<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 QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 X NO
---- ----
COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AT NOVEMBER 9, 1999
1,000 SHARES
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<PAGE>
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LEINER HEALTH PRODUCTS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
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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, 1999 and 1998 .........3
Condensed Consolidated Balance Sheets -
As of September 30, 1999 (Unaudited) and March 31, 1999 ................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the six months ended September 30, 1999 and 1998 ...................5
Notes to Condensed Consolidated Financial Statements (Unaudited) .........6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .......................................11
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........19
PART II. Other Information ..................................................20
SIGNATURES ...................................................................21
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-2-
<PAGE>
PART I ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Operations
Unaudited
(in thousands)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------- --------------------
1999 1998 1999 1998
----- ---- ---- -----
<S> <C> <C> <C> <C>
Net sales $144,499 $149,414 $265,398 $271,737
Cost of sales 112,792 113,033 203,454 201,910
-------- -------- -------- --------
Gross profit 31,707 36,381 61,944 69,827
Marketing, selling and distribution expenses 19,257 19,356 38,787 37,166
General and administrative expenses 9,138 9,701 18,000 18,526
Amortization of goodwill 416 417 835 836
Closure of facilities (138) 321 868 321
Other charges (income) 375 (1,165) 750 (688)
-------- -------- --------- --------
Operating income 2,659 7,751 2,704 13,666
Interest expense, net 7,878 7,572 15,038 13,891
-------- -------- -------- --------
(Loss) income before income taxes (5,219) 179 (12,334) (225)
(Benefit) provision for income taxes (2,420) 96 (5,447) (72)
------- -------- ------- --------
Net (loss) income $ (2,799) $ 83 $ (6,887) $ (153)
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
PART I ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 1999
------------ --------
UNAUDITED NOTE 1
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,339 $ 77
Accounts receivable, net 75,068 127,127
Inventories 158,669 151,605
Prepaid expenses and other current assets 19,146 10,738
-------- --------
Total current assets 255,222 289,547
Property, plant and equipment, net 58,335 61,241
Goodwill, net 53,897 54,334
Deferred financing charges 10,515 10,565
Other noncurrent assets 12,043 9,851
-------- --------
Total assets $390,012 $425,538
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Bank checks outstanding, less cash on deposit $ 400 $ 6,539
Current portion of long-term debt 5,503 4,068
Accounts payable 90,751 82,244
Customer allowances payable 7,152 9,603
Accrued compensation and benefits 7,985 11,120
Other accrued expenses 6,409 9,350
-------- --------
Total current liabilities 118,200 122,924
Long-term debt 293,687 317,859
Other noncurrent liabilities 4,499 4,253
Commitments and contingent liabilities
Shareholder's deficit:
Common stock 1 1
Capital in excess of par value 1,851 1,851
Accumulated deficit (28,184) (21,297)
Accumulated other comprehensive loss (42) (53)
-------- --------
Total shareholder's deficit (26,374) (19,498)
-------- --------
Total liabilities and shareholder's deficit $390,012 $425,538
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
PART I ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (6,887) $ (153)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 4,277 3,903
Amortization 4,391 3,775
Translation adjustment 11 54
Changes in operating assets and liabilities:
Accounts receivable 52,184 16,119
Inventories (6,686) (43,720)
Bank checks outstanding, less cash on deposit (6,181) 4,526
Accounts payable 8,383 (16,225)
Customer allowances payable (2,450) (1,176)
Accrued compensation and benefits (3,146) (1,159)
Other accrued expenses 586 (1,097)
Income taxes payable/receivable (8,806) (4,402)
Other (3,109) (695)
-------- --------
Net cash provided by (used in) operating activities 32,567 (40,250)
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (1,667) (10,259)
Increase in other noncurrent assets (4,466) (3,816)
-------- --------
Net cash used in investing activities (6,133) (14,075)
FINANCING ACTIVITIES:
Net payments under bank revolving credit facility (51,525) (2,837)
Borrowings under bank term credit facility 30,000 59,763
Payments under bank term credit facility (798) (665)
Capital contribution from parent - 26
Repurchase of minority interest - (947)
Increase in deferred financing charges (857) (983)
Net (payments) borrowings on other long-term debt (895) 1,451
-------- --------
Net cash (used in) provided by financing activities (24,075) 55,808
Effect of exchange rate changes (97) (84)
-------- --------
Net increase in cash and cash equivalents 2,262 1,399
Cash and cash equivalents at beginning of period 77 1,026
-------- -------
Cash and cash equivalents at end of period $ 2,339 $ 2,425
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for
the three and six months ended September 30, 1999 include the accounts of
Leiner Health Products Inc. (the "Company") and its subsidiaries, including
Vita Health Products Inc. ("Vita Health"). Such financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals and for adjustments
recorded in connection with the closure of facilities - Note 8) considered
necessary for a fair presentation have been included. Operating results for
the three and six month periods ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended March 31,
2000.
