SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 NO X
------ ------
At October 31, 1996, the registrant had 1,000,000 shares of common stock
outstanding.
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q/A
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at September 30, 1996 and
December 31, 1995 2
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1996 and 1995 4
Notes to Consolidated Unaudited Financial Statements 5 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10 - 15
Part II. Other Information 16
Item 4. Submission of Matters to a Vote of Security Holders.
Item 6. Exhibits and Reports on Form 8-K.
Signatures 17
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995 (1)
----------- -----------
Assets (unaudited)
Current assets: As Restated
(Note 10)
<S> <C> <C>
Cash and cash equivalents $ 8,367 $ 7,945
Marketable securities -- 201
Accounts receivable, net of allowance for bad debts of
$228 and $177, respectively 25,071 24,372
Inventories 30,779 25,273
Deferred tax assets 112 --
Prepaid expenses and other current assets 1,347 872
--------- ---------
Total current assets 65,676 58,663
Property, plant and equipment, net 13,456 13,036
Deferred tax assets 54,020 --
Other assets 10,256 3,610
========= =========
Total $ 143,408 $ 75,309
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current portion of long-term debt $ 86 $ 1,479
Current portion of capital lease obligations 143 136
Loan payable - bank -- 660
Notes payable - shareholders -- 846
Accounts payable 10,366 6,854
Accrued expenses and other current liabilities 13,040 4,258
--------- ---------
Total current liabilities 23,635 14,233
Long-term debt, less current portion 47,273 5,367
Capital lease obligations, less current portion 195 304
Senior subordinated notes 100,000 --
--------- ---------
--------- ---------
Total liabilities 171,103 19,904
--------- ---------
Senior redeemable cumulative preferred stock, $.01 par value;
156,410 shares authorized;30,000 shares outstanding as of
September 30, 1996 30,000 --
--------- ---------
Junior redeemable cumulative preferred stock, $.01 par value;
140,090 shares authorized; 37,000 shares outstanding as of
September 30, 1996 37,000 --
--------- ---------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, $1 par value; 75,000,000 shares authorized;
1,000,000 shares outstanding as of September 30, 1996 and
450,000 shares outstanding as of December 31, 1995 1,000 450
Additional paid-in capital 74,581 68
Retained Earnings (deficit) (170,276) 54,887
--------- ---------
Total shareholders' equity (deficit) (94,695) 55,405
--------- ---------
Total $ 143,408 $ 75,309
========= =========
</TABLE>
(1) The Consolidated Balance Sheet as of December 31, 1995 has been taken from
the audited financial statements at that date.
2
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------
1996 1995 1996 1995
------------- ------------- ------------- --------
(unaudited) As Restated
(Note 10)
(unaudited)
<S> <C> <C> <C> <C>
Net sales $ 39,393 $ 35,002 $ 121,230 $ 104,822
Cost of sales 23,830 21,899 71,682 63,945
--------- --------- --------- ---------
Gross profit 15,563 13,103 49,548 40,877
Operating expenses 7,828 6,742 22,644 20,521
--------- --------- --------- ---------
Income from operations 7,735 6,361 26,904 20,356
--------- --------- --------- ---------
Other (expense) income:
Interest income 137 80 452 227
Interest expense (4,312) (221) (6,903) (638)
Transaction expenses -- -- (400) --
Nonrecurring non-competition agreement expense -- -- (15,300) --
Other 38 (289) 15 (193)
--------- --------- --------- ---------
(4,137) (430) (22,136) (604)
--------- --------- --------- ---------
Income before provision for income taxes 3,598 5,931 4,768 19,752
Provision for (benefit from) income taxes 1,433 47 (2,854) 139
========= ========= ========= =========
Net income $ 2,165 $ 5,884 $ 7,622 $ 19,613
========= ========= ========= =========
Pro forma for change in tax status (Note 2)
Historical income before provision for income taxes $ 3,598 $ 5,931 $ 4,768 $ 19,752
Pro forma provision for income taxes 1,439 2,347 8,027 7,818
--------- --------- --------- ---------
Pro forma net income (loss) 2,159 $ 3,584 (3,259) $ 11,934
========= =========
Senior and junior preferred stock dividends (2,139) (3,386)
--------- ---------
Pro forma net income (loss) applicable to common
stock $ 20 $ (6,645)
========= =========
Pro forma net income (loss) per share $ 0.02 $ (6.65)
========= =========
Weighted average shares outstanding (Note 4) 1,000 1,000
========= =========
</TABLE>
3
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
1996 1995
------------- -------------
As Restated
(Note 10)
(unaudited)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,622 $ 19,613
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,322 664
Gain on sale of equipment -- (58)
Bad debt expense 128 116
Deferred income taxes (2,952) --
Nonrecurring non-competition agreement expense 15,300 --
Changes in operating assets and liabilities:
Accounts receivable (827) 521
Inventories (5,506) (7,096)
Prepaid expenses and other current assets (475) (190)
Accounts payable 3,512 2,550
Accrued expenses and other current liabilities 5,396 1,580
--------- ---------
