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, 1997
Commission file number 0-21003
TWINLAB CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 11-3317986
(State of incorporation) (I.R.S. Employer Identification No.)
2120 Smithtown Avenue, Ronkonkoma, NY 11779
(Address of principal executive office) (zip code)
(516) 467-3140
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [x] NO [ ]
At April 30, 1997, the registrant had 27,000,000 shares of common stock
outstanding.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS EXCEPT SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996[1]
-------------- -----------------
(UNAUDITED)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 1,844 $ 3,794
Accounts receivable, net of allowance for bad
debts of $408 and $208, respectively 33,605 31,027
Inventories 35,112 29,443
Deferred tax assets 852 1,218
Prepaid expenses and other current assets 1,297 1,076
----------- -----------
Total current assets 72,710 66,558
Property, plant and equipment, net 16,153 14,157
Deferred tax assets 51,916 52,858
Other assets 7,180 7,964
----------- -----------
Total $ 147,959 $ 141,537
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 15,085 $ 20,085
Current portion of capital lease obligations 149 146
Accounts payable 14,635 10,313
Accrued expenses and other current liabilities 10,358 8,882
----------- -----------
Total current liabilities 40,227 39,426
Long-term debt, less current portion 100,258 100,265
Capital lease obligations, less current portion 119 158
----------- -----------
Total liabilities 140,604 139,849
----------- -----------
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value; 2,000,000
shares authorized; none issued
Common stock, $1.00 par value; 75,000,000
shares authorized; 27,000,000 shares outstanding
as of March 31, 1997 and December 31, 1996 27,000 27,000
Additional paid-in capital 141,338 141,338
Accumulated deficit (160,983) (166,650)
------------ ------------
Total shareholders' equity 7,355 1,688
----------- -----------
Total $ 147,959 $ 141,537
=========== ===========
</TABLE>
(1) The consolidated balance sheet as of December 31, 1996 has been taken from
the audited financial statements at that date.
2
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
NET SALES $ 51,169 $ 43,984
COST OF SALES 29,183 26,362
----------- -----------
GROSS PROFIT 21,986 17,622
OPERATING EXPENSES 9,688 7,299
----------- -----------
INCOME FROM OPERATIONS 12,298 10,323
OTHER (EXPENSE) INCOME:
Interest income 44 167
Interest expense (3,044) (224)
Transaction expenses -- (400)
Other 6 (1)
----------- ------------
(2,994) (458)
INCOME BEFORE PROVISION FOR INCOME TAXES 9,304 9,865
PROVISION FOR INCOME TAXES 3,637 86
----------- -----------
NET INCOME $ 5,667 $ 9,779
=========== ===========
NET INCOME PER SHARE $ 0.21
===========
WEIGHTED AVERAGE SHARES OUTSTANDING 27,000
===========
PRO FORMA RELATING TO CHANGE IN TAX STATUS*
Historical income before provision for income taxes $ 9,865
Pro forma provision for income taxes 3,906
-----------
Pro forma net income relating to change in tax status $ 5,959
===========
per share $ 0.22
===========
Weighted average shares outstanding 27,000
===========
</TABLE>
* The Company consisted during the quarter ended March 31, 1996 of "S"
Corporations as a result of which federal and state taxes were generally paid
at the shareholder level only. The pro forma information assumes the Company
had elected "C" Corporation status, and had not elected "S" Corporation
status.
3
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---- ----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 5,667 $ 9,779
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 466 302
Bad debt expense 200 144
Deferred income taxes 1,308 --
Changes in operating assets and liabilities:
Accounts receivable (2,778) 559
Inventories (5,669) (2,837)
Prepaid expenses and other current assets (221) (607)
Accounts payable 4,322 2,960
Accrued expenses and other current liabilities 1,476 (50)
----------- ------------
Net cash provided by operating activities 4,771 10,250
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- (23)
Acquisition of property, plant and equipment (2,292) (224)
Decrease (increase) in other assets 614 (52)
----------- -----------
Net cash used in investing activities (1,678) (299)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders -- (2,728)
Payments of debt (5,007) (85)
Principal payments of capital lease obligations (36) (34)
------------ ------------
Net cash used in financing activities (5,043) (2,847)
------------ ------------
Net (decrease) increase in cash and cash equivalents (1,950) 7,104
Cash and cash equivalents at beginning of period 3,794 7,945
----------- -----------
Cash and cash equivalents at end of period $ 1,844 $ 15,049
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 270 $ 224
=========== ===========
Income taxes $ 1,314 $ 80
=========== ===========
</TABLE>
4
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. 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 and subsidiaries as of March 31, 1997 and the results
of its operations and cash flows for the three months ended March 31, 1997
and 1996 in conformity with generally accepted accounting principles for
the interim financial information applied on a consistent basis. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the full year.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes
thereto included in Twinlab Corporation's December 31, 1996 Annual Report
to Stockholders on Form 10-K as filed with the Securities and Exchange
Commission.