The balance sheet at March 31, 1999 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 1999.
Certain reclassifications have been made to the fiscal 1999 condensed
consolidated financial statements to conform with the fiscal 2000 presentation.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1999 1999
------------- ---------
<S> <C> <C>
Raw materials, bulk vitamins and packaging materials............... $100,823 $ 86,925
Work-in-process.................................................... 14,512 12,717
Finished products.................................................. 43,334 51,963
-------- --------
$158,669 $151,605
======== ========
</TABLE>
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<PAGE>
PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
3. LONG-TERM DEBT
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement, which was amended on June 30, 1999 to include an additional U.S. term
loan in the amount of $30,000,000 as described below (the "Credit Agreement").
The Credit Agreement provided for one U.S. term loan due December 30, 2004 in
the amount of $68,000,000, two U.S. term loans due December 30, 2005 in the
amounts of $65,000,000 and $30,000,000, 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 amount of U.S. $125,000,000 (the "Revolving Facility") a portion of which
is made available to Vita Health in Canadian dollars. The unpaid principal
amount outstanding on the Revolving Facility is due and payable on June 30,
2003. The terms, conditions and restrictions of the Credit Agreement are
consistent with the terms, conditions and restrictions of the credit facility as
previously in effect, with the exception of certain debt covenants.
Borrowings under the Credit Agreement bear interest at floating rates that
are based on the agent lender's base rate (8.25% at September 30, 1999), the
agent lender's Canadian prime rate (6.25% at September 30, 1999), LIBOR
(6.08% at September 30, 1999) or the lender's banker's acceptance rate (4.91%
at September 30, 1999), as the case may be, plus an applicable margin (as
defined in the Credit Agreement) 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,
amortization expense and other special charges and its effect on the
applicable margin 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, (b)
for the two Term B loans under the Term Facility, from 2.125% to 2.875% for
LIBOR-based loans, and from 1.125% to 1.875% for alternate base rate-based
loans and (c) for the one Term C loan and the one Term D loan under the Term
Facility, from 2.25% to 3.0% for LIBOR-based loans, and from 1.25% to 2.0%
for alternate base rate-based loans. As of September 30, 1999, the Company's
weighted average interest rates were 8.42% for U.S. borrowings and 7.23% for
Canadian borrowings under the Credit Agreement. In addition to certain agent
and up-front fees, the 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 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
shareholder's equity. The Company was in compliance with all such financial
covenants as of September 30, 1999. As of September 30, 1999, the Company had
$82,731,000 available under its Revolving Facility.
Principal payments on long-term debt as of September 30, 1999 through fiscal
2004 and thereafter are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year
----------
2000 ........................ $ 2,603
2001 ........................ 4,417
2002 ........................ 2,275
2003 ........................ 1,747
2004 ........................ 74,459
Thereafter ........................ 213,689
--------
Total ........................ $299,190
========
</TABLE>
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-7-
<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
4. COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income for the three and six months ended
September 30, 1999 and 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (loss) income ............................ $(2,799) $ 83 $(6,887) $ (153)
Foreign currency translation adjustment....... (77) (75) (11) (54)
------- ------- ------- -------
Comprehensive (loss) income .................. $(2,876) $ 8 $(6,898) $ (207)
======= ======= ======= =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
On June 30, 1997, Leiner Health Products Group Inc. ("Leiner Group"), the
Company's sole shareholder, and the Company entered into a consulting
agreement with North Castle Partners, L.L.C. (the "Sponsor") 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 $1,500,000, 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 terminates if Baird Investment Group, L.L.C.
ceases to be the managing member of North Castle Partners I, L.L.C., or upon
the earliest of June 30, 2007 or the date that North Castle Partners I,
L.L.C. terminates before that date.
