<PAGE>
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UNITED STATES
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 QUARTER ENDED SEPTEMBER 30, 1997
COMMISSION FILE NUMBER 333-33121
LEINER HEALTH PRODUCTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 95-3431709
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
901 East 233rd Street, Carson, California 90745
(310) 835-8400
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------------------------------------------
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
---------- ---------
COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AT DECEMBER 3, 1997
1,000 SHARES
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LEINER HEALTH PRODUCTS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
<S> <C> <C>
PART I. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ITEM 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations (Unaudited) -
For the three and six months ended September 30, 1996 and 1997 . . . . . 3
Condensed Consolidated Balance Sheets -
As of March 31, 1997 and September 30, 1997 (Unaudited). . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the three and six months ended September 30, 1996 and 1997 . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . .10
PART II. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Operations
Unaudited
(in thousands)
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1996 1997 1996 1997
-------- -------- -------- --------
Net sales $85,573 $112,237 $156,207 $206,313
Cost of sales 67,027 83,321 119,097 155,181
-------- -------- -------- --------
Gross profit 18,546 28,916 37,110 51,132
Marketing, selling and 12,234 14,599 23,194 26,555
distribution expenses
General and administrative 4,586 7,946 9,155 13,539
expenses
Management reorganization 126 -- 313 --
Expenses related to -- 299 -- 32,638
recapitalization of parent
Amortization of goodwill 374 434 738 836
Other charges 120 375 241 463
-------- -------- -------- --------
Operating income (loss) 1,106 5,263 3,469 (22,899)
Interest expense, net 2,258 5,816 4,410 7,616
-------- -------- -------- --------
Loss before income taxes and (1,152) (553) (941) (30,515)
extraordinary item
Benefit for income taxes before (501) (113) (409) (7,218)
extraordinary item -------- -------- -------- --------
Loss before extraordinary item (651) (440) (532) (23,297)
Extraordinary loss on the early
extinguishment of debt, net of -- -- -- 1,109
income taxes of $761
-------- -------- -------- --------
Net Loss ($651) ($440) ($532) ($24,406)
-------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
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PART 1 ITEM 1
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LEINER HEALTH PRODUCTS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31, SEPTEMBER 30,
1997 1997
---------- ----------
Audited Unaudited
ASSETS
Current assets:
Cash and cash equivalents $ 2,066 $ 921
Accounts receivable, net 77,436 51,919
Income taxes receivable -- 5,188
Inventories 86,823 104,215
Deferred income taxes 3,838 3,844
Prepaid expenses and other current assets 2,639 2,887
---------- ----------
Total current assets 172,802 168,974
---------- ----------
Property, plant and equipment, net 42,367 43,310
Goodwill, net 58,035 57,435
Deferred income taxes -- 3,321
Deferred financing charges 1,875 11,756
Other noncurrent assets 9,485 10,876
---------- ----------
TOTAL ASSETS $284,564 $295,672
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Bank checks outstanding, less cash on
deposit $10,410 $ 6,652
Current portion of long-term debt 3,148 2,041
Accounts payable 61,623 61,605
Customer allowances payable 6,632 7,744
Accrued compensation and benefits 6,233 7,146
Income taxes payable 1,818 --
Other accrued expenses 3,535 5,983
---------- ----------
Total current liabilities 93,399 91,171
---------- ----------
Long-term debt 102,290 238,121
Deferred income taxes 2,582 2,582
Other noncurrent liabilities 1,425 1,427
Commitments and contingent liabilities
Minority interest in subsidiary 4,718 1,028
Shareholder's equity (deficit):
Common stock 1 1
Capital in excess of par 62,966 --
Cumulative translation adjustment (173) (62)
Retained earnings (deficit) net of charges
from recapitalization of parent of $0 and
$31,543 at March 31, 1997 and September 30,
1997, respectively 17,356 (38,596)
---------- ----------
Total shareholder's equity (deficit) 80,150 (38,657)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $284,564 $295,672
---------- ----------
See accompanying notes to condensed consolidated financial statements.