2. PRO FORMA INFORMATION
The Company completed a recapitalization transaction in May of 1996
(including a change in the Company's tax status from "S" to "C" corporation
status) and subsequently completed an initial public offering ("IPO") of
its common stock in November of 1996. The following unaudited pro forma
results of operations give effect to the Company's recapitalization
transaction and its change from "S" to "C" corporation status and
subsequent IPO as if each occurred as of January 1, 1996 and exclude
non-recurring transaction expenses. The pro forma operations data have been
prepared for comparative purposes only and do not purport to represent what
the Company's actual results of operations would have been had the
recapitalization transaction and subsequent IPO in fact occurred on January
1, 1996.
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------
(UNAUDITED)
Net sales $43,984
Interest expense 2,927
Net income 4,406
Net income per share 0.16
5
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. CONDENSED AND SUMMARIZED FINANCIAL INFORMATION
The Company's amended revolving credit facility and restrictive covenants
contained in the indenture governing the senior subordinated notes restrict
the payment of dividends and the making of loans, advances, or other
distributions to Twinlab Corporation ("TLC") except in certain limited
circumstances. The condensed financial information of TLC, on a stand-alone
basis, is as follows (because TLC had no cash prior to the recapitalization
transaction on May 7, 1996, no condensed statement of cash flow is
presented for the three months ended March 31, 1996.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS MARCH 31, 1997 DECEMBER 31, 1996
--------------------------------- -------------- -----------------
ASSETS (UNAUDITED)
<S> <C> <C>
Cash $ 163 $ 162
Investment in subsidiaries 7,192 1,526
----------- -----------
$ 7,355 $ 1,688
=========== ===========
SHAREHOLDERS' EQUITY
Common stock ($1.00 par value;
75,000,000 shares authorized;
27,000,000 outstanding) $ 27,000 27,000
Additional paid-in capital 141,338 141,338
Accumulated deficit (160,983) (166,650)
------------ ------------
$ 7,355 $ 1,688
=========== ===========
<CAPTION>
THREE MONTHS ENDED MARCH 31,
CONDENSED STATEMENTS OF INCOME 1997 1996
------------------------------ ------------ ---------
<S> <C> <C>
Equity interest in net income of subsidiaries $ 5,666 $ 9,779
Interest income 1 --
---------- ----------
Net income $ 5,667 $ 9,779
========== ==========
<CAPTION>
CONDENSED STATEMENT OF CASH FLOW THREE MONTHS ENDED MARCH 31, 1997
--------------------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 5,667
-----------
Net income
CASH FLOWS USED IN INVESTING ACTIVITIES
Equity investments in subsidiaries (5,666)
-----------
Net increase in cash 1
Cash at beginning of period 162
-----------
Cash at end of period $ 163
===========
</TABLE>
6
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Twin Laboratories Inc. ("Twin") and Advanced Research Press, Inc. ("ARP")
are, respectively, a direct and indirect wholly-owned subsidiary of TLC.
TLC and ARP have provided joint and several full and unconditional senior
subordinated guarantees of the senior subordinated notes of Twin.
The assets, results of operations and shareholders' equity of Twin comprise
substantially all of the assets, results of operations and shareholders'
equity of TLC on a consolidated basis. TLC has no separate operations and
has no significant assets other than TLC's investment in Twin and, through
Twin, in ARP. Twin has no direct or indirect subsidiaries other than ARP;
and neither Twin nor ARP has any stockholder other than respectively, TLC
and Twin. Accordingly, the Company has determined that separate financial
statements of Twin and ARP would not be material to investors and,
therefore, are not included herein.