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 October 26, 1999, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 673 lawsuits, of which 669 have been settled.
The Company entered into an agreement (the "Agreement") with the Company's
supplier of bulk L-Tryptophan, under which the supplier agreed to assume the
defense of all claims and to pay all settlements and judgements, other than
for certain punitive damages, against the Company arising out of the
ingestion of 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 or paid in
any settlement.
Of the remaining four 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 four currently pending claims not
to exceed $1,000,000 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.
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-8-
<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
7. BUSINESS SEGMENT INFORMATION
The Company operated in two reportable segments. One represents the Company's
U.S. operations ("Leiner U.S.") and the other represents the Company's Canadian
operations ("Vita Health"). The Company's operating segments manufacture a range
of vitamins, minerals and nutritional supplements and distribute their products
primarily through mass market retailers. The Company evaluates segment
performance based on operating profit, before the effect of non-recurring
charges and gains, and intersegment profit.
Selected financial information for the Company's reportable segments for the
three and six months ended September 30, 1999 and 1998 is as follows (in
thousands):
<TABLE>
<CAPTION>
Leiner Vita Consolidated
U.S. Health totals
--------- -------- ------------
<S> <C> <C> <C>
THREE MONTHS ENDED SEPTEMBER 30, 1999:
External sales $ 133,114 $ 11,385 $ 144,499
Intersegment sales 405 13 418
Segment operating income 1,808 851 2,659
Depreciation and amortization 4,259 213 4,472
Interest expense, net 7,462 416 7,878
Income tax (benefit) expense (2,277) (143) (2,420)
Segment assets 357,471 32,541 390,012
Expenditures for long-lived assets (3,849) 365 (3,484)
THREE MONTHS ENDED SEPTEMBER 30, 1998:
External sales $ 140,795 $ 8,619 $ 149,414
Intersegment sales 820 2 822
Segment operating income 7,067 684 7,751
Depreciation and amortization 3,567 190 3,757
Interest expense, net 7,222 350 7,572
Income tax (benefit) expense (57) 153 96
Segment assets 375,865 26,238 402,103
Expenditures for long-lived assets (2,021) 246 (1,775)
SIX MONTHS ENDED SEPTEMBER 30, 1999:
External sales $ 243,083 $ 22,315 $ 265,398
Intersegment sales 619 27 646
Segment operating income 919 1,785 2,704
Depreciation and amortization 8,249 419 8,668
Interest expense, net 14,217 821 15,038
Income tax (benefit) expense (5,566) 119 (5,447)
Segment assets 357,471 32,541 390,012
Expenditures for long-lived assets 714 953 1,667
SIX MONTHS ENDED SEPTEMBER 30, 1998:
External sales $ 254,597 $ 17,140 $ 271,737
Intersegment sales 1,130 17 1,147
Segment operating income 12,559 1,107 13,666
Depreciation and amortization 7,323 355 7,678
Interest expense, net 13,242 649 13,891
Income tax (benefit) expense (275) 203 (72)
Segment assets 375,865 26,238 402,103
Expenditures for long-lived assets 9,280 979 10,259
</TABLE>
8. CLOSURE OF FACILITIES
In the second quarter of fiscal 2000, the Company closed its Madison,
Wisconsin facility. As a result, the Company incurred approximately
$1,006,000 in the first quarter of fiscal 2000 for severance and other costs
related to the closure, which was offset by a $248,000 reversal of excess
reserves for severance and other costs in the second quarter of fiscal year
2000 and a gain of approximately $230,000 from the sale of the facility.
In the second quarter of fiscal 2000, the Company announced its plans to close
its Sherburne, New York facility in the third quarter of fiscal 2000. As a
result, the Company reserved approximately $340,000 in the second quarter of
fiscal 2000 for severance and other costs related to the closure.
