowings and lower interest rates.
15
INCOME TAXES: The Company recorded a federal benefit from income taxes of $6.9
million for the nine months ended September 30, 2002. The benefit recorded
represented 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 nine months ended September 30, 2002 as it
is more likely than not that such benefit will not be realized.
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 nine months ended September 30, 2002, cash provided by operating
activities was $18.5 million as compared to $11.9 million for the nine months
ended September 30, 2001. Cash provided by operating activities for the nine
months ended September 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 nine
months ended September 30, 2001 was primarily attributable to the collection of
an income tax refund of $11.7 million in addition to reductions in accounts
receivable and inventories partially offset by the timing of payments of
accounts payable and accrued expenses.
Capital expenditures were $1.1 million and $3.1 million for the nine months
ended September 30, 2002 and 2001, respectively. Capital expenditures are
expected to be approximately $1.5 million during fiscal 2002.
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 $19.3 million and $17.6 million for
the nine months ended September 30, 2002 and 2001, respectively, and represented
the repayment of outstanding debt and the payment of debt issuance costs.
In November 2002, the Company completed an amendment and waiver to its Revolving
Credit Facility which, among other things, reduced the total facility from $60
million to $50 million, revised the financial covenant relating to EBITDA (as
defined therein) and increased the commitment fee on the unused portion of the
facility from 0.375% to 0.5%. Borrowings outstanding under the Revolving Credit
Facility as of October 31, 2002 were approximately $14.8 million. As of October
31, 2002, approximately $14.0 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 $15.0 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. As of September 30, 2002, $0.1
million has been paid and 93,750 shares of common stock have been issued. The
fair value of the compensation for providing the letter of
16
credit, $1.6 million, has been recorded as deferred financing costs and is
being amortized over the remaining term of the Revolving Credit Facility.
Effective November 8, 2002, Brian Blechman and Neil Blechman, each an
Executive Vice President, retired as employees of the Company. In connection
with their retirement, the Company is obligated to make payments to each for a
period of three years at their current base salary.
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.
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. Accordingly, the Company has established a reserve of $3.6
million for product liability matters that is primarily based on known claims
and an estimate of unasserted claims that are probable of assertion and can be
reasonably estimated as of the balance sheet date. 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 September 30, 2002, because the
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
17
SFAS No. 144 did not have a significant impact on the Company's financial
statements. See Note 13 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.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. The adoption of SFAS No. 145 is not expected to have a
significant impact on the Company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and will be adopted by the Company on January 1, 2003. The Company currently
accounts for costs associated with exit or disposal activities in accordance
with EITF 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)".
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 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 including the Company's line of
ephedra-free products; (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
18
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.
19
PART II
OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Issuance of Securities
On August 1, 2002, the Company issued 18,750 shares of common stock (from
shares held in treasury) to each of Brian Blechman, Dean Blechman, Neil
Blechman, Ross Blechman and Steve Blechman in consideration for providing
an aggregate letter of credit amounting to $15.0 million with respect to
the Company's obligations under its Revolving Credit Facility. Such common
stock was issued in a transaction that was exempt from registration under
Section 4 (2) of the Securities Act.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to the Company's management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures pursuant to Exchange
Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC
filings.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to
the date the Company completed its evaluation.
20
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.65 - Waiver and Amendment Number Six to the Financing Agreement and
Loan Documents dated as of March 29, 2001 between CIT Group/Business
Credit, Inc. and other lenders thereto and Twin Laboratories Inc. and
certain subsidiaries as borrowers.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on August 9, 2002 stating that the
Company has provided to the Securities and Exchange Commission the
certifications of its Chief Executive Officer and Chief Financial
Officer, as required by 18 U.S.C. Section 1350, as created by Section
906 of the Sarbanes-Oxley Act of 2002.
21
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: November 14, 2002
------------------
22
CERTIFICATIONS
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Ross Blechman certify that:
1. I have reviewed this quarterly report on Form 10-Q of Twinlab Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ Ross Blechman
----------------------
Ross Blechman
Chief Executive Officer
23
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Joseph Sinicropi certify that:
1. I have reviewed this quarterly report on Form 10-Q of Twinlab Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: November 14, 2002 /s/ Joseph Sinicropi
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Joseph Sinicropi
Chief Financial Officer
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