Back to GetFilings.com
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 March 31, 2003
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
----------- -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
----------- -----------
At April 30, 2003, the registrant had 29,222,106 shares of common stock
outstanding.
TABLE OF CONTENTS
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 2003 and 2002 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Unaudited Financial Statements 6
Independent Accountants' Review Report 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
2
PART I
FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 23,972 20,545
Inventories (Note 5) 28,453 29,254
Prepaid expenses and other current assets 3,548 1,853
Assets held for sale (Note 3) 3,183 --
Assets of discontinued operations (Note 4) -- 6,370
--------- ---------
Total current assets 59,156 58,022
Property, Plant and Equipment, net (Note 3) 29,784 34,019
Other Assets (Notes 6 and 9) 4,423 5,136
--------- ---------
TOTAL $ 93,363 $ 97,177
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities:
Current portion of long-term debt (Note 7) $ 30,534 $ 6,565
Accounts payable 19,008 16,132
Accrued expenses and other current liabilities (Notes 3
and 10) 18,469 21,156
--------- ---------
Total current liabilities 68,011 43,853
Long-Term Debt, less current portion (Note 7) 40,090 64,451
--------- ---------
Total liabilities 108,101 108,304
--------- ---------
Commitments and Contingencies (Note 10)
Shareholders' Deficit:
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 29,222,106
outstanding as of March 31, 2003 and 33,041,756
issued and 29,128,356 outstanding as of December 31,
2002 33,042 33,042
Additional paid-in capital 287,853 288,582
Accumulated deficit (301,363) (297,639)
--------- ---------
19,532 23,985
Treasury stock at cost; 3,819,650 shares as of March 31,
2003 and 3,913,400 shares as of December 31, 2002 (34,270) (35,112)
--------- ---------
Total shareholders' deficit (14,738) (11,127)
--------- ---------
TOTAL $ 93,363 $ 97,177
========= =========
3
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
(unaudited)
Net Sales $ 37,718 $ 45,457
Cost of Sales 23,589 28,998
--------- ---------
Gross Profit 14,129 16,459
Operating Expenses 16,426 17,904
Restructuring Charges (Note 3) 959 --
--------- ---------
Loss from Operations (3,256) (1,445)
--------- ---------
Other (Expense) Income:
Interest expense, net (2,096) (1,973)
Other (14) 28
--------- ---------
(2,110) (1,945)
--------- ---------
Loss from Continuing Operations before Income Taxes (5,366) (3,390)
Benefit from Income Taxes (Note 8) -- (6,911)
--------- ---------
(Loss) Income from Continuing Operations (5,366) 3,521
--------- ---------
Discontinued Operations:
Income from discontinued operations (Note 4) 890 216
Gain on disposal of subsidiary (Note 4) 752 --
--------- ---------
1,642 216
--------- ---------
Net (Loss) Income $ (3,724) $ 3,737
========= =========
Basic and Diluted (Loss) Income Per Share:
(Loss) income from continuing operations $ (0.19) $ 0.12
Income from discontinued operations 0.06 0.01
--------- ---------
Net (loss) income $ (0.13) $ 0.13
========= =========
Basic and diluted weighted average shares outstanding 29,162 28,941
========= =========
4
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
---- ----
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (3,724) $ 3,737
Adjustment to reconcile net (loss) income to net
cash (used in) provided by operating activities:
Income from discontinued operations (1,642) (216)
Depreciation and amortization 1,687 1,653
Bad debt expense 150 150
Provision for excess and slow moving inventories -- 1,595
Other (147) --
Changes in operating assets and liabilities:
Accounts receivable (3,577) (305)
Inventories 801 4,794
Refundable income taxes -- (6,911)
Prepaid expenses and other current assets (1,695) (963)
Accounts payable 2,876 (2,884)
Accrued expenses and other current liabilities (2,526) 2,930
--------- ---------
Net cash (used in) provided by continuing operations (7,797) 3,580
Net cash provided by discontinued operations 2,969 669
--------- ---------
Net cash (used in) provided by operating activities (4,828) 4,249
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of business and fixed assets 5,517 --
Acquisition of property, plant and equipment (309) (20)
Decrease in other assets 12 10
--------- ---------
Net cash provided by (used in) investing activities 5,220 (10)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under Revolving Credit Facility 136 (3,494)
Payments of debt (528) (545)
Payments of debt issuance costs -- (200)
--------- ---------
Net cash used in financing activities (392) (4,239)
--------- ---------
Net change in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period -- --
--------- ---------
Cash and cash equivalents at end of period $ -- $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 489 $ 872
========= =========
Income taxes, net of cash refunds $ 102 $ 44
========= =========
5
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
-----------------------------------------------------------
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated unaudited
financial statements include all necessary adjustments (consisting of
normal recurring accruals) and present fairly the financial position of
Twinlab Corporation ("Twinlab") and subsidiaries (collectively, the
"Company") as of March 31, 2003, and the results of its operations and
its cash flows for the three months ended March 31, 2003 and 2002 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 ended March 31, 2003 are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with 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, 2002, as filed with the Securities and Exchange
Commission.