Net cash provided by operating activities 23,520 17,700
--------- ---------
Cash flows from investing activities:
Maturities of marketable securities 201 1,159
Proceeds from sales of property, plant and equipment 10 825
Acquisition of property, plant and equipment (1,253) (2,465)
(Increase) decrease in other assets (7,145) 201
--------- ---------
Net cash used in investing activities (8,187) (280)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of debt 153,000 4,675
Proceeds from issuance of senior and junior preferred stock 67,000 --
Distributions to shareholders (8,929) (20,595)
Payments of debt (13,993) (4,481)
Issuance of capital stock 5,500 --
Principal payments of capital lease obligations (102) (115)
Repurchase of shareholders' common stock and recapitalization (217,387) --
--------- ---------
Net cash used in financing activities (14,911) (20,516)
--------- ---------
Net increase (decrease) in cash and cash equivalents 422 (3,096)
Cash and cash equivalents at beginning of period 7,945 5,735
========= =========
Cash and cash equivalents at end of period $ 8,367 $ 2,639
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 1,999 $ 546
========= =========
Income taxes $ 1,162 $ 162
========= =========
</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 September 30, 1996, the results
of its operations for the three and nine months ended September 30, 1996
and 1995, and its cash flows for the nine months ended September 30, 1996
and 1995, in conformity with generally accepted accounting principles for
the interim financial information applied on a consistent basis. The
results of operations for the three and nine months ended September 30,
1996, 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 registration statement on Form
S-1 as filed with the Securities and Exchange Commission ("SEC") (File No.
333-05191).
2. Description of Entity and Basis of Presentation - Prior to May 7, 1996,
Twin Laboratories Inc. ("Twin") and its affiliates, Twinlab Export Corp.
("Export"), Twinlab Specialty Corporation ("Specialty"), Alvita Products,
Inc. ("Alvita"), Natur-Pharma Inc. ("Natur-Pharma"), B. Bros. Realty
Corporation ("B. Bros.") and Advanced Research Press, Inc. ("ARP")
(collectively the "Companies") operated as separate corporations, all of
which were wholly-owned by the same individuals (with some companies having
different ownership percentages among such individuals) except for
Natur-Pharma and B. Bros. which were only ninety-seven percent owned by
such individuals.
In July 1995, the shareholders of the Companies signed a non-binding letter
of intent to sell an interest in the Companies and subsequently entered
into a stock purchase and sale agreement (the "Acquisition Agreement") (see
Note 3).
On February 27, 1996, Twinlab Corporation (formerly TLG Laboratories
Holding Corp.) ("TLC") was incorporated in contemplation of the Acquisition
Agreement. The accompanying consolidated financial statements include the
accounts of TLC and subsidiaries (the "Company") after giving retroactive
effect, in a manner similar to a pooling of interests, to the merger of the
Companies pursuant to the Acquisition Agreement.
The Companies had been S Corporations, pursuant to the Internal Revenue
Code, through May 7, 1996. Upon completion of the Acquisition Agreement,
the Companies terminated their S Corporation status. The pro forma income
statement information reflects adjustments to the historical net income had
the Companies not elected S Corporation status for income tax purposes for
all periods presented.
3. Acquisition Agreement and related transactions - The shareholders of the
Companies entered into the Acquisition Agreement, which is dated as of
March 5, 1996 and which was consummated on May 7, 1996, pursuant to which,
among other things, (i) TLC acquired all of the outstanding capital stock
of Natur-Pharma, (ii) Green Equity Investors II, L.P. ("GEI") acquired
480,000 shares (48%) of the common stock of TLC for aggregate consideration
of $4,800, and shares of non-voting junior redeemable preferred stock of
TLC for aggregate consideration of $37,000, (iii) certain other investors
acquired 70,000 shares (7%) of the common stock of TLC (however, each of
these other investors own less than 5% of the common stock of TLC) for
aggregate
5
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
consideration of $700 and shares of non-voting senior redeemable preferred
stock of TLC for aggregate consideration of $30,000, (iv) certain of the
shareholders of the Companies (the "Continuing Shareholders") received from
TLC, in exchange for certain of their shares of common stock of
Natur-Pharma, 450,000 shares (45%) of the outstanding shares of common
stock of TLC valued at $4,500, and (v) the shareholders of the Companies
received a total of $212,500 in consideration of the balance of their
shares of common stock of Natur-Pharma and for all of their shares of
capital stock of Twin, Alvita, Export, Specialty, B. Bros., and ARP. Of the
total cash consideration to the shareholders, approximately $15,300
represented consideration for non-competition agreements entered into by
the shareholders of the Companies, which was recognized as a nonrecurring
expense upon the consummation of the Acquisition Agreement.