Summarized financial information of Twin is as follows:
AS OF MARCH 31, 1997 AS OF DECEMBER 31, 1996
-------------------- -----------------------
(UNAUDITED)
Current assets $74,352 $68,100
Noncurrent assets 75,249 74,979
Current liabilities 40,227 39,426
Noncurrent liabilities 100,378 100,423
Shareholder's equity 8,996 3,230
THREE MONTHS ENDED MARCH 31,
1997 1996
------------ -------
Net sales $51,169 $43,984
Gross profit 21,986 17,622
Net income 5,666 9,779
Summarized financial information of ARP is as follows:
AS OF MARCH 31,1997 AS OF DECEMBER 31,1996
------------------- ----------------------
Current assets $ 1,492 $ 1,577
Noncurrent assets 184 182
Current liabilities 971 1,200
Noncurrent liabilities - -
Shareholder's equity 705 559
THREE MONTHS ENDED MARCH 31,
1997 1996
-------- ------
Net sales $1,591 $1,419
Gross profit 406 133
Net income 146 23
7
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. INVENTORIES
INVENTORIES CONSIST OF THE FOLLOWING:
MARCH 31, 1997 DECEMBER 31,1996
-------------- ----------------
(UNAUDITED)
Raw materials $13,627 $10,802
Work in process 7,699 8,712
Finished goods 13,786 9,929
------- -------
Total $35,112 $29,443
======= =======
8
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
response to Part I, Item 1 of this report.
The Company operates in one business segment, the manufacture and marketing of
brand name nutritional supplements. Within this segment, the Company operates in
two primary business areas: the TWINLAB Division and the herbal products
category. Products sold under the TWINLAB brand name include vitamins, minerals,
amino acids, fish and marine oils, sports nutrition products and special
formulas. The herbal products category includes a full line of herbal
supplements and phytonutrients marketed by the Nature's Herbs Division and a
full line of herb teas marketed by the Alvita Tea Division. In addition, the
Company's publishing activities are conducted through its subsidiary, Advanced
Research Press, Inc.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO
THREE MONTHS ENDED MARCH 31, 1996
NET SALES. Net sales for the three months ended March 31, 1997 was $51.2
million, an increase of $7.2 million, or 16.3%, as compared to net sales of
$44.0 million for the three months ended March 31, 1996. The 16.3% increase was
attributable to increases in gross sales, partially offset by an increase in
discounts and allowances which was due to the Company's increased sales volume.
Net sales of TWINLAB products contributed $41.6 million, an increase of $7.0
million, or 20%, as compared to $34.6 million for the three months ended March
31, 1996. The increase in net sales was primarily due to the expansion of
established accounts, improved business development in other channels of
distribution, increased sales of Vitamin E, Zinc Lozenges, echinacea and
Chondroitin Sulfate (CSA) and related products, and product specific
advertising. Herbal products contributed $8.2 million, an increase of $0.1
million, or 1.2%, as compared to $8.1 million for the three months ended March
31, 1996. Publishing contributed $1.4 million as compared to $1.3 million for
the three months ended March 31, 1996.
GROSS PROFIT. Gross profit for the three months ended March 31, 1997 was $22.0
million, which represented an increase of $4.4 million, or 24.8%, as compared to
$17.6 million for the three months ended March 31, 1996. Gross profit margin was
43.0% for the three months ended March 31, 1997 as compared to 40.1% for the
three months ended March 31, 1996. The overall increase in gross profit dollars
was attributable to the Company's higher sales volume for the three months ended
March 31, 1997. The increase in gross profit margin for the three months ended
March 31, 1997 as compared to the three months ended March 31, 1996 was due
primarily to a more favorable product mix, to higher gross profit margins on
recently introduced new product formulations and product line extensions, and to
continued absorption of manufacturing overhead expenses over a larger sales
base.
9
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
OPERATING EXPENSES. Operating expenses were $9.7 million for the three months
ended March 31, 1997, representing an increase of $2.4 million, or 32.7%, as
compared to $7.3 million for the three months ended March 31, 1996. As a percent
of net sales, operating expenses increased from 16.6% for the three months ended
March 31, 1996 to 18.9% for the three months ended March 31, 1997. The increase
in operating expenses was primarily attributable to increased selling and
advertising expenses and higher operating expenses resulting from the Company's
increased level of sales for the three months ended March 31, 1997. The increase
in operating expenses as a percent of net sales was primarily due to increased
advertising relating to a new television advertising campaign for TWINLAB
products.
INCOME FROM OPERATIONS. Income from operations was $12.3 million for the three
months ended March 31, 1997, representing an increase of $2.0 million, or 19.1%,
as compared to $10.3 million for the three months ended March 31, 1996. Income
from operations margin increased to 24.0% of net sales for the three months
ended March 31, 1997, as compared to 23.5% of net sales for the three months
ended March 31, 1996. The increase in income from operations and income from
operations margin was primarily due to the Company's higher sales volume
together with higher gross margins, offset in part by higher operating expenses
as a percent of net sales for the three months ended March 31, 1997.
OTHER EXPENSE. Other expense was $3.0 million for the three months ended March
31, 1997, as compared to $0.5 million for the three months ended March 31, 1996.