Borrowings under the Revolving Credit Facility are due within 12
months. In addition, the Company does not currently anticipate being in
compliance with certain financial covenants contained in the mortgage
agreement relating to the Utah facility. Accordingly, the Company has
classified these borrowings as current liabilities. The uncertainty
regarding the Company's ability to refinance these borrowings indicate
that the Company may be unable to continue as a going concern. The
Company's capital resources and liquidity needs are expected to be
provided by the Company's cash flow from operations and borrowings
under its Revolving Credit Facility. The Company's ability to meet its
borrowing obligations, fund required capital expenditures and pursue
its business strategy for at least the next 12 months is dependent upon
(i) the ability to successfully amend the mortgage agreement; (ii) the
ability to extend the term of the Revolving Credit Facility or enter
into an alternative borrowing arrangement; (iii) the absence of any
material judgments against the Company in connection with litigation
matters that are not covered by insurance; and (iv) the successful
implementation of its business plan.
The Company is currently in negotiations to amend the mortgage
agreement and plans to initiate negotiations to extend the term of the
Revolving Credit Facility or to enter into an alternative borrowing
arrangement. In addition, the Company has begun to realize cost
savings as a result of the facilities consolidation and other
restructuring activities and has begun to invest in marketing and
advertising programs and reorganize the sales organization in an
effort to increase sales. In the event that these activities are not
sufficient to return the Company to profitability, the Company will be
required to initiate additional cost reductions or take other
actions to enable the Company to continue its operations. There can be
no assurance that these activities will be successful.
2. STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. No stock-based employee compensation cost is reflected
in the net (loss) income, as all options granted under these plans had
an exercise price equal to the market value of the underlying common
stock on the date of the grant.
The following table illustrates the effect on net (loss) income and
(loss) income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," to stock-based employee compensation. The Company's
calculations were made using the Black-Scholes option pricing model.
THREE MONTHS ENDED MARCH 31,
----------------------------
2003 2002
------- -------
Net (loss) income, as reported $(3,724) $ 3,737
Deduct: Total stock based compensation
expense determined under fair
value based method for all awards,
net of related tax effects (419) (255)
------- -------
Pro forma net (loss) income $(4,143) $ 3,482
======= =======
======= =======
(Loss) income per share:
Basic and diluted - as reported $ (0.13) $ 0.13
Basic and diluted - pro forma $ (0.14) $ 0.12
3. RESTRUCTURING CHARGES
On July 24, 2002, the Company announced a comprehensive restructuring
of its operations designed to improve the Company's financial
performance and operating
6
results. The restructuring, designed to reduce costs and better align
the Company's operational infrastructure to its sales volume, resulted
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 remain in New York. The consolidation of the
facilities was substantially completed during fiscal 2002 and is
anticipated to be completed during the second quarter of 2003.
Significant components of the restructuring charges recorded during the
three months ended March 31, 2003 and restructuring accrual as of March
31, 2003 include:
December 31, 2002 March 31, 2003
Restructuring Restructuring
Accrual Charges Payments Accrual
------- ------- -------- -------
Facility costs $ 2,543 $ -- $ (787) $ 1,756
Employee costs 3,914 864 (1,683) 3,095
Professional fees 30 4 (34) --
Other -- 91 (91) --
- ----------------- ------- ------- ------- -------
Total $ 6,487 $ 959 $(2,595) $ 4,851
======= ======= ======= =======
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 have left as of March 31, 2003 and it is anticipated that the
balance will be leaving during the second quarter of 2003.
The Company anticipates recording additional restructuring charges of
approximately $200 in connection with the consolidation of the
facilities, substantially all of which are expected to be recorded
during the second quarter of 2003.
Certain fixed assets relating to the New York manufacturing and
distribution facilities totaling $3,183 have been reclassified as
assets held for sale as of March 31, 2003. The Company anticipates
selling these assets during fiscal 2003.
4. DISPOSITION OF OPERATIONS
a. HEALTH FACTORS INTERNATIONAL, INC.
On May 22, 2002, the Company completed the sale of substantially all of
the fixed assets of Health Factors International, Inc. ("Health
Factors") 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.
("Bronson") was outsourced to Anabolic while the manufacture of certain
private label products was discontinued.
7
b. BRONSON LABORATORIES, INC.