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PART 1 ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)
SIX MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
----------- ------------
OPERATING ACTIVITIES:
Net loss $ (532) $ (24,406)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,045 6,697
Stock option compensation expense 66 8,300
Deferred income taxes -- (3,327)
Extraordinary loss on the early extinguishment -- 1,870
of debt
Translation adjustment -- (111)
Changes in operating assets and liabilities:
Accounts receivable 18,636 25,521
Inventories (9,509) (17,371)
Bank checks outstanding, less cash on 4,551 (3,762)
deposit
Accounts payable (4,093) (22)
Customer allowances payable (508) 1,112
Accrued compensation and benefits (1,371) 913
Other accrued expenses (1,171) 2,446
Income taxes payable/receivable (1,323) (7,006)
Other (1,060) (246)
----------- ------------
Net cash provided by (used in) operating 9,731 (9,392)
activities
----------- ------------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment, net (2,635) (4,440)
Increase in other noncurrent assets (665) (3,470)
----------- ------------
Net cash used in investing activities (3,300) (7,910)
----------- ------------
FINANCING ACTIVITIES:
Net payments under former bank credit facility (5,981) (100,405)
Borrowings under new bank revolving credit -- 45,484
facility
Borrowings under new bank term credit facility -- 85,000
Payments under new bank term credit facility -- (212)
Repurchase of preferred stock -- (3,599)
Increase in deferred financing charges -- (9,696)
Increase in other long-term debt 1,136 --
Payments on other long-term debt (1,092) (528)
----------- ------------
Net cash provided by (used in) financing (5,937) 16,044
activities
----------- ------------
Effect of exchange rate changes -- 113
NET INCREASE (DECREASE) IN CASH AND CASH 494 (1,145)
EQUIVALENTS
Cash and cash equivalents at beginning of period 1,411 2,066
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,905 $ 921
----------- ------------
See accompanying notes to condensed consolidated financial statements.
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
NOTE 1 -- Basis of Presentation
The accompanying unaudited condensed consolidated financial statements for the
three and six months ended September 30, 1997 include the accounts of Leiner
Health Products Inc. (the "Company") and its subsidiaries, including Vita Health
Company (1985) Ltd. ("Vita Health") which was acquired January 30, 1997 in a
transaction accounted for as a purchase, and have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the rules of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included. Such adjustments consisted
only of normal recurring items, except for adjustments recorded in connection
with the Recapitalization as discussed in Note 3. This report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended March 31, 1997, which are included in the
Company's Registration Statement on Form S-4, on file with the SEC (Commission
file number 333-33121). The results of operations for the periods indicated
should not be considered as indicative of operations for the full year.
NOTE 2 -- Inventories
Inventories consist of the following as of March 31, 1997 and September 30, 1997
(in thousands):
March 31, September 30,
1997 1997
--------- ------------
Raw materials, bulk vitamins and packaging
materials $ 51,488 $ 61,079
Work-in-process 5,849 9,965
Finished products 29,486 33,171
--------- ------------
$ 86,823 $ 104,215
--------- ------------
--------- ------------
NOTE 3 - The Recapitalization
On June 30, 1997, the Company's ultimate parent, Leiner Health Products Group
Inc. ("Leiner Group") completed a leveraged recapitalization
("Recapitalization"). This transaction was effected through receipt of an
equity investment from North Castle Partners I, L.L.C. ("North Castle"), an
investment fund formed by Mr. Charles F. Baird, Jr. to effect the
Recapitalization. Pursuant to the Recapitalization, Leiner Group repurchased
common stock from its existing shareholders in an amount totaling (together with
equity retained by such shareholders) $211.1 million, issued $80.4 million of
new shares of the recapitalized Leiner Group to North Castle, issued $85 million
of Senior Subordinated Notes (the "Notes"), and established a $210 million
senior secured credit facility (the "New Credit Facility") that provides for
both term and revolving credit borrowings. Immediately upon consummation of the
Recapitalization, the obligations of Leiner Group under the Notes and the New
Credit Facility were assigned to and assumed by the Company. The
Recapitalization was accounted for as a recapitalization of Leiner Group which
had no impact on the historical basis of assets and liabilities as reflected in
the Company's consolidated financial statements.
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
In connection with the Recapitalization, the Company deducted $1.1 million of
deferred financing charges, net of income taxes of $0.8 million, from net income
(loss) as an extraordinary loss in the six months ended September 30, 1997.
Additionally, in connection with the Recapitalization, the Company incurred
expenses of approximately $32.6 million, consisting of expenses of approximately
$11.8 million related to Leiner Group's equity transactions, transaction bonuses
granted to certain management personnel in the aggregate amount of approximately
$5.2 million and compensation expense related to the in-the-money value of stock
options of approximately $15.6 million. The compensation expense represented
the excess of the fair market value of the underlying common stock over the
exercise price of the options cancelled in connection with the Recapitalization.