Pursuant to the terms of the Acquisition Agreement, Twin, Alvita, Export,
Specialty, and B. Bros. were merged into Natur-Pharma, ARP was merged with
Natur-Pharma II, Inc., a wholly-owned subsidiary of Natur-Pharma, and
Natur-Pharma became a wholly-owned subsidiary of TLC. Natur-Pharma changed
its name to Twin Laboratories Inc. ("New Twin"). TLC's initial board of
directors consists of five of the Continuing Shareholders and three
designees of GEI. A majority of TLC's shareholders have the ability to
elect a majority of its directors. However, regardless of the composition
of the board of directors, pursuant to the terms of the TLC shareholders
agreement, a wide range of actions to be taken by TLC require the
affirmative approval of both a majority of the Continuing Shareholder
directors and a majority of the GEI designee directors. These actions
include, but are not limited to, payment of certain dividends, engagement
in new businesses, acquisition of other businesses, entering certain
contracts, incurring certain debt or obligations, making certain
investments, relocation of executive offices, selection of location and
date of the annual shareholders meeting, termination or material
modification of any employee benefit plan, selection of auditors or legal
counsel, adoption or amendment of strategic plans or operating budgets, and
election or termination of any executive officers. In addition, certain
fundamental corporate actions, including but not limited to amendments to
the certificate of incorporation, the sale of substantially all of the
assets of the Company, and the merger or combination of the Company with
another entity, additionally require an affirmative vote of holders of at
least 80% of the issued and outstanding common stock of TLC. Such voting
rights are generally effective until such time as the common stock of TLC
is publicly held. Because the transactions contemplated by the Acquisition
Agreement do not result in a change in control as defined in Emerging
Issues Task Force Issue No. 88-16, "Basis in Leveraged Buyout Transactions"
("EITF 88-16"), the transactions were accounted for as a recapitalization
under the guidance of EITF 88-16 and the Companies' historical basis of
accounting were applied to the consolidated financial statements of TLC.
Upon consummation of the Acquisition Agreement, the Companies terminated
their S Corporation status. The mergers of Twin, Alvita, Export, Specialty,
and B. Bros. Into Natur-Pharma were treated as taxable asset purchases for
federal and state income tax purposes and as a recapitalization for
financial accounting purposes. For federal and state income tax purposes,
the purchase price was allocated among the various corporations and their
respective assets and liabilities based on the respective fair values as of
the closing of the Acquisition Agreement. This resulted in different book
and tax asset bases for the assets of these companies, which resulted in
deferred tax assets of approximately $57,300.
New Twin obtained additional financing necessary to effect the transactions
contemplated by the Acquisition Agreement, repay certain existing
indebtedness of the
6
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
Companies, and pay the fees and expenses incurred in connection with the
Acquisition Agreement through the incurrence of debt which totaled
$153,000. Such debt included: (1) borrowings of $53,000 under a term loan
credit facility provided by certain banks, financial institutions and other
entities, and (2) gross proceeds of $100,000 from the private placement of
subordinated debt securities which securities were subsequently exchanged
on October 28, 1996 for registered debt securities. A six-year $15,000
revolving credit facility was also obtained from the term loan lenders, to
provide for working capital requirements.
Borrowings of New Twin under the term loan and revolving credit facilities
and the indenture governing the subordinated debt restrict the payment of
dividends and the making of loans, advances or other distributions to TLC,
except in certain limited circumstances. The transfer of assets of New Twin
and ARP to TLC as loans, advances and other distributions is restricted by
such financing arrangements. The subordinated debt is jointly and severally
guaranteed by TLC and ARP on a full and unconditional unsecured senior
subordinated basis.
The assets, results of operations and shareholders' equity of New 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 its
wholly-owned subsidiary New Twin and, through New Twin, in ARP, New Twin's
wholly-owned subsidiary. TLC has no direct or indirect subsidiaries other
than New Twin and ARP; and neither New Twin nor ARP has any stockholder
other than, respectively, TLC and New Twin. Accordingly, the Company has
determined that separate financial statements of New Twin and ARP would not
be material to investors and, therefore, such financial statements are not
included herein.
Summarized financial information of New Twin is as follows:
September 30, December 31,
1996 1995
---------------- --------------
(unaudited)
Current assets $ 65,676 $ 58,663
Noncurrent assets 77,732 16,646
Current liabilities 20,249 14,233
Noncurrent liabilities 147,468 5,671
Shareholders' equity (deficit) (24,309) 55,405
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1996 1995 1996 1995
------ ------------ --------- -----------
Net sales $ 39,393 $ 35,002 $121,230 $104,822
Gross profit 15,563 13,103 49,548 40,877
Net income 2,165 5,884 7,622 19,613
7
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
Summarized financial information of ARP is as follows:
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
Current assets $1,650 $1,266
Noncurrent assets 171 168
Current liabilities 1,338 1,211
Noncurrent liabilities -- --
Shareholders' equity 483 222
Three months ended Nine months ended
September 30, September 30,
---------------------------- --------------------------
1996 1995 1996 1995
------ ------- ------- -------
Net sales $1,408 $1,285 $4,446 $4,011
Gross profit 125 17 592 473
Net income (loss) 41 (66) 317 231
4. Pro forma net income (loss) per share - Pro forma net income (loss) per
share for the three months and nine months ended September 30, 1996 has
been computed by dividing pro forma net income (loss), after reduction for
senior and junior preferred stock dividends, by the number of weighted
average shares outstanding and for the nine months ended September 30, 1996
assumes as outstanding for the entire period, the 550,000 shares which were
issued on May 7, 1996 in connection with the Acquisition Agreement.