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<PAGE>
PART 1 ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
9. SUBSEQUENT EVENTS
On October 7, 1999, the Company reached a definitive agreement with Novopharm
Limited of Ontario, Canada to purchase substantially all of the assets of two of
its divisions, Stanley Pharmaceuticals Ltd. and Granutec, Inc., and certain
related assets of Novopharm. The agreement is subject to various conditions
including regulatory approvals. Upon closing, expected to be in the second
half of fiscal 2000, the Company expects to use approximately $33,000,000 of
funds available under its Revolving Facility, assume approximately $7,100,000
of debt and receive a capital contribution from its parent totaling
$20,000,000.
In connection with the pending acquisition, the Company will amend its Credit
Agreement, effective on or about the closing date of the acquisition
primarily to increase the limit it can spend on this acquisition, as well as
the applicable margins (as defined in the Credit Agreement) included as part
of the interest rates for borrowings under its Revolving and Term Facilities.
On October 8, 1999, the Company entered into an interest protection agreement
with respect to $54,000,000 of its indebtedness under the Credit Agreement,
whereby the Company will not pay any lower than 5.94% on LIBOR rates plus
applicable margin on the interest rates payable thereon. In connection with
this transaction, the Company received $229,500 that will be recorded as a
reduction of interest expense over the period of the agreement, which
terminates October 8, 2001.
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-10-
<PAGE>
PART 1 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 Products Inc. of Canada ("Vita
Health"), a wholly-owned subsidiary, for the three months ended September 30,
1999 ("second quarter of fiscal 2000") and the six months ended September 30,
1999 and the significant developments affecting its financial condition since
March 31, 1999. 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, 1999, which are included in the Company's Annual
Report on 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 its sales, and a more significant
portion of its operating income, in the second half of the fiscal year.
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,
1999 and 1998.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 78.1 75.7 76.7 74.3
----- ----- ----- -----
Gross profit ............................... 21.9 24.3 23.3 25.7
Marketing, selling and distribution expenses 13.4 12.9 14.6 13.7
General and administrative expenses ........ 6.3 6.5 6.8 6.8
Amortization of goodwill ................... 0.3 0.3 0.3 0.3
Closure of facilities ...................... (0.1) 0.2 0.3 0.1
Other charges (income) ..................... 0.2 (0.8) 0.3 (0.2)
----- ----- ----- -----
Operating income ........................... 1.8 5.2 1.0 5.0
Interest expense, net ...................... 5.4 5.0 5.7 5.1
----- ----- ----- -----
(Loss) income before income taxes .......... (3.6) 0.2 (4.7) (0.1)
(Benefit) provision for income taxes ....... (1.7) 0.1 (2.1) -
----- ----- ----- -----
Net (loss) income .......................... (1.9)% 0.1% (2.6)% (0.1)%
===== ===== ===== =====
</TABLE>
Net sales for the second quarter of fiscal 2000 were $144.5 million, a
decrease of $4.9 million, or 3.3% versus the second quarter of fiscal 1999.
This decrease was caused primarily by decreases in the Company's vitamin
product sales and non-core drug repackaging sales of $3.9 million and $2.3
million, respectively, partially offset by a $2.5 million increase in
over-the-counter pharmaceuticals ("OTCs"). The Company's vitamin product
sales have been negatively impacted primarily by lower sales of herbal
products as compared to the prior year. This is consistent with the overall
U.S. herbal products market for food, drug and mass merchandisers which
management estimates declined by over 5% in the thirteen week period ended
September 26, 1999 versus the comparable period in 1998 when it increased by
over 42%. The decrease in the herbal products occurred even though management
estimates the overall U.S. vitamin market for food, drug and mass
merchandisers ("FDM Market") increased 5% for the same time period. The
current trend in the Company's vitamin product sales also reflects the
continued reduction of inventory balances being conducted by certain of the
Company's customers. Drug repackaging sales decreased in
- --------------------------------------------------------------------------------
-11-
<PAGE>
PART 1 ITEM 2
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
the three months ended September 30, 1999 compared to the prior year period
due to the Company exiting the drug repackaging business in July 1999. Sales
of OTCs increased 17.5% to $16.7 million during the second quarter of fiscal
2000 as compared to the same period in fiscal 1999. Management expects this
trend in OTC sales to continue during the remainder of the year, as compared
to fiscal 1999. The Company intends to build these product sales and, as part
of this strategy, signed a definitive agreement on October 7, 1999 with
Novopharm Limited of Ontario, Canada to purchase substantially all of the
assets of two of its divisions, Stanley Pharmaceuticals Ltd. and Granutec,
Inc., and certain related assets of Novopharm Limited related to the
manufacturing and distribution of OTCs.