The assumption of debt and the transfer of excess funds from Leiner Group
related to the Recapitalization total approximately $102.8 million and consist
of the following (in thousands):
Assumption of debt from Leiner Group:
Senior Credit Facility $ (149,736)
Subordinated Debt (85,000) $ (234,736)
-----------
Funds transferred from Leiner Group 131,928
-----------
Recapitalization of Parent $ (102,808)
-----------
The net amount above was first applied against capital in excess of par value
until that was exhausted and then against retained earnings.
NOTE 4 - Long-Term Debt
The New Credit Facility consists of two term loans ("Term Facility") due
December 30, 2004 and December 30, 2005 in the amounts of $45 million and $40
million, respectively, and a revolving credit facility in the amount of $125
million (the "Revolving Facility"), made available in U.S. dollars to the
Company (such portion, the "U.S. Revolving Facility") with a portion denominated
in Canadian dollars made available to Vita Health (such portion, the "Canadian
Revolving Facility"). The unpaid principal amount outstanding on the Revolving
Facility is due and payable on June 30, 2003. The Term Facility requires
quarterly amortization payments of approximately 1% per annum over the next six
years. Amortization payments scheduled during the period October 1, 1997
through September 30, 1998 total $0.85 million. Borrowings under the New Credit
Facility bear interest at floating rates that are based on the lender's base
rate (8.5% at September 30, 1997) the lender's Canadian prime rate (4.75% at
September 30, 1997), LIBOR (5.72% at September 30, 1997) or the lender's
banker's acceptance rate (3.75% at September 30, 1997), as the case may be, plus
an "applicable margin" that is itself based on the Company's leverage ratio.
The leverage ratio is defined generally as the ratio of total funded
indebtedness to the consolidated EBITDA and varies as follows: (a) for revolving
credit borrowings, from 0.75% to 2.5% for LIBOR - or banker's acceptance-based
loans, and from zero to 1.5% for alternate base rate- or Canadian prime
rate-based loans, and (b) for loans under the Term Facility, from 2.375% to
2.875% or 2.5% to 3.0% for LIBOR-based loans and from 1.375% to 1.875% or 1.5%
to 2.0% for alternate base rate-based loans. As of September 30, 1997, the
Company's interest rates were 8.52% for U.S. borrowings and 5.7% for Canadian
borrowings under the New Credit Facility. In addition to certain agent and
up-front fees, the New Credit Facility requires a commitment fee of up to 0.5%
of the average daily unused portion of the revolving credit facility based on
the Company's leverage ratio.
On July 30, 1997, the Company entered into an interest protection arrangement
covering $29.5 million of its borrowings under the New Credit Facility. Under
this arrangement, the Company obtained a fixed interest rate of 6.17% for LIBOR
instead of the fluctuating rate as described above and pays a fee of
approximately $15.8 thousand per annum. That fee is charged to interest expense
as incurred and payments received as a result of the cap are
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
accrued as a reduction of interest expense on the floating-rate under the New
Credit Facility. The agreement expires July 30, 2000.
The obligations of the Company under the U.S. Revolving Facility and the Term
Facilities are guaranteed by the direct parent of the Company, PLI Holdings Inc.
("PLI Holdings") and by any direct or indirect U.S. subsidiaries of the Company.
The obligations of Vita Health under the Canadian Revolving Facility are
guaranteed by the Company, PLI Holdings, the Company's direct or indirect U.S.
subsidiaries, Vita Health and its direct or indirect subsidiaries. The New
Credit Facility also is secured by substantially all the assets of the Company
and any of its direct or indirect U.S. subsidiaries, all of the capital stock of
the Company and any such direct or indirect U.S. subsidiaries, and 65% of the
capital stock of any direct non-U.S. subsidiaries of the Company and its U.S.
subsidiaries. The Canadian Revolving Facility is also secured by substantially
all assets of Vita Health, its direct and indirect Canadian parents and any
direct or indirect non-U.S. subsidiaries of the Company, and all of the capital
stock of any such direct or indirect non-U.S. subsidiaries. The New Credit
Facility contains financial covenants that require, among other things, the
Company to comply with certain financial ratios and tests, including those that
relate to the maintenance of specified levels of cash flow and stockholder's
equity. The Company was in compliance with all such financial covenants as of
September 30, 1997. As of November 10, 1997, the Company had $51.2 million
available under its New Revolving Facility.