On January 17, 2003, the Company sold substantially all of the assets,
including inventory, of Bronson to a privately held dietary supplement
manufacturer for approximately $8,000. Bronson's results of operations
have been classified as discontinued operations and prior periods have
been reclassified.
Net sales and income from discontinued operations
related to Bronson are as follows:
THREE MONTHS ENDED
MARCH 31,
------------------
2003 2002
------ ------
Net sales $3,485 $2,730
Income before income taxes 890 216
Gain on disposal of subsidiary 752 --
Income from discontinued operations 1,642 216
Income from discontinued operations per diluted share 0.06 0.01
The assets of discontinued operations are comprised of the following:
2003 2002
----- ------
Inventories $ -- $2,303
Other current assets -- 108
Property, plant and equipment, net -- 499
Intangible assets -- 3,460
----- ------
Assets of discontinued operations $ -- $6,370
===== ======
5. INVENTORIES
Inventories, net of reserves for excess and obsolete inventory, consist
of the following:
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
Raw Materials $ 7,882 $ 6,226
Work in Process 5,710 8,644
Finished Goods 14,861 14,384
---------- ----------
Total $ 28,453 $ 29,254
========== =========
Reserves for excess and obsolete inventory totaled $5,371 and $5,770 as
of March 31, 2003 and December 31, 2002, respectively.
6. OTHER ASSETS
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", effective
January 1, 2002. Intangible assets subject to amortization after the
adoption of SFAS No. 142 are being amortized on the straight-line
method and consist of the following:
MARCH 31, 2003 DECEMBER 31, 2002
----------------------------- ----------------------------
RANGE GROSS GROSS
OF CARRYING ACCUMULATED CARRYING ACCUMULATED
LIVES AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
----- ------ ------------ ------ ----- ------------ ------
Trademarks 3-20 $1,982 $ 690 $1,292 $2,191 $ 708 $1,483
Other 5 307 272 35 307 267 40
------ ------ ------ ------ ------ ------
$2,289 $ 962 $1,327 $2,498 $ 975 $1,523
====== ====== ====== ====== ====== ======
8
Amortization expense for other intangible assets still subject to
amortization was approximately $199 and $23 for the three months ended
March 31, 2003 and 2002, respectively. At March 31, 2003, estimated
future amortization expense of other intangible assets still subject to
amortization is as follows: approximately $178 for the remaining nine
months of 2003, and approximately $230, $217, $209, $190 and $23 for
the years ended December 31, 2004, 2005, 2006, 2007 and 2008,
respectively.
7. CURRENT AND LONG-TERM DEBT
a. REVOLVING CREDIT FACILITY
As a result of the sale of Bronson, effective January 17, 2003, the
Company completed an amendment to the Revolving Credit Facility, which
among other things, revised the financial covenants relating to EBITDA
and reduced the total facility from $50,000 to $45,000. The Company was
in compliance with the covenants relating to the Revolving Credit
Facility as of March 31, 2003.
The Company's Revolving Credit Facility expires on March 29, 2004.
Accordingly, borrowings outstanding under the Revolving Credit Facility
as of March 31, 2003 have been classified as a current liability. The
Company plans to initiate negotiations to extend the term of the
Revolving Credit Facility or to enter into an alternative borrowing
arrangement that would provide for future borrowings. There can be no
assurance, however, that by March 29, 2004, an extension of the
Revolving Credit Facility will be successfully negotiated or the
Company will be able to enter into an alternative borrowing arrangement
on terms favorable to the Company. The absence of an extension of the
Revolving Credit Facility or alternative borrowing arrangement would
have a material adverse effect on the financial condition of the
Company and its ability to continue its operations. Borrowings
outstanding under the Revolving Credit Facility as of March 31, 2003
were approximately $24,500.
b. MORTGAGE PAYABLE
The Company was in default of certain financial covenants contained in
the mortgage agreement relating to the Utah facility during fiscal 2002
for which a waiver was obtained through April 3, 2003. The Company will
be subject to the financial covenant tests for the quarter ended June
30, 2003 and does not currently anticipate being in compliance.
Accordingly, the outstanding mortgage payable totaling $5,568 has been
classified as a current liability as of March 31, 2003. The Company has
entered into negotiations with the lender to amend the mortgage
agreement, however, there can be no assurance that an amendment will be
successfully negotiated. In the event that the Company is unable to
amend the mortgage agreement, the Company will be required to repay the
mortgage in order to avoid a cross-default under the terms of the
Revolving Credit Facility.
8. INCOME TAXES
The Company did not record a benefit from income taxes for losses
incurred during the three months ended March 31, 2003 and 2002 (except
as discussed below) as it is more likely than not that such benefits
will not be realized. As a result of losses incurred, the Company has
recorded a full valuation allowance against its net deferred tax
assets.