5. Classification of inventories is:
September 30, December 31,
1996 1995
------------- ------------
(unaudited)
Raw Materials $13,293 $11,006
Work-in-process 8,850 4,550
Finished Goods 8,636 9,717
============ ==========
$30,779 $25,273
============ ==========
6. Changes in authorized capital - In July 1996, the Board of Directors (the
"Board") and the stockholders authorized an increase in the number of
shares of common stock authorized to 75,000,000 and an increase in the
number of shares of preferred stock authorized to 2,000,000, which
preferred stock may be issued by the Board on such terms and with such
rights, preferences and designations as the Board may determine, without
further stockholder action.
7. Stock incentive plan - In July 1996, the Board and stockholders of TLC
approved and adopted the Twinlab Corporation 1996 Stock Incentive Plan (the
"1996 Plan"). The 1996 Plan provides for the issuance of a total of up to
400,000 authorized and unissued shares of common stock, treasury shares
and/or shares acquired by TLC for purposes of the 1996 Plan. Awards under
the 1996 Plan may be made in the form of (i) incentive stock options, (ii)
nonqualified stock options, (iii) stock appreciation rights, (iv)
restricted stock and (v) performance shares. Options become exercisable
over five
8
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(All amounts in thousands, except share and per share data)
years from the date of grant at the rate of 20% of the grant each year. As
of September 30, 1996, no awards have been made under the 1996 plan.
8. Proposed initial public offering - On June 4, 1996, TLC filed a
registration statement on Form S-1 in respect of an offering by TLC for the
sale to the public (the "IPO") of shares of its common stock, $1.00 par
value. The registration statement has not yet been declared effective by
the SEC. The registration statement, as subsequently amended, states that
the maximum aggregate offering price of the securities to be registered is
$156,400. The expected use of the net proceeds of the IPO and, to the
extent necessary, available cash resources of the Company, would be to
redeem all of the outstanding shares of senior preferred stock and all of
the outstanding shares of junior preferred stock of TLC, which together
have an aggregate liquidation preference of $67,000 (plus accrued and
unpaid dividends thereon); and to prepay all of the $47,000 of remaining
outstanding indebtedness under the term loan facility, plus accrued and
unpaid interest thereon. The balance, if any, of the net proceeds of the
IPO would be used for general corporate purposes.
Prior to the consummation of the IPO, the Board will authorize a stock
split (effected in the form of a stock dividend), of all issued and
outstanding common shares at the rate of 18.5 for 1, which will increase
the number of issued and outstanding shares from 1,000,000 to 18,500,000.
9. Amended and restated revolving credit facility - In connection with the
IPO, New Twin expects to enter into a $50,000 amended and restated
revolving credit facility (the "Amended and Restated Revolving Credit
Facility") which would expire on May 7, 2002. Borrowings under the Amended
and Restated Revolving Credit Facility would bear interest, at the
borrower's discretion, at either the Alternative Base Rate, as defined, or
at the Eurodollar Rate, plus a margin of 1.25%, as defined. Interest rates
are subject to increase or reduction based upon the Company's meeting
certain financial tests. Borrowings under the Amended and Restated
Revolving Credit Facility would be available for working capital
requirements and for general corporate purposes, including up to $35,000 of
which would be available to fund permitted acquisitions, as defined. A
portion of the Amended and Restated Revolving Credit Facility not to exceed
$15,000 would be available for the issuance of letters of credit which
generally would have an initial term of one year or less. The Amended and
Restated Revolving Credit Facility is expected to be secured by first
priority secured interests in most of the tangible and intangible assets of
New Twin. In addition, the Amended and Restated Revolving Credit Facility
would be subject to certain restrictive covenants including, among other
things, the maintenance of certain debt coverage ratios, as well as
restrictions on additional indebtedness, dividends and certain other
significant transactions.