Principal payments on long-term debt as of September 30, 1997 through fiscal
2002 and thereafter are (in thousands):
FISCAL YEAR
1998 . . . . . . . . . . . . . . . . . . . $ 1,159
1999 . . . . . . . . . . . . . . . . . . . 1,614
2000 . . . . . . . . . . . . . . . . . . . 2,402
2001 . . . . . . . . . . . . . . . . . . . 2,321
2002 . . . . . . . . . . . . . . . . . . . 861
Thereafter . . . . . . . . . . . . . . . . . . . 231,805
----------
Total . . . . . . . . . . . . . . . . . . . $240,162
----------
NOTE 5 - Related Party Transactions
Upon consummation of the Recapitalization, Leiner Group's management agreement
with AEA Investors Inc., one of the Company's shareholders, was terminated, and
Leiner Group and the Company entered into a consulting agreement with North
Castle Partners, L.L.C. (the "Sponsor"), an affiliate of North Castle, to
provide the Company with certain business, financial and managerial advisory
services. Mr. Baird acts as the managing member of the Sponsor through Baird
Investment Group, L.L.C. In exchange for such services, Leiner Group and the
Company have agreed to pay the Sponsor an annual fee of $1.5 million, payable
semi-annually in advance, plus the Sponsor's reasonable out-of-pocket expenses.
This fee may be reduced upon completion of an initial public offering of Leiner
Group's shares. The agreement also terminates on June 30, 2007, unless Baird
Investment Group ceases to be the managing member of North Castle, or upon the
earliest of June 30, 2007 or the date that North Castle terminates before that
date. Leiner Group and the Company have also paid the Sponsor a transaction fee
of $3.5 million for services related to arranging, structuring and financing the
Recapitalization, and reimbursed the Sponsor's related out-of-pocket expenses.
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
NOTE 6 -- Contingent Liabilities
LITIGATION AND CLAIMS
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of December 1, 1997, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 668 lawsuits of which 660 have been settled.
The Company has entered into an agreement (the "Agreement") with the Company's
supplier of bulk L-Tryptophan, under which the supplier has agreed to assume the
defense of all claims and to pay all settlements and judgments, other than for
certain punitive damages, against the Company arising out of the ingestion of
these L-Tryptophan products. To date, the supplier has funded all settlements
and paid all legal fees and expenses incurred by the Company related to these
matters. No punitive damages have been awarded in the 660 cases that have been
settled.
Of the remaining 8 cases, management does not expect that the Company will be
required to make any material payments in connection with their resolution by
virtue of the Agreement, or, in the event that the supplier ceases to honor the
Agreement, by virtue of the Company's product liability insurance, subject to
deductibles with respect to the 8 currently pending claims not to exceed $1.3
million in the aggregate. Accordingly, no provision has been made in the
Company's consolidated financial statement for any loss that may result from
these remaining actions.
The Company is subject to other legal proceedings and claims which arise in the
normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
OTHER
In August 1997, the FDA announced a proposal to ban the use of phenolthalein in
laxatives. The FDA reportedly took this action in response to certain studies
which concluded that the administration of very high doses of yellow
phenolthalein could cause cancer in laboratory animals. The reports concerning
these studies state that the dosages administered substantially exceeded the
dosages commonly used by human beings. In response, the Company voluntarily
discontinued production of its laxative product containing yellow phenolhthalein
and notified its customers that they may return this product. Accordingly, the
Company has provided approximately $0.8 million for estimated returns and
inventory valuation reserves related to this action in the three months ended
September 30, 1997. The Company has reformulated this product and expects to be
shipping the reformulated version in December 1997.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The following discussion explains material changes in the consolidated results
of operations for Leiner Health Products Inc. and its subsidiaries (the
"Company") including Vita Health Company (1985) Ltd. of Canada ("Vita Health"),
a wholly-owned subsidiary acquired January 30, 1997, for the three months ended
September 30, 1997 ("second quarter of fiscal 1998") and the significant
developments affecting its financial condition since March 31, 1997. The
following discussion should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto for the year ended March 31,
1997, which are included in the Company's Registration Statement on Form S-4
("Registration Statement"), on file with the Securities Exchange Commission.
SEASONALITY
The Company's business is seasonal, as increased vitamin usage corresponds with
the cough, cold and flu season. A significant portion of the Company's sales
and a more significant portion of the Company's operating income, therefore,
occurs in the second half of the fiscal year as reflected in the table below
(dollars in millions):
Net Sales Operating Income (Loss)
----------------- ------------------------
Amount % of Year Amount % of Year
------ --------- ------ ----------
Fiscal 1998
First Quarter . . . . . . . . $ 94.1 -- $ (28.2) (1) --
Second Quarter . . . . . . . . 112.2 -- 5.3 --
Fiscal 1997
First Quarter . . . . . . . . $ 70.6 18 % $ 2.4 9 %
Second Quarter . . . . . . . . 85.6 22 1.1 4
Third Quarter . . . . . . . . 104.3 26 9.3 35
Fourth Quarter . . . . . . . . 132.3 34 13.9 52
------ --------- ------ ----------
$392.8 100 % $26.7 (2) 100 %
------ --------- ------ ----------
(1) Includes expenses of $15.4 million related to stock option compensation,
$5.1 million of management bonuses and expenses incurred by Leiner Group in
connection with its capital raising activities of $11.8 million, all of
which were incurred in connection with the Recapitalization. Without these
expenses, operating income would have been $4.1 million.