The Company recorded a benefit from income taxes of $6,911 for the
three months ended March 31, 2002. The benefit recorded represents a
Federal refund received by the Company as a result of the Job Creation
and Worker Assistance Act of 2002.
9
9. 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 March 31, 2003, $281 has been paid and
281,250 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.
10. LEGAL MATTERS
A number of the Company's products include alkaloids from the herb
known as "Ma Huang," also known as ephedra, which contains
naturally-occurring ephedrine alkaloids. Products containing Ma Huang
accounted for approximately 11% and 25% of the Company's net sales
during the three months ended March 31, 2003 and 2002, respectively.
Ma Huang has been the subject of extensive 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. Recently, the Suffolk County (New York)
legislature passed a bill that bans retail sales of ephedra products in
Suffolk County. Other jurisdictions have proposed similar legislation.
The current media and political attention to Ma Huang is likely to lead
to further legislation related to the sale of products containing Ma
Huang including the possible ban of sale of these products.
On February 28, 2003, the U.S. Food and Drug Administration, Department
of Health and Human Services announced a series of actions that will
potentially regulate the manner in which products containing the
ingredient ephedra are marketed, including a thirty-day comment period
to create a record to support potential restrictions that could range
from label requirements to a ban of the ingredient. By letter dated
March 13, 2003, the Committee on Energy and Commerce of the U.S. House
of Representatives requested certain information from the Company
related to, among other things, the sales history of its products
containing ephedra, any adverse health events associated with such
products, scientific studies related to such products and information
related to certain of the Company's non-ephedra products. The Company
has provided a comprehensive response to the Committee.
On or about April 15, 2003, the Company received an "Investigative
Demand" from the Office of Attorney General of the State of Missouri.
The Investigative Demand requests certain documentary information and
testimony related to, among other things, the Company's sale and
marketing of products containing ephedra. The Company is in the process
of responding to the Investigative Demand.
The Company has been named as a defendant in a number of pending
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
10
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. In
particular, several of the class actions, as economic injury cases, are
not generally covered by insurance. At least one of the Ma Huang
lawsuits involving a claim of wrongful death is not currently covered
by insurance.
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 decided to discontinue
the sale of products that contain Ma Huang effective on or about 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 cost 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 annual 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.
The Company has been named as a defendant in a number of pending
product liability lawsuits that 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 a current analysis prepared by management, with the assistance
of actuarial consultants, the Company has estimated a range of
potential liability in an amount it deems reasonable in connection with
certain product liability matters involving ephedra. Accordingly, the
Company has established a reserve of $4,340 for product liability
indemnity claims that is primarily based on known claims and an
estimate of unasserted claims involving ephedra 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 March 31, 2003 because the timing of any payments are
not fixed or reliably determinable at the present time. This reserve
assumes continuing insurance for ephedra related personal injury
actions, albeit with a significant retention and limited total
coverage.
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.
There can be no assurance that the impact of the Company's self-insured
retention limits in the event of multiple damage awards or settlements,
or any award of damages in excess of the Company's insurance coverage
limits (which limits are significantly lower than in prior periods) or
any materially increased legal costs, will not have a material adverse
effect on the financial condition or results of operations of the
Company. In
11
addition, one or more large punitive damage awards, which are generally
not insurable, would have a material adverse effect on the financial
condition and results of operations of the Company.
Further, the Company's 2003 comprehensive general liability ("CGL")
insurance policy for non-Ma Huang products has a significantly higher
self-insured retention limit than in 2002 and the herbal product
Kava-Kava is expressly excluded from coverage under the 2003 policy.
The Company has received one Kava-Kava related wrongful death complaint
in 2003. The Company plans to vigorously defend itself against this
action and is investigating whether any of its CGL policies apply to
this claim. If a CGL policy is not applicable to this claim, a finding
of liability and damages could have a material adverse effect on the
results of operations and financial condition of the Company. The
Company is unable to predict the outcome of this matter or to estimate
a range of potential loss. Accordingly, the effect, if any, that such
action may have on the Company's financial position or results of
operations cannot be determined at this time.
The Company is presently engaged in various other legal actions in the
ordinary course of business including product liability, breach of
contract claims and employment related claims. Management is of the
opinion that the amounts which may be awarded or assessed, if any, in
connection with these matters, after taking into consideration the
Company's insurance coverage, will not have a material adverse effect
on its results of operations or financial condition.
11. NET (LOSS) INCOME PER SHARE
Basic net (loss) income per share was determined by using the weighted
average number of common shares outstanding during the respective
periods. Diluted net (loss) income per share further assumes the
issuance of common shares for all dilutive outstanding stock options.
Potentially dilutive stock options totaling 2,093,000 and 2,116,000 as
of March 31, 2003 and 2002, respectively, were excluded from the
computation of diluted net (loss) income per share because they were
anti-dilutive.