10. Restatement of Financial Statements As of September 30, 1996 and for the
Nine Months Ended September 30, 1996 - As described in Note 3, in
connnection with the Acquisition Agreement, the Company recorded deferred
tax assets of approximately $57,300. These assets were originally recorded
with a corresponding credit to additional paid-in capital. Subsequent to
the issuance of the September 30, 1996 interim financial statements, the
Company realized that approximately $6,120 of these deferred tax assets,
representing the tax benefit relating to $15,300 of nonrecurring
non-competition agreement expense, should have been recorded with a
corresponding credit to the provision for income taxes. The results of the
restatement on the financial statements as of, and for the nine months
ended September 30, 1996, are summarized as follows:
<TABLE>
<CAPTION>
As Previously As
Reported Adjustments Restated
-------- ----------- --------
<S> <C> <C> <C>
Provision for (benefit from) income
taxes $ 3,266 $ (6,120) $ (2,854)
Net income 1,502 6,120 7,622
Additional paid-in capital 80,701 (6,120) 74,581
Retained earnings (deficit) (176,396) 6,120 (170,276)
</TABLE>
This restatement has no impact on previously reported pro forma net loss,
pro forma net loss per share or total shareholders' deficit as of, and for
the nine month period ended September 30, 1996. This restatement also has
no impact on the Company's operations or its cash flows.
9
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following should be read in conjunction with the response to Part I, Item 1
of this report.
Results of Operations
The following table sets forth, for the periods indicated, certain historical
income statement and other data for the Company and also sets forth certain of
such data as a percentage of net sales.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------------ -----------------------------------
1996 1995 1996 1995
------------------- -------------- ------------- -------------------
$ % $ % $ % $ %
------------------- -------------- ------------- -------------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Vitamins, Minerals & Amino Acids $ 29.2 24.1% $ 25.6 24.4% $ 9.9 25.2% $ 7.3 20.8%
Sports Nutrition 43.7 36.0 38.4 36.6 15.0 38.1 13.8 39.5
Special Formulas 31.4 25.8 26.5 25.3 9.7 24.4 9.6 27.5
Herbal Supplements & Phytonutrients 16.5 13.7 14.6 13.9 5.4 13.8 5.1 14.4
Herb Teas 5.7 4.7 4.1 3.9 1.6 4.1 0.9 2.5
Publishing 4.1 3.4 4.2 4.1 1.3 3.3 1.3 3.8
------ ----- ------ ----- ----- ----- ----- -----
Gross Sales 130.6 107.7 113.4 108.2 42.9 108.9 38.0 108.5
Discounts & Allowances (9.4) (7.7) (8.6) (8.2) (3.5) (8.9) (3.0) (8.5)
------ ----- ------ ----- ----- ----- ----- -----
Net Sales $ 121.2 100.0% $ 104.8 100.0% $ 39.4 100.0% $ 35.0 100.0%
Gross Profit 49.6 40.9 40.9 39.0 15.6 39.5 13.1 37.4
Operating Expenses 22.6 18.7 20.5 19.6 7.8 19.9 6.7 19.3
Income From Operations 26.9 22.2 20.4 19.4 7.7 19.6 6.4 18.2
</TABLE>
The Company consisted of "S" corporations through the consummation of the
Acquisition Agreement on May 7, 1996. Accordingly, federal and state taxes were
generally paid at the shareholder level only. The provision for income taxes
through May 7, 1996 represented state taxes for New York, which imposes a
corporate tax for all income in excess of $0.2 million. Upon consummation of the
transactions related to the Acquisition Agreement, the Company eliminated its
"S" corporation status and, accordingly, is subject to federal and state income
taxes.
Nine Months Ended September 30, 1996 Compared to
Nine Months Ended September 30, 1995
Net Sales. Net sales for the nine months ended September 30, 1996 was $121.2
million, an increase of $16.4 million, or 15.7%, as compared to net sales of
$104.8 million for the nine months ended September 30, 1995. The 15.7% increase
was attributable to increases in gross sales in each of the Company's six
product categories other than publishing, partially offset by an increase in
discounts and allowances which was due to the Company's increased sales volume.
Vitamins, minerals and amino acids contributed $29.2 million, an increase of
$3.6 million, or 14.3%, as compared to $25.6 million for the nine months ended
September 30, 1995. The increase in gross sales of vitamins, minerals and amino
acids was primarily due to continued strong consumer interest in these products.
Sports nutrition products contributed $43.7 million, an increase of $5.3
million, or 13.7%, as compared to $38.4 million for the nine months ended
September 30, 1995, primarily due to the increased demand for a variety of these
products, including $1.2 million of gross sales in September 1996 (the first
month of introduction) from the Company's newly-
10
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
introduced line of Ma Huang-free products. Special formulas contributed $31.4
million, an increase of $4.9 million, or 18.4%, as compared to $26.5 million for
the nine months ended September 30, 1995. The increase in gross sales of special
formulas was primarily due to the successful introduction of a variety of new
product formulations. Herbal supplements and phytonutrients contributed $16.5
million, an increase of $1.9 million, or 13.3%, as compared to $14.6 million for
the nine months ended September 30, 1995, and herb teas contributed $5.7
million, an increase of $1.6 million, or 39.8%, as compared to $4.1 million for
the nine months ended September 30, 1995. The gross sales increase in both
herbal supplements and phytonutrients and herb teas was primarily due to new
product introductions, continued strong consumer interest in existing products
and increased penetration of the Company's line of Nature's Herbs herbal
supplements and phytonutrients and the Company's line of Alvita herb tea
products into domestic health food stores. Publishing contributed $4.1 million
as compared to $4.2 million for the nine months ended September 30, 1995.