(2) Includes expenses incurred in connection with the closure of the OTC liquid
pharmaceuticals manufacturing facility, a management reorganization,
non-cash stock compensation expense and the preparation of a registration
statement in connection with a withdrawn initial public offering.
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<PAGE>
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of operations as
a percentage of net sales for the three and six months ended September 30, 1996
and 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------
1996 1997 1996 1997
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . 78.3 74.2 76.2 75.2
------- ------ ------ ------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . 21.7 25.8 23.8 24.8
Marketing, selling and distribution expenses . . . . . . . . 14.3 13.0 14.9 12.9
General and administrative expenses. . . . . . . . . . . . . 5.4 7.1 5.9 6.6
Management reorganization. . . . . . . . . . . . . . . . . . 0.1 -- 0.2 --
Expenses related to recapitalization of parent . . . . . . . -- 0.3 -- 15.8
Amortization of goodwill . . . . . . . . . . . . . . . . . . 0.4 0.4 0.5 0.4
Other charges. . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.3 0.1 0.2
------- ------ ------ ------
Operating income (loss). . . . . . . . . . . . . . . . . . . 1.3 4.7 2.2 (11.1)
Interest expense, net. . . . . . . . . . . . . . . . . . . . 2.7 5.2 2.8 3.7
------- ------ ------ ------
Loss before income taxes and extraordinary item. . . . . . . (1.4) (0.5) (0.6) (14.8)
Benefit for income taxes before extraordinary item . . . . (0.6) (0.1) (0.3) (3.5)
------- ------ ------ ------
Loss before extraordinary item . . . . . . . . . . . . . . . (0.8) (0.4) (0.3) (11.3)
Extraordinary item . . . . . . . . . . . . . . . . . . . . -- -- -- 0.5
------- ------ ------ ------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . (0.8)% (0.4)% (0.3)% (11.8)%
------- ------ ------ ------
</TABLE>
Net sales for the second quarter of fiscal 1998 were $112.2 million, an increase
of $26.7 million, or 31.2%, versus the second quarter of fiscal 1997. Sales
from Vita Health accounted for $7.8 million of this increase. Excluding Vita
Health net sales, the Company's net sales increased $18.9 million, or 22.1%,
over the comparable period in fiscal 1997. For the six months ended September
30, 1997, net sales increased by $50.1 million, or 32.1%, compared to the
comparable period in fiscal 1997. Excluding Vita Health sales of $14.9 million,
the Company's net sales increased $35.2 million or 22.6%.
The Company's sales growth was primarily attributable to volume growth in
vitamins. The Company's volume growth in vitamin sales, in turn, was primarily
attributable to sales growth in the vitamin market generally coupled with growth
in the Company's market share. Excluding Vita Health sales, the Company's
vitamin product sales increased by $20.7 million, or 30.1%, compared to the
second quarter of the prior year. Management estimates that the overall U. S.
vitamin market grew by over 20% in August and September 1997, driving total U.
S. vitamin market growth for the second quarter up approximately 19% versus the
same period a year ago. Sales growth among the Company's products was strongest
in herbs and supplements. For the six months ended September 30, 1997, the
Company's vitamin sales were up $35.7 million, or 28.4%, compared to the
comparable period in fiscal 1997 as the Company continues to emphasize higher
growth products and to gain distribution in new channels. Sales of
over-the-counter pharmaceuticals ("OTCs"), excluding Vita Health, decreased by
$2.0 million for the second quarter of fiscal 1998 but were essentially flat for
the six month period as compared to the same periods in fiscal 1997, which is
consistent with very low sales growth in the OTC market generally.
