<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
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FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
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)
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
--- ---
COMMON STOCK, $.01 PAR VALUE, OUTSTANDING AT AUGUST 10, 1998:
1,000 SHARES
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-1-
<PAGE>
LEINER HEALTH PRODUCTS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. Financial Information .................................................... 3
ITEM 1. Financial Statements ................................................ 3
Condensed Consolidated Statements of Operations (Unaudited) -
For the three months ended June 30, 1998 and 1997 ..................... 3
Condensed Consolidated Balance Sheets -
As of June 30, 1998 (Unaudited) and March 31, 1998 .................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the three months ended June 30, 1998 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 .............................................. 9
PART II. Other Information ...................................................... 14
SIGNATURE PAGE ................................................................... 14
</TABLE>
-2-
<PAGE>
PART I ITEM 1
Leiner Health Products Inc.
Condensed Consolidated Statements of Operations
Unaudited
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales $122,323 $ 94,076
Cost of sales 88,877 71,860
-------- --------
Gross profit 33,446 22,216
Marketing, selling and distribution
expenses 17,810 11,956
General and administrative expenses 8,825 5,593
Expenses related to recapitalization of
parent -- 32,339
Amortization of goodwill 419 402
Other charges 409 88
-------- --------
Operating income (loss) 5,983 (28,162)
Other expenses 68 --
Interest expense, net 6,319 1,800
-------- --------
Loss before income taxes and
extraordinary item (404) (29,962)
Benefit for income taxes before
extraordinary item (168) (7,105)
-------- --------
Loss before extraordinary item (236) (22,857)
Extraordinary loss on the early
extinguishment of debt, net of income
taxes of $761 -- 1,109
-------- --------
Net loss $ (236) $(23,966)
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-3-
<PAGE>
PART I ITEM 1
Leiner Health Products Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
--------- ---------
UNAUDITED
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 270 $ 1,026
Accounts receivable, net 70,391 89,358
Inventories 203,624 137,853
Income taxes receivable 784 323
Deferred income taxes 8,579 8,578
Prepaid expenses and other current assets 2,588 1,975
--------- ---------
Total current assets 286,236 239,113
Property, plant and equipment, net 58,967 48,899
Goodwill, net 55,790 56,412
Deferred financing charges 11,696 11,465
Other noncurrent assets 8,735 9,937
--------- ---------
TOTAL ASSETS $421,424 $365,826
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Bank checks outstanding, less cash on deposit $ 10,477 $ 3,730
Current portion of long-term debt 2,326 1,733
Accounts payable 111,337 93,226
Customer allowances payable 12,170 14,063
Accrued compensation and benefits 8,526 10,132
Accrued interest expense 4,851 3,116
Income taxes payable -- 3,349
Other accrued expenses 3,542 3,709
--------- ---------
Total current liabilities 153,229 133,058
Long-term debt 293,703 257,059
Deferred income taxes 2,597 2,600
Other noncurrent liabilities 2,000 1,997
Commitments and contingent liabilities
Minority interest in subsidiary -- 1,028
Shareholder's deficit:
Common stock 1 1
Capital in excess of par value 1,851 1,825
Retained deficit net of charges from
recapitalization of parent of $31,543 at
June 30, 1998 and March 31, 1998, respectively (31,840) (31,604)
Accumulated other comprehensive loss:
Cumulative translation adjustment (117) (138)
--------- ---------
Total shareholder's deficit (30,105) (29,916)
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT $421,424 $365,826
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-4-
<PAGE>
PART I ITEM 1
Leiner Health Products Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-------------------------------
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (236) $ (23,966)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 1,848 1,740
Amortization 2,073 1,358
Stock option compensation expense -- 8,300
Deferred income taxes -- (3,321)
Extraordinary loss on the early extinguishment of debt -- 1,870
Translation adjustment (21) (206)
Changes in operating assets and liabilities:
Accounts receivable 18,858 21,430
Inventories (66,080) (9,335)
Bank checks outstanding, less cash on deposit 6,776 (192)
Accounts payable 18,203 (8,103)
Customer allowances payable (1,882) 13
Accrued compensation and benefits (1,593) 11,110
Other accrued expenses 1,583 (931)
Income taxes payable/receivable (3,821) (6,496)
Other (612) (478)
-------- ---------
Net cash used in operating activities (24,904) (7,207)
INVESTING ACTIVITIES:
Additions to property, plant, and equipment, net (12,034) (1,301)
(Increase) decrease in other noncurrent assets 85 (3,069)
-------- ---------
Net cash used in investing activities (11,949) (4,370)
FINANCING ACTIVITIES:
Net borrowings (payments) under new bank revolving credit facility (21,651) 37,247
Borrowings under new bank term credit facility 59,763 85,000
Payments under new bank term credit facility (308) --
Net payments under former bank credit facility -- (100,405)
Capital contribution from parent 26 --
Repurchase of minority interest (947) --
Increase in deferred financing charges (752) (9,366)
Payments on other long-term debt (268) (245)
-------- ---------
Net cash provided by financing activities 35,863 12,231
Effect of exchange rate changes 234 397
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (756) 1,051
Cash and cash equivalents at beginning of period 1,026 2,066
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 270 $ 3,117
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
-5-
<PAGE>
PART I ITEM 1
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 months ended June 30, 1998 include the accounts of Leiner Health Products
Inc. (the "Company") and its subsidiaries, including Vita Health Products Inc.