Gross Profit. Gross profit for the nine months ended September 30, 1996 was
$49.6 million, which represented an increase of $8.7 million, or 21.2%, as
compared to $40.9 million for the nine months ended September 30, 1995. Gross
profit margin was 40.9% for the nine months ended September 30, 1996 as compared
to 39.0% for the nine months ended September 30, 1995. The overall increase in
gross profit dollars was attributable to the Company's higher sales volume for
the nine months ended September 30, 1996. The increase in gross profit margin
for the nine months ended September 30, 1996 as compared to the nine months
ended September 30, 1995 was due primarily to a more favorable product mix, to
higher gross profit margins on recently introduced new product formulations and
product line extensions, to a reduction in sales discounts and allowances
offered on certain of the Company's lines of TWINLAB (vitamins, minerals, amino
acids, fish and marine oils, sports nutrition products and special formulas) and
Nature's Herbs products under certain sales programs introduced in 1995 and to
continued absorption of manufacturing overhead expenses over a larger sales
base.
Operating Expenses. Operating expenses were $22.6 million for the nine months
ended September 30, 1996, representing an increase of $2.1 million, or 10.3%, as
compared to $20.5 million for the nine months ended September 30, 1995. As a
percent of net sales, operating expenses declined from 19.6% for the nine months
ended September 30, 1995 to 18.7% for the nine months ended September 30, 1996.
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 nine months ended September 30,
1996. The decline in operating expenses as a percent of net sales was due to the
Company's ability to maintain its expenditures for research and development and
certain general and administrative functions at approximately the same level as
in the nine months ended September 30, 1995, while substantially increasing the
Company's sales volume.
Income from Operations. Income from operations was $26.9 million for the nine
months ended September 30, 1996, representing an increase of $6.5 million, or
32.2%, as compared to $20.4 million for the nine months ended September 30,
1995. Income from operations margin increased to 22.2% of net sales for the nine
months ended September 30, 1996, as compared to 19.4% of net sales for the nine
months ended September 30, 1995. The increase in income from operations and
income from operations margin was primarily due to the Company's higher sales
volume for the nine months ended September 30, 1996 together with higher gross
margins and lower operating expenses as a percent of net sales.
11
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
Other Expense. Other expense was $22.1 million for the nine months ended
September 30, 1996, as compared to $0.6 million for the nine months ended
September 30, 1995. The net increase is primarily attributable to (i) a $15.3
million charge relating to the write-off of certain non-competition agreements
related to the consummation of the Acquisition Agreement, (ii) $0.4 million of
expenses related to the consummation of the Acquisition Agreement and related
transactions and (iii) a $6.3 million increase in interest expense which
resulted from increased borrowings, partially offset by an increase in interest
and other income.
Three Months Ended September 30, 1996 ("third quarter 1996") Compared to Three
Months Ended September 30, 1995 ("third quarter 1995")
Net Sales. Net sales for third quarter 1996 was $39.4 million, an increase of
$4.4 million, or 12.5%, as compared to net sales of $35.0 million in third
quarter 1995. The 12.5% increase was attributable to increases in gross sales in
each of the Company's six product categories other than publishing (which
remained unchanged from third quarter 1995), partially offset by an increase in
discounts and allowances which was due to the Company's increased sales volume.
Vitamins, minerals and amino acids contributed $9.9 million, an increase of $2.6
million, or 36.2%, as compared to $7.3 million in third quarter 1995. The
increase in gross sales of vitamins, minerals and amino acids was primarily due
to continued strong consumer interest in these products. Sports nutrition
products contributed $15.0 million, an increase of $1.2 million, or 8.6%, as
compared to $13.8 million in third quarter 1995. The increase in gross sales of
sports nutrition products was primarily due to sales of the Company's
newly-introduced line of Ma Huang-free products which contributed gross sales of
$1.2 million in September 1996, their first month of introduction. Special
formulas contributed $9.7 million, as compared to $9.6 million in third quarter
1995. Herbal supplements and phytonutrients contributed $5.4 million, an
increase of $0.3 million, or 7.8%, as compared to $5.1 million in third quarter
1995, and herb teas contributed $1.6 million, an increase of $0.7 million, or
82.2%, as compared to $0.9 million in third quarter 1995. The increase in gross
sales of herb teas was primarily due to new product introductions, continued
strong consumer interest in existing products and increased penetration of
Alvita products into domestic health food stores. Publishing contributed $1.3
million in each of third quarter 1996 and third quarter 1995.