The net increase of $2.5 million is primarily attributable to a $2.8 million
increase in interest expense which resulted from increased borrowings.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997, cash provided by operating activities
was $4.8 million, as compared to $10.3 million for the three months ended March
31, 1996. Cash used in financing activities was $5.0 million for the three
months ended March 31, 1997, and represented the repayment of outstanding
indebtedness. Cash used in financing activities for the three months ended March
31, 1996 was $2.8 million and primarily consisted of distributions to
stockholders of $2.7 million.
Capital expenditures were $2.3 million and $0.2 million for the three months
ended March 31, 1997 and 1996, respectively. Historical capital expenditures
were primarily used to purchase production equipment, expand capacity and
improve manufacturing efficiency. Capital expenditures are expected to be
approximately $4.8 million during the calendar year 1997, and will be used to
purchase manufacturing equipment. The Company estimates that its historical
level of maintenance capital expenditures has been approximately $0.5 million
per fiscal year. The Company recently terminated a contract for the purchase of
an approximately 110,000 square foot warehouse, manufacturing and office
facility in Ronkonkoma, New York in accordance with the terms of the contract.
Management believes that it will be able to lease, purchase, or construct
additional facilities to the extent necessary to meet the Company's future
expansion requirements.
10
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
TLC has no operations of its own and accordingly has no independent means of
generating revenue. As a holding company, TLC's internal sources of funds to
meet its cash needs, including payment of expenses, are dividends and other
permitted payments from its direct and indirect subsidiaries. The indenture,
dated as of May 7, 1996, among TLC, Twin Laboratories Inc., ARP and Fleet
National Bank, as trustee, relating to the senior subordinated notes and the
amended revolving credit facility impose upon the Company certain financial and
operating covenants, including, among others, requirements that the Company
maintain certain financial ratios and satisfy certain financial tests,
limitations on capital expenditures and restrictions on the ability of the
Company to incur debt, pay dividends or take certain other corporate actions.
Management believes that the Company has adequate capital resources and
liquidity to meet its borrowing obligations, fund all required capital
expenditures and pursue its business strategy for the next 18 to 24 months. The
Company's capital resources and liquidity are expected to be provided by the
Company's cash flow from operations, and borrowings under its amended revolving
credit facility. As of April 30, 1997, approximately $30 million of borrowings
were available under the amended revolving credit facility for working capital
requirements and general corporate purposes.
One of the Company's business strategies is to pursue acquisition opportunities,
including product line acquisitions, that complement its existing products,
expand its distribution channels or are compatible with its business philosophy
and strategic goals. Future acquisitions could be financed by internally
generated funds, bank borrowings, public offerings or private placements of
equity or debt securities, or a combination of the foregoing. Up to $30 million
of borrowings under the amended revolving credit facility will be available to
fund future acquisitions subject to certain conditions and reductions ($15
million of which is available as of April 30, 1997). There can be no assurance
that the Company will be able to make acquisitions on terms favorable to the
Company or that funds to finance an acquisition will be available or permitted
under the Company's financing instruments.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information contained or incorporated by reference in this periodic report on
Form 10-Q and in other SEC filings by the Company contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995 which can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof of other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that future results covered
by the forward-looking statements will be achieved, and other factors could also
cause actual results to vary materially from the future results covered in such
forward-looking statements.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There have been no matters submitted to a vote of security holders during the
quarter ended March 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K:
A report on Form 8-K was filed on March 4, 1997, reporting the
scheduled date of the Company's Annual Meeting record date with respect
thereto.
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TWINLAB CORPORATION
BY: /s/ Ross Blechman
-------------------
Ross Blechman
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
DATED: May 14, 1997 BY: /s/ Brian Blechman
--------------------
Brian Blechman
EXECUTIVE VICE PRESIDENT - TREASURER,
CHIEF ACCOUNTING OFFICER
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 1844
<SECURITIES> 0
<RECEIVABLES> 34013
<ALLOWANCES> (408)
<INVENTORY> 35112
<CURRENT-ASSETS> 72710
<PP&E> 23799
<DEPRECIATION> (7646)
<TOTAL-ASSETS> 147959
<CURRENT-LIABILITIES> 40227
<BONDS> 0
0
0
<COMMON> 27000
<OTHER-SE> (19645)
<TOTAL-LIABILITY-AND-EQUITY> 147959
<SALES> 51169
<TOTAL-REVENUES> 51169
<CGS> 29183
<TOTAL-COSTS> 29183
<OTHER-EXPENSES> 9688
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<INTEREST-EXPENSE> 3044
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<INCOME-TAX> 3637
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<NET-INCOME> 5667
<EPS-PRIMARY> 0.21
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</TABLE>