("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, 1998, which are included in the Company's Annual Report on Form 10-K, 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.
As of April 1, 1998, the Company adopted the Financial Accounting Standards
Board Statement No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS No. 130").
SFAS No. 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
Statement had no impact on the Company's net loss or stockholder's equity.
SFAS No. 130 requires foreign currency translation adjustments, which prior
to adoption were reported separately in stockholder's equity, to be included
in other comprehensive income.
The components of comprehensive loss for the three months ended June 30, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
------- ---------
<S> <C> <C>
Net Loss..................................... $ (236) $ (23,966)
Foreign currency translation adjustment...... 21 206
------- ---------
Comprehensive loss........................... $ (215) $ (23,760)
------- ---------
------- ---------
</TABLE>
NOTE 2 -- Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
---------- ----------
<S> <C> <C>
Raw materials, bulk vitamins and
packaging materials......................... $ 124,456 $ 83,475
Work-in-process.............................. 12,924 9,832
Finished products............................ 66,244 44,546
---------- ----------
$ 203,624 $ 137,853
---------- ----------
---------- ----------
</TABLE>
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"). 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
Partners I, L.L.C. ("North Castle"), issued $85 million of Senior
Subordinated Notes due 2007 (the "Notes"), and established a $210 million
senior secured credit facility (the "Credit Facility") that provides for both
term and revolving credit borrowings.
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 three months ended June 30, 1997.
Additionally, in connection with the Recapitalization, the Company incurred
expenses of approximately $32.3 million in the first quarter of fiscal 1998,
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 $5.1 million and compensation expense
related to the in-the-money value of stock options of approximately $15.4
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.
-6-
<PAGE>
PART I ITEM 1
Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
NOTE 4 -- Long-Term Debt
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Amended Credit Agreement"). The Amended Credit Agreement
consists of two U.S. term loans due December 30, 2004 and December 30, 2005
in the amounts of $68,000,000 and $65,000,000, respectively, and a Canadian
dollar denominated term loan due December 30, 2004 in the amount of
approximately U.S. $12,000,000 (collectively, the "Term Facility"), and a
revolving credit facility in the U.S. dollar equivalent amount of
$125,000,000 (the "Revolving Facility") made available in U.S. dollars to the
Company with a portion denominated in Canadian dollars made available to Vita
Health. 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 five years.
Amortization payments scheduled during the period July 1, 1998 through June
30, 1999 total $1.4 million. Amounts outstanding under the prior credit
facility in place at March 31, 1998 were rolled over into the Amended Credit
Agreement. The terms, conditions and restrictions of the Amended Credit
Agreement are consistent with the terms, conditions and restrictions of the
prior credit facility.
Borrowings under the Amended Credit Agreement bear interest at floating rates
that are based on the agent lender's base rate (8.5% at June 30, 1998), the
agent lender's Canadian prime rate (6.5% at June 30, 1998), LIBOR (5.69% at
June 30, 1998) or the agent lender's banker's acceptance rate (4.90% at June
30, 1998), 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
earnings before interest, taxes, depreciation and amortization expense 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 the two
Term B loans and the one Term C loan under the Term Facility, from 2.125% to
2.875% or 2.25% to 3.0%, respectively, for LIBOR-based loans, and from 1.125%
to 1.875% or 1.25% to 2.0%, respectively, for alternate base rate-based
loans. As of June 30, 1998, the Company's interest rates were 8.01% for U.S.
borrowings and 4.88% for Canadian borrowings under the Amended Credit
Agreement. In addition to certain agent and up-front fees, the Amended
Credit Agreement requires a commitment fee of up to 0.5% of the average daily
unused portion of the Revolving Facility based on the Company's leverage
ratio.