Gross profit margin was 25.8% for the second quarter of fiscal 1998, up from
21.7% in the second quarter of the prior fiscal year. Gross profit for the
second quarter increased by $10.4 million, up 55.9% from $18.5 million to $28.9
million in fiscal 1998. Excluding Vita Health, the increase in gross profit
during the second quarter of fiscal 1998 as compared to the second quarter of
fiscal 1997 was $8.1 million, or 43.7%. The improvement in gross profit
- --------------------------------------------------------------------------------
-11-
<PAGE>
PART I ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
margins is primarily attributable to the high growth of branded vitamin
products, increased efficiencies from higher production volume and higher gross
margins at Vita Health in comparison to the Company's other operations.
For the six months ended September 30, 1997, gross profit increased by $14.0
million, or 37.8%, compared to the same period in fiscal 1997. Excluding Vita
Health, gross profit for the six months ended September 30, 1997 increased $9.6
million, or 25.9%, versus the comparable period in fiscal 1997. Gross profit
margin was 24.8%, a 1.0 percentage point increase in the six months ended
September 30, 1997, up from 23.8% in the comparable period in fiscal 1997.
Marketing, selling and distribution expenses together with general and
administrative expenses (collectively, "Operating Expenses") for the second
quarter of fiscal 1998 were 20.1% of net sales, a slightly higher percentage
than the 19.7% in the prior year's comparable quarter. Operating Expenses in
the second quarter of fiscal 1998 increased by $5.7 million, or 34.0%, as
compared to the second quarter in fiscal 1997. Excluding Vita Health, Operating
Expenses increased $4.4 million, or 26.0%. For the six months ended September
30, 1997, however, Operating Expenses were 19.5% of net sales versus 20.8% in
the prior year period, reflecting lower spending in the first quarter. The
second quarter increase in Operating Expenses was primarily attributed to volume
variable expenses such as distribution expenses and the timing of senior
management bonus accruals. Because of the increased profitability of the
Company (excluding expenses related to the Recapitalization), senior management
bonuses were accrued in the first half of fiscal 1998 as compared with the prior
year's bonuses, which were not earned until the fourth quarter.
In the first half of fiscal 1998, the Company recorded expenses relating to the
Recapitalization of $32.6 million, consisting primarily of compensation expenses
related to the in-the-money value of stock options issued to certain management
personnel of $15.6 million, management bonuses of $5.2 million, and expenses
incurred by Leiner Group in connection with its capital raising activities of
$11.8 million.
In the first half of fiscal 1997, the Company reorganized its management team.
Expenses of $0.3 million were incurred relating to severance for the previous
Chief Financial Officer, Vice President of Product Development and Vice
President of Corporate Development, and include hiring and relocation expenses
for the current Chief Financial Officer and other corporate officers.
Other charges for the second quarter of fiscal 1998 were $0.4 million, which
compares to $0.1 million for the second quarter of fiscal 1997. The increase
was due to the management fee increase of $0.3 million in the second quarter of
fiscal 1998 arising primarily as a result of a consulting agreement entered into
in connection with the Recapitalization.
In the second quarter, operating income was $5.3 million, a 376% increase over
the prior year quarter. Excluding Vita Health, operating income increased by
$3.3 million, or 300%, over the prior year period, primarily due to the increase
in sales and gross profit as compared to the second quarter of fiscal 1997. For
the six months ended September 30, 1997, the Company recognized an operating
loss of $22.9 million due to expenses incurred in connection with the
Recapitalization of Leiner Group. Without these Recapitalization expenses,
operating income would have been $9.7 million, an increase of $6.3 million, or
181%, over the comparable period in fiscal 1997.
Net interest expense increased by $3.6 million during the second quarter of
fiscal 1998, as compared to the second quarter of fiscal 1997. This increase
was due to an increase in the indebtedness of the Company, as well as changes in
the Company's debt structure and interest rates arising as a result of the
Recapitalization and taking effect at the end of the first quarter of fiscal
1998.
The income tax benefit for the second quarter of fiscal 1998 was $0.1 million,
which compares to an income tax benefit of $0.5 million for the second quarter
of fiscal 1997. Based on the latest estimates, the Company expects its
effective tax rate to be approximately 53% for the remainder of fiscal 1998, and
to be higher than the combined federal and state rate of 40% primarily because
of the nondeductibility for income tax purposes of goodwill
- --------------------------------------------------------------------------------
-12-
<PAGE>
PART I ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
amortization, certain Recapitalization expenses and certain accruals.