12. OPERATING SEGMENTS
As previously disclosed, the Company completed the sale of
substantially all of the assets of Bronson on January 17, 2003 and
Bronson's results of operations have been classified as discontinued
operations. As a result of this transaction, the Company no longer
operates in the direct-to-consumer segment. Accordingly, the Company
conducts its operations through one reportable segment, the retail
segment. Products sold by the retail segment include vitamins, minerals
and specialty supplements, sports nutrition products and diet and
energy products primarily under the Twinlab, Ironman Triathlon, "Fuel"
and other brand names; an extensive line of herbal supplements and
phytonutrients under the Nature's Herbs brand name; and a full line of
herbal teas under the Alvita brand name. In addition, the Company
distributed vitamins, herbs, nutritional supplements and health and
beauty aids under the Bronson brand name, through catalogs and
specialty direct mailings to customers, including healthcare and
nutritional professionals, and 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 its Health Factors' operations and on January 17, 2003,
the Company sold substantially all of the assets of Bronson. Bronson's
results of operations have been classified as discontinued operations
and prior periods have been reclassified.
12
Segment information for the three months ended March 31, 2003 and 2002
was as follows:
INTERCOMPANY
RETAIL OTHER(1) ELIMINATION TOTAL
- ------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003
Net sales to external customers $ 37,718 $ -- $ -- $ 37,718
Loss from operations (3,204) (52) -- (3,256)
Total assets 93,363 -- -- 93,363
THREE MONTHS ENDED MARCH 31, 2002
Net sales to external customers $ 45,457 $ -- $ -- $ 45,457
Loss from operations (1,393) (52) -- (1,445)
Total assets (2) 122,135 -- -- 122,135
[1] The "Other" column includes corporate-related items.
[2] Total assets exclude the assets from discontinued operations of $6,223 as
of March 31, 2002.
13. RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations". 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 did not have a significant impact
on the Company's consolidated financial statements.
On January 1, 2003, the Company adopted the remaining provisions of
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 did not have
a significant impact on the Company's consolidated financial
statements.
On January 1, 2003, the Company adopted 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. The adoption of SFAS No. 146 did
not have a significant impact on the Company's consolidated financial
statements.
On January 1, 2003, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation ("FIN") No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others, an Interpretation of FASB
Statement No. 5, 57 and 107 and Rescission of FASB Interpretation No.
34". FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for
Contingencies", relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees.
Specifically, FIN 45 requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The adoption of FIN 45
did not have a significant impact on the Company's consolidated
financial statements.
13
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of Twinlab Corporation
Hauppauge, New York
We have reviewed the accompanying consolidated balance sheet of Twinlab
Corporation and subsidiaries (the "Company") as of March 31, 2003, and the
related consolidated statements of operations and cash flows for the three-month
periods ended March 31, 2003 and 2002. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
operations, shareholders' deficit, and cash flows for the year then ended (not
presented herein); and in our report dated March 1, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
As indicated in Note 1 to the consolidated unaudited financial statements,
certain conditions indicate that the Company may be unable to continue as a
going concern. The accompanying interim financial information does not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Jericho, New York
May 14, 2003
14
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. As previously disclosed, the Company
completed the sale of substantially all of the assets of Bronson on January 17,
2003 and Bronson's results of operations have been classified as discontinued
operations. As a result of this transaction, the Company no longer operates in
the direct-to-consumer segment. Accordingly, the Company conducts its operations
through one reportable segment, the retail segment. Products sold by the retail
segment include vitamins, minerals and specialty supplements, sports nutrition
products and diet and energy products primarily under the Twinlab, Ironman
Triathlon, "Fuel" and other brand names; an extensive line of herbal supplements
and phytonutrients under the Nature's Herbs brand name; and a full line of
herbal teas under the Alvita brand name. In addition, the Company distributed
vitamins, herbs, nutritional supplements and health and beauty aids under the
Bronson brand name, through catalogs and specialty direct mailings to customers,
including healthcare and nutritional professionals, and 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 its Health Factors' operations and on January 17, 2003, the Company sold
substantially all of the assets of Bronson. Bronson's results of operations have
been classified as discontinued operations and prior periods have been
reclassified.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------
NET SALES: Net sales for the three months ended March 31, 2003 were $37.7
million, a decrease of $7.8 million, or 17.0%, as compared to net sales of $45.5
million for the three months ended March 31, 2002. The decrease in net sales was
primarily attributable to a reduction in sales of ephedra products, the sale of
Health Factors and the effect of product rationalizations initiated during
fiscal 2002.