The Amended Credit Agreement 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 June 30, 1998. As of August 11, 1998, the Company
had $30.7 million available under its Revolving Facility.
Principal payments on long-term debt as of June 30, 1998 through fiscal 2003 and
thereafter are (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
-----------
<S> <C>
1999 ........................ $ 1,932
2000 ........................ 2,836
2001 ........................ 2,877
2002 ........................ 1,459
2003 ........................ 1,448
Thereafter ........................ 285,477
-----------
Total ........................ $296,029
-----------
</TABLE>
-7-
<PAGE>
PART I ITEM 1
Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
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. Charles F. Baird Jr., Chairman of Leiner Group's Board of
Directors, 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 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.
NOTE 6 -- Contingent Liabilities
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 August 4, 1998, 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 661 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 661 cases that have been
settled.
Of the remaining 7 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 7 currently pending claims not to exceed $1.0
million in the aggregate. Accordingly, no provision has been made in the
Company's consolidated financial statements 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.
-8-
<PAGE>
PART I ITEM 2
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 Products Inc. of Canada ("Vita Health"), a
wholly-owned subsidiary acquired January 30, 1997, for the three months ended
June 30, 1998 ("first quarter of fiscal 1999") and the significant developments
affecting its financial condition since March 31, 1998. 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, 1998, which
are included in the Company's Form 10-K, 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. Accordingly, the Company historically
has realized a significant portion of the Company's sales, and a more
significant portion of the Company's operating income, in the second half of
the fiscal year.
-9-
<PAGE>
PART I ITEM 2
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 months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
THREE MONTHS ENDED
JUNE 30,
-----------------------
1998 1997
----- -----
<S> <C> <C>
Net sales................................................ 100.0% 100.0%
Cost of sales............................................ 72.7 76.4
----- -----
Gross profit............................................. 27.3 23.6
Marketing, selling and distribution expenses............. 14.6 12.7
General and administrative expenses...................... 7.2 5.9
Expenses related to recapitalization of parent........... -- 34.4
Amortization of goodwill................................. 0.3 0.4
Other charges............................................ 0.3 0.1
----- -----
Operating income (loss).................................. 4.9 (29.9)
Other expense............................................ -- --
Interest expense, net.................................... 5.2 1.9
----- -----
Loss before income taxes and extraordinary item.......... (0.3) (31.8)
Benefit for income taxes before extraordinary item....... (0.1) (7.5)
----- -----
Loss before extraordinary item........................... (0.2) (24.3)
Extraordinary item....................................... -- 1.2
----- -----
Net loss................................................. (0.2)% (25.5)%
----- -----
----- -----
</TABLE>
Net sales for the first quarter of fiscal 1999 were $122.3 million, an
increase of $28.2 million, or 30.0%, versus the first quarter of fiscal 1998.
The Company's sales growth was primarily attributable to volume growth in the
Company's sale of vitamins, which was due primarily to sales growth in the
vitamin market generally. The Company's vitamin product sales increased by
$24.0 million, or 31.7%, compared to the first quarter of the prior year.
Management estimates that the overall U. S. vitamin market grew by over 29%
in the 13 week period ended June 28, 1998. Sales growth among the Company's
products was strongest in herbs and supplements. The Company continues to
emphasize higher growth products and to gain distribution in new channels.
Sales of over-the-counter pharmaceuticals ("OTCs") decreased by $0.7 million
for the first quarter of fiscal 1999 as compared to the same period in fiscal
1998, due primarily to certain OTC products being discontinued at certain
customers. The Company introduced private label cimetidine, a digestive aid,
into nine customer accounts in June 1998 and management expects this new OTC
product to help offset the OTC sales decline.
Gross profit margin was 27.3% for the first quarter of fiscal 1999, up from
23.6% in the first quarter of the prior fiscal year due primarily to a more
favorable mix of higher margin product sales. Gross profit for the first
quarter increased by $11.2 million, up 50.5% from $22.2 million in the first
quarter of fiscal 1998 to $33.4 million in fiscal 1999. The increase in
gross profit during the quarter is primarily attributable to the higher sales
volumes, along with the more favorable mix of higher margin product sales.