For the six months ended September 30, 1999, net sales decreased by $6.3
million, or 2.3% as compared to the first half of fiscal 1999. This decrease
was primarily due to a decline in the Company's non-core product sales of
hair and skin care products from $6.4 million in the six months ended
September 30, 1998 to $0.2 million in the six months ended September 30,
1999. Management does not expect a significant increase in sales for these
non-core products during the remainder of fiscal 2000. The decrease in sales
also reflects a decline of approximately $3.1 million in drug repackaging
sales as compared to the first half of fiscal 1999. The Company closed its
drug repackaging facility in July 1999. The Company's vitamin product sales
in all its markets were flat during the six months ended September 30, 1999,
as compared to the first half of the prior year. This reflects a general
decrease in the rate of growth of vitamin product sales in the overall FDM
Market in the first half of fiscal 2000 versus the comparable period in
fiscal 1999. Management expects the growth rate for the vitamin product sales
in the FDM Market to improve in the second half of fiscal 2000. OTC sales for
the six months ended September 30, 1999 increased $3.7 million, or 12.9%, as
compared to the same period in fiscal 1999 primarily due to increased sales
of digestive aid products.
Gross profit for the second quarter of fiscal 2000 was $31.7 million, a
decrease of $4.7 million, or 12.8%, from $36.4 million in the second quarter
of fiscal 1999. The decrease in gross profit during the quarter is primarily
attributable to the lower sales volume, a shift in product mix to sales of
lower margin multivitamins from higher margin herbal products and pricing
pressures. The pricing pressures are primarily on vitamin C and E products as
declining raw material prices have been recognized in the sales prices prior
to the cost of goods reductions cycling through inventory. Gross profit
margin was 21.9% for the second quarter of fiscal 2000, down from 24.3% in
the second quarter of the prior fiscal year due primarily to a change in
product mix and pricing pressures, discussed previously. In addition, the
gross profit margin was adversely affected by certain plant inefficiencies as
production volumes were decreased in response to the general decrease in the
rate of growth of vitamin product sales in the overall FDM Market, as
discussed above. Management believes the decrease in the demand for herbal
products during the second quarter of fiscal 2000 can be partially attributed
to an increase in media reports during the first quarter of fiscal 2000
questioning the validity and quality of herbal products and the overall
confusion in the marketplace about the quality of herbal products. Management
expects its commitment to, and investment in, the quality of the Company's
herbal products will serve to differentiate the Company's products from its
competitors' herbal products, resulting in higher sales and gross profit in
future periods. Management also expects the gross profit margins to improve
during the second half of fiscal year 2000 as plant efficiencies improve,
including efficiencies at the Company's new facility in Fort Mill, South
Carolina as the benefits of having completed the start-up phase of operations
are realized there, and as the benefits of reduced raw material costs for
vitamin C and E products are realized.
For the six months ended September 30, 1999, gross profit decreased by $7.9
million, or 11.3%, compared to the same period in fiscal 1999. Gross profit
margin was 23.3%, a 2.4 percentage point decrease in the six months ended
September 30, 1999 down from 25.7% in the comparable period in fiscal 1999.
The decrease in gross profit in the first half of the year was primarily due
to the shift in product mix, the effect of certain product line
rationalizations, including certain skin care products, liquid herbal
products, the departure from the drug repackaging business, and certain plant
inefficiencies as noted above.