Gross Profit. Gross profit for third quarter 1996 was $15.6 million, which
represented an increase of $2.5 million, or 18.8%, as compared to $13.1 million
for third quarter 1995. Gross profit margin was 39.5% for third quarter 1996 as
compared to 37.4% for third quarter 1995. The overall increase in gross profit
dollars was attributable to the Company's higher sales volume in third quarter
1996. The increase in gross profit margin in third quarter 1996 as compared to
third quarter 1995 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.
Operating Expenses. Operating expenses were $7.8 million for third quarter 1996,
representing an increase of $1.1 million, or 16.1%, as compared to $6.7 million
for third quarter 1995. As a percent of net sales, operating expenses increased
from 19.3% in third quarter 1995 to 19.9% in third quarter 1996. The increase in
operating expenses, and operating expenses as a percent of net sales, was
attributable to a $0.7 million increase in selling and marketing expenses,
primarily due to increased advertising expense, and a $0.4 million increase in
general and administrative expenses in third quarter 1996.
12
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
Income from Operations. Income from operations was $7.7 million in third quarter
1996, representing an increase of $1.3 million, or 21.6%, as compared to $6.4
million for third quarter 1995. Income from operations margin increased to 19.6%
of net sales in third quarter 1996, as compared to 18.2% of net sales in third
quarter 1995. The increase in income from operations and income from operations
margin was primarily due to the Company's higher sales volume in third quarter
1996 together with higher gross margins.
Other Expense. Other expense during third quarter 1996 amounted to $4.1 million
as compared to $0.4 million in third quarter 1995. The increase is primarily due
to a $4.1 million increase in interest expense which resulted from increased
borrowings.
Liquidity and Capital Resources
For the nine months ended September 30, 1996, cash provided by operating
activities was $23.5 million, as compared to $17.7 million for the nine months
ended September 30, 1995. The increase in cash provided by operating activities
was primarily attributable to an increase in income from operations. Cash used
in financing activities was $14.9 million for the nine months ended September
30, 1996, reflecting the net cash effect of the transactions related to the
Acquisition Agreement, the repayment of $6.0 million of outstanding indebtedness
under the Company's term loan facility, and distributions of $8.9 million to
certain stockholders of the Company. Cash used in financing activities for the
nine months ended September 30, 1995 primarily consisted of distributions to
stockholders of $20.6 million.
Capital expenditures were $1.2 million and $2.5 million for the nine months
ended September 30, 1996 and 1995, respectively. Historical capital expenditures
were primarily used to purchase production equipment, expand capacity and
improve manufacturing efficiency. Capital expenditures are expected to be
approximately $0.5 million and $3.4 million during the fourth quarter of 1996
and fiscal 1997, respectively, and will be used to purchase manufacturing
equipment and fund plant expansion to support the Company's future growth. The
Company is engaged in negotiations for the purchase of an approximately 110,000
square foot warehouse and manufacturing facility in Ronkonkoma, New York. If
this acquisition is completed, the Company anticipates making additional capital
expenditures of approximately $6.8 million in fiscal 1997, including
approximately $2.0 million of anticipated renovations to such facility. The
Company estimates that its historical level of maintenance capital expenditures
has been approximately $0.5 million per fiscal year.
In connection with the Acquisition Agreement, TLC issued shares of its senior
preferred stock and junior preferred stock for aggregate consideration of $67.0
million, entered into a credit facility and borrowed $53.0 million in the form
of a term loan thereunder, and issued $100.0 million principal amount of 10-1/4%
Senior Subordinated Notes due 2006. Subsequent to the Acquisition Agreement, the
Company repaid $6.0 million of outstanding indebtedness under the term loan
facility. On June 4, 1996, TLC filed a registration statement on Form S-1 in
respect of an offering by TLC for the sale to the public (the "IPO") of shares
of its common stock, $1.00 par value. The registration statement has not yet
been declared effective by the SEC. The registration statement, as subsequently
amended, states that the maximum aggregate offering price of the securities to
be registered is $156,400. The net proceeds of the IPO and, to the extent
necessary, available cash resources of the Company (including possible
borrowings available under the Amended and Restated Revolving Credit Facility
which is expected to be entered into in connection with the consummation of the
IPO), will be used to repay all of the Company's outstanding indebtedness under
the term loan facility, plus accrued and unpaid interest thereon, and to redeem
all of the outstanding shares of senior preferred stock and all of the
outstanding shares of junior preferred stock, together having an aggregate
liquidation preference of
13
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
$67.0 million, plus accrued and unpaid dividends thereon. There can be no
assurance that the Company will consummate the IPO.
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. Financing
arrangements under which Twin Laboratories Inc. is the borrower contain, and the
Amended and Restated Revolving Credit Facility is expected to contain, certain
financial and operating covenants which, among other things, require the
maintenance of a maximum leverage ratio and a minimum fixed charge ratio.