Marketing, selling and distribution expenses together with general and
administrative expenses (collectively, "Operating Expenses") for the first
quarter of fiscal 1999 were 21.8% of net sales, a higher percentage than the
18.6% in the prior year's comparable quarter. Operating Expenses in the
first quarter of fiscal 1999 increased by $9.1 million, or 51.8%, as compared
to the first quarter in fiscal 1998. This increase in Operating Expenses is
primarily the result of infrastructure development in support of new products
and diversification strategies plus an unusually low spending level in the
first quarter of fiscal 1998.
-10-
<PAGE>
PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
In the first quarter of fiscal 1998, the Company recorded expenses relating
to the Recapitalization of $32.3 million, consisting primarily of
compensation expense related to the in-the-money value of stock options
issued to certain management personnel of $15.4 million, management bonuses
of $5.1 million, and expenses incurred by Leiner Group in connection with its
capital raising activities of $11.8 million.
Other charges for the first quarter of fiscal 1999 were $0.4 million, which
compares to $0.1 million for the first quarter of fiscal 1998. The increase
was due to the management fee increase of $0.3 million in the first quarter
of fiscal 1999 arising primarily as a result of a consulting agreement
entered into in connection with the Recapitalization.
In the first quarter of fiscal 1999, operating income was $6.0 million,
compared to an operating loss of $28.2 million recorded in the first quarter
of fiscal 1998. The fiscal 1998 quarterly results include the $32.3 million
of expenses related to the Recapitalization of Leiner Group. Excluding these
Recapitalization expenses, operating income increased $1.8 million or 43.2%
over the prior year period, primarily due to the increase in sales and gross
profit, offset by the increase in Operating Expense, between the two
quarterly periods.
Net interest expense increased by $4.5 million during the first quarter of
fiscal 1999, versus the first quarter of fiscal 1998. This increase was due
primarily to an increase in the indebtedness of the Company, as well as to
changes in the Company's debt structure and interest rates which arose as a
result of the Recapitalization and took effect at the end of the first
quarter of fiscal 1998.
The benefit for income taxes for the first quarter of fiscal 1999 was $0.2
million or $6.9 million less than the first quarter of fiscal 1998. Based on
the latest estimates, the Company expects its effective tax rate to be
approximately 44% for the remainder of fiscal 1999, and to be higher than the
combined federal and state rate of 40% primarily because of the
nondeductibility for income tax purposes of goodwill amortization 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 $0.2
million was recorded in the first quarter of fiscal 1999 as compared with a
net loss of $24.0 million in the first quarter of fiscal 1998.
OTHER INFORMATION
Earnings before interest, taxes, depreciation, amortization and other
non-cash charges ("EBITDA") totaled $9.3 million for the first quarter of
fiscal 1999, which was $26.1 million higher than the comparable period in
fiscal 1998. Excluding Recapitalization-related cash expenses, EBITDA was
$7.2 million for the first quarter of fiscal 1998, $2.1 million less than the
first quarter of fiscal 1999. The Company believes that EBITDA provides
useful information regarding the Company's debt service ability, but should
not be considered in isolation or as a substitute for the Statements of
Operations or Cash Flow data.
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. In addition, the Company is required to repay the $145.0
million in currently outstanding term loans under the Amended Credit
Agreement (defined below) over the seven and one-half year period following
May 15, 1998, with scheduled principal payments of $1.4 million annually for
the first five years, $48.5 million in the sixth year, $66.4 million in the
seventh year, and $21.6 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 Amended Credit Agreement) unless a
leverage ratio test is
-11-
<PAGE>
PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
met, to prepay the borrowings under the Amended Credit Agreement. All
outstanding revolving credit borrowings under the Amended Credit Agreement
will become due on June 30, 2003.
During the first quarter of fiscal 1999, net cash used in operating
activities totaled $24.9 million. This resulted primarily from an increase
in inventories of $66.1 million partially offset by a decrease in accounts
receivable of $18.9 million, an increase in accounts payable of $18.2
million, and an increase in bank checks outstanding of $6.8 million. The
inventory increase is primarily the result of (i) a strategic decision to
increase inventories to ensure on-time order delivery to customers during the
period of start-up operations at its newly completed manufacturing and
distribution facility in Fort Mill, South Carolina, (ii) the positioning of
the Company to capitalize on certain market opportunities arising from
service shortfalls by certain of its competitors, and (iii) the shipment to
the Company of back ordered softgel materials. In order to help address the
temporary liquidity demands of higher inventories and capital spending, the
Company has received extended terms from its major suppliers and accelerated
payment terms from its major customers, effective for the second and third
quarters of fiscal 1999. The Company expects inventories to decline to more
customary levels by December 31, 1998. The decrease in accounts receivable
since the beginning of the first quarter of fiscal 1999 is due primarily to
the seasonality of the Company's business. The increase in accounts payable
during that same period is primarily the result of the increased inventory
purchases.