A number of the Company's products include alkaloids from the herb known as "Ma
Huang," also known as ephedra, which contains naturally-occurring ephedrine
alkaloids. Products containing Ma Huang accounted for approximately 11% and 25%
of the Company's net sales during the three months ended March 31, 2003 and
2002, respectively.
Ma Huang has been the subject of extensive 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. Recently, the Suffolk County (New York)
legislature passed a bill that bans retail sales of ephedra products in Suffolk
County. Other jurisdictions have proposed similar legislation. The current media
and political attention to Ma Huang is likely to lead to further legislation
related to the sale of products containing Ma Huang including the possible ban
of sale of these products.
On February 28, 2003, the U.S. Food and Drug Administration, Department of
Health and Human Services announced a series of actions that will potentially
regulate the manner in which products containing the ingredient ephedra are
marketed, including a thirty-day comment period to create a record to support
potential restrictions that could range from label requirements to a ban of the
ingredient. By letter dated March 13, 2003, the Committee on Energy and Commerce
of the U.S. House of Representatives requested certain information from the
15
Company related to, among other things, the sales history of its products
containing ephedra, any adverse health events associated with such products,
scientific studies related to such products and information related to certain
of the Company's non-ephedra products. The Company has provided a comprehensive
response to the Committee.
On or about April 15, 2003, the Company received an "Investigative Demand" from
the Office of Attorney General of the State of Missouri. The Investigative
Demand requests certain documentary information and testimony related to, among
other things, the Company's sale and marketing of products containing ephedra.
The Company is in the process of responding to the Investigative Demand.
The Company has been named as a defendant in a number of pending 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. In particular, several of the class actions, as economic injury cases,
are not generally covered by insurance. At least one of the Ma Huang lawsuits
involving a claim of wrongful death is not currently covered by insurance.
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 decided to discontinue the sale of products that contain Ma Huang
effective on or about 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 cost 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
annual 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 March 31, 2003 was $14.1
million, which represented a decrease of $2.4 million, or 14.2%, as compared to
$16.5 million for the three months ended March 31, 2002. Gross profit margin was
37.5% for the three months ended March 31, 2003 as compared to 36.2% for the
three months ended March 31, 2002. The overall decrease in gross profit dollars
was primarily attributable to the Company's lower sales volume. 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 $16.4 million for the three months
ended March 31, 2003, representing a decrease of $1.5 million, or 8.3%, as
compared to $17.9 million for the three months ended March 31, 2002. As a
percent of net sales, operating expenses increased from 39.4% for the three
months ended March 31, 2002 to 43.5% for the three months ended March 31, 2003.
The decrease in operating expenses was primarily attributable to a reduction in
personnel related costs ($1.2 million) and the elimination of costs related to
Health Factors and business rationalizations ($1.6 million) partially offset by
an increase in advertising and marketing expenditures ($1.0 million).
RESTRUCTURING CHARGES: On July 24, 2002, the Company announced a comprehensive
restructuring of its operations designed to further improve the Company's
financial
16
performance and operating results. The restructuring, designed to reduce costs
and better align the Company's operational infrastructure to its sales volume,
resulted 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
remain in New York. The consolidation of the facilities was substantially
completed during fiscal 2002 and is anticipated to be completed during the
second quarter of 2003.
Restructuring charges recorded during the three months ended March 31, 2003
totaled $1.0 million and primarily represented employee costs. Employee costs
primarily represent severance and related benefits.
The Company anticipates recording additional restructuring charges of
approximately $0.2 million in connection with this consolidation, substantially
all of which are expected to be recorded during the second quarter of 2003.
LOSS FROM OPERATIONS: The Company recorded a loss from operations of $(3.3)
million for the three months ended March 31, 2003, as compared to $(1.4) million
for the three months ended March 31, 2002.
OTHER (EXPENSE) INCOME: Other (expense) income was a net expense of $2.1 million
for the three months ended March 31, 2003, as compared to $1.9 million for the
three months ended March 31, 2002. The net increase of $0.2 million was
attributable to an increase in interest expense as a result of additional
amortization of deferred financing costs.
INCOME TAXES: The Company did not record a benefit from income taxes for losses
incurred during the three months ended March 31, 2003 and 2002 (except as
discussed below) as it is more likely than not that such benefits will not be
realized. As a result of losses incurred, the Company has recorded a full
valuation allowance against its net deferred tax assets.
The Company recorded a benefit from income taxes of $6,911 for the three months
ended March 31, 2002. The benefit recorded represents a Federal refund received
by the Company as a result of the Job Creation and Worker Assistance Act of
2002.