The extraordinary loss recorded in the first quarter of fiscal 1998 represented
the write-off of $1.9 million of deferred financing charges which had been
incurred by the Company when it entered into a credit facility on January 30,
1997. The income tax effect of that charge was a benefit of $0.8 million.
Primarily as a result of the factors discussed above, a net loss of $0.4 million
was recorded in the second quarter of fiscal 1998 as compared with a net loss of
$0.7 million in the second quarter of fiscal 1997. For the six months ended
September 30, 1997, there was a loss of $24.4 million compared to a loss of $0.5
million in the first half of fiscal 1997. The net loss for the six months ended
September 30, 1997 reflects a restatement of the accounting treatment for
restructuring expenses of $11.8 million associated with the Recapitalization.
These amounts, initially reflected only in the balance sheet because they were
equity related, have now been reflected as a charge to the Company's income
statement for the six months ended September 30, 1997, contained in this report.
Such amounts were also reflected in the Company's income statement for the three
months ended June 30, 1997 contained in the Registration Statement when it
became effective.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash has historically been used to fund capital expenditures,
working capital requirements and debt service. As a result of the
Recapitalization, the Company's liquidity requirements have significantly
increased, primarily due to significantly increased interest expense
obligations. Interest expense, excluding amortization of deferred financing
fees, is estimated to be $21.8 million per year, associated with borrowings of
$159.8 million under the New Credit Facility, $85.0 million under the Notes, and
existing capitalized lease obligations of $4.8 million. In addition, the
Company will be required to repay the $85.0 million in term loans under the New
Credit Facility over the eight and one-half year period following June 30, 1997,
with scheduled principal payments of $850,000 annually for the first six years,
$27.4 million in the seventh year, $39.3 million in the eighth year, and $13.2
million in the final six months. the Company will also be required to apply
certain asset sale proceeds, as well as 50% of its excess cash flow (as defined
in the New Credit Facility) unless a leverage ratio test is met, to prepay the
borrowings under the New Credit Facility. All outstanding revolving credit
borrowings under the New Credit Facility will become due on June 30, 2003.
During the first half of fiscal 1998, net cash used in operating activities
totaled $9.4 million. This resulted from the first half net loss of $24.4
million offset by non-cash charges of $13.4 million and a net change in
operating assets and liabilities of $1.6 million. The changes from March 31,
1997 to September 30, 1997 in accounts receivable and inventory are due
primarily to the seasonality of the business.
Net cash used in investing activities was $7.9 million in the first half of
fiscal 1998. This was primarily due to net capital expenditures of $4.4 million
and deposits of $2.7 million that were made during the first half of fiscal 1998
in connection with the lease of the South Carolina facility. The major capital
expenditures were related to investments in capacity expansion at the Garden
Grove tableting facility and information systems improvements.
Net cash provided by financing activities was $16.0 million in the first half of
fiscal 1998. This was primarily the result of the Recapitalization.
FINANCING ARRANGEMENTS
The New Credit Facility provides for term loan borrowings in an aggregate
principal amount of $85.0 million, consisting of $45.0 million maturing seven
and one-half years following June 30, 1997 and $40.0 million maturing eight
and one-half years following June 30, 1997, and U.S. and Canadian revolving
credit facilities with aggregate availability of $125.0 million, of which
$74.8 million was drawn down in connection with the Recapitalization. As of
November 10, 1997, the Company's unused availability under the New Credit
Facility was approximately
- --------------------------------------------------------------------------------
-13-
<PAGE>
PART I ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
$51.2 million. The Revolving Credit Facility will mature six years after
June 30, 1997, and includes letter of credit and swingline facilities.
Borrowings under the New Credit Facility bear interest at floating rates that
are based on LIBOR or on the applicable alternate base rate (as defined), and
accordingly, the Company's financial condition and performance is and will
continue to be affected by changes in interest rates. The Company has
entered into an interest protection arrangement effective July 30, 1997 with
respect to $29.4 million of its indebtedness under the New Credit Facility
that provides a cap of 6.17% for LIBOR. The New Credit Facility imposes
certain restrictions on the Company, including restrictions on its ability to
incur additional debt, enter into sale-leaseback transactions, incur
contingent liabilities, pay dividends or make distributions, incur or grant
liens, sell or otherwise dispose of assets, make investments or capital
expenditures, repurchase or prepay the Notes or other subordinated debt, or
engage in certain other activities. The Company must also comply with
certain financial ratios and tests, including a minimum net worth
requirement, a maximum leverage ratio, a minimum interest coverage ratio and
a fixed charge coverage ratio.
The Company may be required to purchase its $85 million of Senior Subordinated
Notes (the "Notes") upon a Change of Control (as defined) and in certain
circumstances with the proceeds of asset sales. The Notes are subordinated to
the indebtedness under the New Credit Facility. The Indenture imposes certain
restrictions on the Company and its subsidiaries, including restrictions on its
ability to incur additional debt, make dividends, distributions or investments,
sell or otherwise dispose of assets, or engage in certain other activities.