Net cash used in investing activities was $11.9 million in the first quarter
of fiscal 1999. This was primarily due to net capital expenditures of $12.0
million. The major capital expenditures were related to investments in
capacity expansion at the new manufacturing, packaging and distribution
facility in South Carolina, as well as at the Garden Grove tableting plant.
The Company expects to invest approximately $62 million in its business in
fiscal 1999, primarily to complete its capacity expansion program. Of this
amount, approximately $22 million is for the Ft. Mill, South Carolina
facility, which will be financed by an operating lease. Of the remaining $40
million which will be spent on equipment and software, approximately $17
million will be financed through operating leases, $3 million will be
financed by capitalized leases and the balance of approximately $20 million
will be a use of the Company's cash.
Net cash provided by financing activities was $35.9 million in the first
quarter of fiscal 1999. This was primarily the result of increased net
borrowings under the Amended Credit Agreement. During the first quarter of
fiscal 1999, the Company redeemed the balance of the preferred stock of its
Canadian subsidiary outstanding as of March 31, 1998, which had been issued
in connection with the acquisition of Vita Health.
FINANCING ARRANGEMENTS
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement ("Amended Credit Agreement"). The Amended Credit Agreement
provides for two U.S. term loans due December 30, 2004 and December 30, 2005
in the amounts of $68,000,000 and $65,000,000, respectively, and a Canadian
dollar denominated term loan due December 30, 2004 in the amount of
approximately U.S. $12,000,000, and a revolving credit facility in the U.S.
dollar equivalent amount of $125,000,000 (the "Revolving Facility") made
available in U.S. dollars to the Company with a portion denominated in
Canadian dollars made available to Vita Health. The unpaid principal amount
outstanding on the Revolving Facility is due and payable on June 30, 2003.
Amounts outstanding under the Company's credit facility in place at March 31,
1998 were refinanced with the proceeds from the Amended Credit Agreement. As
of August 11, 1998, the Company's unused availability under the Amended
Credit Agreement was approximately $30.7 million.
The Revolving Credit Facility includes letter of credit and swingline
facilities. Borrowings under the Amended Credit Agreement 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
Amended Credit Agreement that provides a cap of 6.17% on LIBOR rates plus
applicable margin on the interest rates payable thereon. The Amended Credit
Agreement 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 its Senior
Subordinated Notes due 2007 (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 minimum cash
flow coverage ratio.
The Company may be required to purchase 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 Amended Credit
Agreement. The indenture governing the Notes 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 Amended Credit Agreement,
amounting to approximately U.S. $15.5 million as of June 30, 1998, is
denominated in Canadian dollars. All other outstanding borrowings under the
Amended Credit Agreement, and all of the borrowings under the Notes, are
denominated in U.S. dollars.
-12-
<PAGE>
PART I ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
At June 30, 1998, borrowings under the Amended Credit Agreement bore interest
at a weighted average rate of 7.77% per annum. The Notes bear interest at a
rate of 9.625% per annum.
The Company has established a new manufacturing, packaging and distribution
facility in Fort Mill, South Carolina. The West Unity, Ohio packaging plant
was closed the first week of July 1998 and its packaging lines have been
relocated to the Fort Mill, South Carolina facility. The Company expects to
incur expenses estimated at approximately $1.9 million annually through
fiscal year 1999 in connection with this new facility. The Company has leased
this new facility under a prearranged lease at an estimated incremental
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 Amended Credit
Agreement, 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, 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
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
Form 10-K for the fiscal year ended March 31, 1998 (including, without
limitation, those factors discussed in the "Business-Risk Factors" section of
Item 1 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.
-13-
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information in Note 6 to the Company's Condensed Consolidated
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 - June 30,1998
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: /s/ WILLIAM B. TOWNE
---------------------------------
William B. Towne
Executive Vice President, Chief
Financial Officer, Director,
and Treasurer
Date: August 14, 1998
-14-
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<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
JUNE 30,1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
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