DISCONTINUED OPERATIONS: On January 17, 2003, the Company sold substantially all
of the assets, including inventory, of Bronson to a privately held dietary
supplement manufacturer for approximately $8.0 million. Bronson's results of
operations have been classified as discontinued operations and prior periods
have been reclassified. Net sales for Bronson were $3.5 million and $2.7 million
and income from operations was $0.9 million and $0.2 million for the three
months ended March 31, 2003 and 2002, respectively. The gain on the sale of the
assets (excluding inventory) was approximately $0.8 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the three months ended March 31, 2003, cash used in operating activities was
$(4.8) million as compared to cash provided by operating activities of $4.2
million for the three months ended March 31, 2002. Cash used in operating
activities for the three months ended March 31, 2003 was primarily attributable
to an increase in accounts receivable and prepaid expenses and the payment of
restructuring costs. Cash provided by operating activities for the three months
ended March 31, 2002 was primarily attributable to a reduction in inventories.
Net cash provided from investing activities was $5.2 million for the three
months ended March 31, 2003 as compared to net cash used in investing activities
of $(0.2) million for the three months ended March 31, 2002. The Company
received proceeds of $5 million from the sale of
17
the assets of Bronson (excluding inventory) and $0.5 million from the sale of
certain fixed assets during the three months ended March 31, 2003. Capital
expenditures were $0.3 million and $20,000 for the three months ended March 31,
2003 and 2002, respectively. Capital expenditures are expected to be
approximately $2.0 million during fiscal 2003.
Certain fixed assets relating to the New York manufacturing and distribution
facilities totaling $3.2 million have been reclassified as assets held for sale
as of March 31, 2003. The Company anticipates selling these assets during fiscal
2003.
Net cash used in financing activities was $0.4 million and $4.2 million for the
three months ended March 31, 2003 and 2002, respectively, and represented the
net repayment of outstanding debt and the payment of debt issuance costs.
As a result of the sale of Bronson, effective January 17, 2003, the Company
completed an amendment to the Revolving Credit Facility, which among other
things, revised the financial covenants relating to EBITDA and reduced the total
facility from $50 million to $45 million.
The Company's Revolving Credit Facility expires on March 29, 2004. Accordingly,
borrowings outstanding under the Revolving Credit Facility as of March 31, 2003
have been classified as a current liability. The Company plans to initiate
negotiations to extend the term of the Revolving Credit Facility or to enter
into an alternative borrowing arrangement that would provide for future
borrowings. There can be no assurance, however, that by March 29, 2004, an
extension of the Revolving Credit Facility will be successfully negotiated or
the Company will be able to enter into an alternative borrowing arrangement on
terms favorable to the Company. The absence of an extension of the Revolving
Credit Facility or alternative borrowing arrangement would have a material
adverse effect on the financial condition of the Company and its ability to
continue its operations. Borrowings outstanding under the Revolving Credit
Facility as of April 30, 2003 were approximately $24.5 million. As of April 30,
2003, approximately $8 million of borrowings were available under the Revolving
Credit Facility.
The Company was in compliance with the covenants relating to the Revolving
Credit Facility and the senior subordinated notes as of March 31, 2003.
The Company was in default of certain financial covenants contained in the
mortgage agreement relating to the Utah facility during fiscal 2002 for which a
waiver was obtained through April 3, 2003. The Company will be subject to the
financial covenant tests for the quarter ended June 30, 2003 and does not
currently anticipate being in compliance. Accordingly, the outstanding mortgage
payable totaling $5.6 million has been classified as a current liability as of
March 31, 2003. The Company has entered into negotiations with the lender to
amend the mortgage agreement, however, there can be no assurance that an
amendment will be successfully negotiated. In the event that the Company is
unable to amend the mortgage agreement, the Company will be required to repay
the mortgage in order to avoid a cross-default under the terms of 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. As of March 31, 2003, $0.3
million has been paid and 281,250 shares of common stock have been issued. 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.
18
The Company has been named as a defendant in a number of pending product
liability lawsuits that 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 a current analysis prepared by management, with the assistance of
actuarial consultants, the Company has estimated a range of potential liability
in an amount it deems reasonable in connection with certain product liability
matters involving ephedra. Accordingly, the Company has established a reserve of
$4.3 million for product liability indemnity claims that is primarily based on
known claims and an estimate of unasserted claims involving ephedra 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
March 31, 2003 because the timing of any payments are not fixed or reliably
determinable at the present time. This reserve assumes continuing insurance for
ephedra related personal injury actions, albeit with a significant retention and
limited total coverage.
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.
There can be no assurance that the impact of the Company's self-insured
retention limits in the event of multiple damage awards or settlements, or any
award of damages in excess of the Company's insurance coverage limits (which
limits are significantly lower than in prior periods) or any materially
increased legal costs, will not have a material adverse effect on the financial
condition or results of operations of the Company. In addition, one or more
large punitive damage awards, which are generally not insurable, would have a
material adverse effect on the financial condition and results of operations of
the Company.