A portion of the outstanding borrowings under the New Credit Facility, amounting
to approximately U.S. $14.8 million as of September 30, 1997, is denominated in
Canadian dollars. All other outstanding borrowings under the New Credit
Facility, and all of the borrowings under the Notes, are denominated in U.S.
dollars.
At September 30, 1997, borrowings under the New Credit Facility bore interest at
a weighted average rate of 8.24% per annum. The Notes bear interest at a rate
of 9.625% per annum.
The Company currently plans to pursue a receivables financing to be entered into
during fiscal 1998, with initial availability of the equivalent of approximately
$40 million principal amount, which would be fully drawn at the closing of that
financing. Usage under this receivables facility is expected to result in a
dollar-for-dollar reduction in both outstanding borrowings under the Revolving
Credit Facility and the availability under the Revolving Credit Facility. No
assurance can be given that this receivables financing will be implemented.
The Company intends to establish a new packaging and distribution facility in
York County, South Carolina. As this new facility becomes operational, other
facilities located in the midwestern United States will be closed. The Company
expects to incur expenses estimated at approximately $1.9 million annually
through fiscal year 1999 in connection with the establishment of the new
facility and the closure of the midwestern U.S. facilities. The Company will
lease this new facility under a prearranged, assigned purchase and leaseback
facility that will provide the financing for its construction, at an estimated
annual lease expense, net of lease costs for the facilities currently expected
to be closed, of $1.4 million.
The Company currently believes that cash flow from operating activities,
together with revolving credit borrowings available under the New Credit
Facility, will be sufficient to fund the Company's currently anticipated working
capital, capital spending and debt service requirements until the maturity of
the Revolving Credit Facility (June 30, 2003), but there can be no assurance in
this regard. The Company expects that its working capital needs will require it
to obtain new revolving credit facilities at the time that the Revolving Credit
Facility matures, whether by extending, renewing, replacing or otherwise
refinancing the Revolving Credit Facility. No assurance can be given that any
such extension, renewal, replacement or refinancing can be successfully
accomplished.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including statements regarding, without limitation, (i) the
- --------------------------------------------------------------------------------
-14-
<PAGE>
PART I ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(CONTINUED)
Company's growth strategies; (ii) trends in the Company's business; and (iii)
the Company's future liquidity requirements and capital resources.
Forward-looking statements are made based upon management's current expectations
and beliefs concerning future developments and their potential effects upon the
Company. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on the Company will be those anticipated by management. The
important factors described elsewhere in this report and in the Company's
Registration Statement on Form S-4 (including, without limitation, those factors
discussed in the "Risk Factors" section thereof), on file with the Securities
and Exchange Commission, could affect (and in some cases have affected) the
Company's actual results and could cause such results to differ materially from
estimates or expectations reflected in such forward-looking statements. In
light of these factors, there can be no assurance that events anticipated by the
forward-looking statements contained in this report will in fact transpire.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its periodic reports,
the Company does not intend to review or revise any particular forward-looking
statement referenced in this report in light of future events.
- --------------------------------------------------------------------------------
-15-
<PAGE>
PART II OTHER INFORMATION
- --------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The information in Note 6 to the Company's Condensed Consolidated Financial
Statements included herein is hereby incorporated by reference.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits:
27 Financial Data Schedule - September 30, 1997
Reports on Form 8-K:
None.
SIGNATURE
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.
LEINER HEALTH PRODUCTS INC.
By:
------------------------------
William B. Towne
Executive Vice President, Chief
Financial Officer, Director,
Treasurer and Secretary
Date: December , 1997
-----
- --------------------------------------------------------------------------------
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 921
<SECURITIES> 0
<RECEIVABLES> 55,803
<ALLOWANCES> 3,884
<INVENTORY> 104,215
<CURRENT-ASSETS> 168,974
<PP&E> 66,797
<DEPRECIATION> 23,487
<TOTAL-ASSETS> 295,672
<CURRENT-LIABILITIES> 91,171
<BONDS> 238,121
0
0
<COMMON> 1
<OTHER-SE> (38,658)
<TOTAL-LIABILITY-AND-EQUITY> 295,672
<SALES> 206,313
<TOTAL-REVENUES> 206,313
<CGS> 155,181
<TOTAL-COSTS> 155,181
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 7,616
<INCOME-PRETAX> (30,515)
<INCOME-TAX> (7,218)
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<DISCONTINUED> 0
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