Borrowings of Twin Laboratories Inc. under the term loan and revolving credit
facilities and the indenture governing the subordinated debt restrict the
payment of dividends and the making of loans, advances or other distributions to
TLC, except in certain limited circumstances. The transfer of assets of Twin
Laboratories Inc. and ARP to TLC as loans, advances and other distributions is
restricted by such financing arrangements.
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. The Company's capital resources
and liquidity are expected to be provided by the Company's cash flow from
operations, its existing revolving credit facility and, if entered into,
borrowings under the Amended and Restated Revolving Credit Facility.
One of the Company's business strategies is to pursue acquisition opportunities,
including product line acquisitions, that complement its existing products 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. In connection with the IPO, the Company expects to
enter into the Amended and Restated Revolving Credit Facility, which is expected
to provide for a revolving credit facility of $50.0 million, up to $35.0 million
of which is expected to be available to fund acquisitions, subject to certain
conditions and reductions. There can be no assurance that the Company will be
able to make acquisitions on terms favorable to the Company and that funds to
finance an acquisition will be available or permitted under the Company's
financing instruments. If the Company completes acquisitions, it will encounter
various associated risks, including the possible inability to integrate business
into the Company's operations, potentially increased goodwill amortization,
diversion of management's attention and unanticipated problems or liabilities,
some or all of which could have a material adverse effect on the Company's
results of operations and financial condition. In addition, such acquisitions
could result in substantial equity dilution to existing stockholders.
The mergers of Twin Laboratories Inc., Alvita Products, Inc., Twinlab Export
Corp., Twinlab Specialty Corporation and B. Bros. Realty Corporation into
Natur-Pharma Inc. were treated as taxable asset purchases for federal and state
income tax purposes and as a recapitalization for financial accounting purposes.
For federal and state income tax purposes, the purchase price was allocated
among the various corporations and their respective assets and liabilities based
on the respective fair values as of the closing of the Acquisition Agreement.
This resulted in different book and tax asset bases for the assets of Twin
Laboratories Inc., Alvita Products, Inc., Twinlab Export Corp., Twinlab
Specialty Corporation and B. Bros. Realty Corporation, which resulted in
deferred tax assets of approximately $57.3 million which will reduce future tax
liabilities.
14
<PAGE>
TWINLAB CORPORATION AND SUBSIDIARIES
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.
15
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) By unanimous written consent dated July 30, 1996, the holders of all
outstanding shares of common stock of TLC approved the following matters:
(i) A proposal to amend and restate TLC's Amended and Restated Certificate
of Incorporation to, among other things, increase the number of authorized
shares of common stock to 75,000,000 and to increase the number of
authorized shares of preferred stock, par value $.01 per share, to
2,000,000. The Second Amended and Restated Certificate of Incorporation of
TLC authorizes the Board of Directors to issue authorized but unissued
shares of preferred stock in one or more series, and to fix by resolution
the voting powers, designations, preferences and relative, optional or
other special rights thereof, including liquidation preferences and the
dividend, conversion and redemption rights of each such series.
(ii) A proposal to amend and restate the By-laws of TLC, to provide, among
other things, that the Board of Directors be comprised of such number of
directors as determined from time to time by the Board, but in no event
less than eight members.
(iii) A proposal to authorize the Twinlab Corporation 1996 Stock Incentive
Plan, which provides for the issuance of up to a total of 400,000
authorized and unissued shares of common stock in the form of (1) incentive
stock options, (2) nonqualified stock options, (3) stock appreciation
rights, (4) restricted stock and (5) performance shares.
(b) In addition, by unanimous written consents dated July 30, 1996, the holders
of the 14% Senior Cumulative Preferred Stock of TLC and the holders of the 11
1/4% Junior Cumulative Preferred Stock of TLC each approved the proposals set
forth in sections (a)(i) and (ii), above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Second Amended and Restated Certificate of Incorporation of
Twinlab Corporation (incorporated by reference to Exhibit 3.4 to
Amendment No. 1 of the Registration Statement on Form S-4, dated
September 18, 1996, filed by Twin Laboratories Inc.).
3.2 Amended and Restated By-laws of Twinlab Corporation
(incorporated by reference to Exhibit 3.5 to Amendment No. 1 of
the Registration Statement on Form S-4, dated September 18, 1996,
filed by Twin Laboratories Inc.).
10.1 Twinlab Corporation 1996 Stock Incentive Plan (incorporated
by reference to Exhibit 10.30 to Amendment No. 4 of the
Registration Statement on Form S-1, dated October 23, 1996, filed
by Twinlab Corporation).
27 Financial Data Schedule.
(b) Reports on Form 8-K:
No report on Form 8-K was filed by the Company during the quarter
ended September 30, 1996.
16
<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: February 18, 1996 By:/s/ Brian Blechman
--------------------------
Brian Blechman
Executive Vice President - Treasurer,
Chief Accounting Officer
17
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