Further, the Company's 2003 comprehensive general liability ("CGL") insurance
policy for non-Ma Huang products has a significantly higher self-insured
retention limit than in 2002 and the herbal product Kava-Kava is expressly
excluded from coverage under the 2003 policy. The Company has received one
Kava-Kava related wrongful death complaint in 2003. The Company plans to
vigorously defend itself against this action and is investigating whether any of
its CGL policies apply to this claim. If a CGL policy is not applicable to this
claim, a finding of liability and damages could have a material adverse effect
on the results of operation and financial condition of the Company. The Company
is unable to predict the outcome of this matter or to estimate a range of
potential loss. Accordingly, the effect, if any, that such action may have on
the Company's financial position or results of operations cannot be determined
at this time.
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
19
tests, limitations on capital expenditures and restrictions on the ability of
the Company to incur debt, pay dividends or take certain other corporate
actions.
Borrowings under the Revolving Credit Facility are due within 12 months. In
addition, the Company does not currently anticipate being in compliance with
certain financial covenants contained in the mortgage agreement relating to
the Utah facility. Accordingly, the Company has classified these borrowings as
current liabilities. The uncertainty regarding the Company's ability to
refinance these borrowings indicate that the Company may be unable to continue
as a going concern. The Company's capital resources and liquidity needs are
expected to be provided by the Company's cash flow from operations and
borrowings under its Revolving Credit Facility. The Company's ability to meet
its borrowing obligations, fund required capital expenditures and pursue its
business strategy for at least the next 12 months is dependent upon (i) the
ability to successfully amend the mortgage agreement; (ii) the ability to
extend the term of the Revolving Credit Facility or enter into an alternative
borrowing arrangement; (iii) the absence of any material judgments against the
Company in connection with litigation matters that are not covered by
insurance; and (iv) the successful implementation of its business plan.
The Company is currently in negotiations to amend the mortgage agreement and
plans to initiate negotiations to extend the term of the Revolving Credit
Facility or to enter into an alternative borrowing arrangement. In addition, the
Company has begun to realize cost savings as a result of the facilities
consolidation and other restructuring activities and has begun to invest in
marketing and advertising programs and reorganize the sales organization in an
effort to increase sales. In the event that these activities are not sufficient
to return the Company to profitability, the Company will be required to initiate
additional cost reductions or take other actions to enable the Company to
continue its operations. There can be no assurance that these activities will be
successful.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
- ------------------------------------------------------
On January 1, 2003, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations". 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 did not have a significant impact
on the Company's consolidated financial statements.
On January 1, 2003, the Company adopted the remaining provisions of 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 did not have a significant impact on the Company's consolidated
financial statements.
On January 1, 2003, the Company adopted 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. The adoption of SFAS No. 146 did not have a significant impact on
the Company's consolidated financial statements.
On January 1, 2003, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others, an Interpretation of FASB Statement No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34". FIN 45 clarifies the requirements of SFAS No. 5,
"Accounting for Contingencies", relating to a guarantor's accounting for, and
disclosure of, the issuance of certain types of guarantees. Specifically, FIN 45
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The adoption of FIN 45 did not have a significant impact on the
Company's consolidated financial statements.
20
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 forwardlooking 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 achieve cost savings and operational
efficiencies as a result of the consolidation of the manufacturing and
distribution facilities; (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 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, 2002, a description of which may be found in the Annual Report on Form 10-K.
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
21
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.
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.
Management, including the Chief Executive Officer and the Chief
Financial Officer, does not expect that the Company's disclosure
controls and procedures or the Company's internal controls will prevent
all error and all fraud. A control system, no matter how well conceived
and operated, provides reasonable assurance that the objectives of the
control system are met. The design of a control system reflects
resource constraints; the benefits of controls must be considered
relative to their costs. Because there are inherent limitations in all
control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any,
within the Company have been or will be detected. These inherent
limitations include the realities that judgments in decision-making can
be faulty and that breakdowns occur because of simple error or mistake.
Controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls is based in part upon
certain assumptions about the likelihood of future events. There can be
no assurance that any design will succeed in achieving its stated goals
under all future conditions; over time, controls may become inadequate
because of changes in conditions or deterioration in the degree of
compliance with the policies or procedures. Because of the inherent
limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.
(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.
22
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) ISSUANCE OF SECURITIES
On February 28, 2003, 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 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
15.1 Letter re: Unaudited interim financial information
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to 18 U.S.C
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter ended March
31, 2003.
23
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: May 15, 2003
------------
24
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: May 15, 2003 /s/ Ross Blechman
-------------------
Ross Blechman
Chief Executive Officer
25
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: May 15, 2003 /s/ Joseph Sinicropi
----------------------------
Joseph Sinicropi
Chief Financial Officer
26