Although marketing, selling and distribution expenses, together with general
and administrative expenses (collectively, "Operating Expenses") decreased by
$0.7 million, or 2.3%, for the second quarter of fiscal 2000 as compared to
the comparable period in fiscal 1999, these expenses were slightly higher as
a percentage of net sales in the second quarter of fiscal 2000 (19.7%) versus
the comparable period of the prior year (19.4%). Operating Expenses for the
second quarter of fiscal 2000 increased as a percentage of net sales
primarily as a result of infrastructure
- --------------------------------------------------------------------------------
-12-
<PAGE>
PART 1 ITEM 2
- --------------------------------------------------------------------------------
development in support of advanced science and product quality initiatives
which began in the first quarter of fiscal 1999. The decrease in the dollar
amount of Operating Expenses from the second quarter of fiscal 1999 to the
second quarter of fiscal 2000 was primarily due to the lower variable
expenses associated with the lower sales volume, and lower spending on
consultants, both of which were partially offset by the increase in the
aforementioned costs. For the six months ended September 30, 1999, Operating
Expenses were 21.4% of net sales versus 20.5% in the prior year. The increase
in Operating Expenses for the six months ended September 30, 1999 is due
primarily to higher fixed costs as a result of infrastructure development in
support of advanced science and product quality initiatives which began in
the first quarter of fiscal 1999 and are expected to continue throughout
fiscal 2000. In addition, the Company increased advertising spending on
branded products in the first half of fiscal 2000 in an effort to better
position its products in the marketplace.
In the second quarter of fiscal 2000, the Company closed its Madison,
Wisconsin facility, thereby exiting its drug repackaging business. As a
result, the Company recorded a gain of $0.2 million in the second quarter of
fiscal 2000 from the sale of the facility and a $0.2 million reversal of
excess reserves for severance and other costs related to the closure that
were originally provided in the first quarter of fiscal 2000. In the second
quarter of fiscal 2000, the Company announced its plans to close its
Sherburne, New York facility in the third quarter of fiscal 2000. As a
result, the Company reserved approximately $0.3 million in the second quarter
of fiscal 2000 for severance and other costs related to the closure. During
the first half of the year, the Company incurred $0.9 million of plant
closure costs compared to $0.3 million incurred in fiscal 1999. This was
primarily due to the items previously discussed in addition to $1.0 million
of severance and other costs related to the Madison closure provided in the
first quarter of fiscal 2000.
During the second quarter of fiscal 2000, the Company incurred $0.4 million of
other charges compared to other income of $1.2 million in the same period in
fiscal 1999. This change was primarily attributable to other income generated by
a non-recurring settlement arising from a dispute involving a service provider
and a former employee in the second quarter of fiscal 1999, which was not
incurred in fiscal 2000. Other charges totaled $0.8 million for the first half
of the year compared to other income of $0.7 million in the first half of fiscal
1999. This change was due to the aforementioned settlement in the second quarter
of fiscal 1999.
In the second quarter of fiscal 2000, operating income was $2.7 million, a
decrease of $5.1 million or 65.7%, compared to the second quarter of fiscal
1999. The decrease was primarily due to lower sales and gross profit margins, in
addition to an increase in other charges due to $1.6 million recorded in the
second quarter of fiscal 1999 in connection to the non-recurring settlement
previously discussed. For the six months ended September 30, 1999, operating
income was down $11.0 million or 80.2% from the six months ended September 30,
1998. This decrease was primarily due to lower sales and gross profit margins,
higher Operating Expenses, and the increase in other charges, all noted above.
In the second quarter of fiscal 2000, net interest expense of $7.9 million
represents an increase of $0.3 million from the second quarter of fiscal 1999.
Net interest expense increased by $1.1 million during the six months ended
September 30, 1999, versus the six months ended September 30, 1998. This
increase in the three and six months ended September 30, 1999 was due primarily
to an increase in the average outstanding indebtedness of the Company.
The benefit for income taxes for the second quarter of fiscal 2000 was $2.4
million compared to the provision of $0.1 million in the second quarter of
fiscal 1999. For the first half of the year, the benefit for income taxes was
$5.4 million compared to $0.1 million in the comparable period in fiscal 1999.
Based on the latest estimates, the Company expects its effective tax rate to be
approximately 42.0% for the remainder of fiscal 2000, 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.
Primarily as a result of the factors discussed above, a net loss of $2.8 million
was recorded in the second quarter of fiscal 2000 as compared to net income of
$0.1 million in the second quarter of fiscal 1999. For the six months ended
September 30, 1999, a net loss of $6.9 million was recorded as compared to the
$0.2 million net loss recorded in the first half of fiscal 1999.
- --------------------------------------------------------------------------------
-13-
<PAGE>
PART I ITEM 2
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OTHER INFORMATION
Earnings before interest, taxes, depreciation, amortization, other non-cash
charges and the charges related to the closure of facilities ("EBITDA")
totaled $6.5 million for the second quarter of fiscal 2000, down from $11.4
million in the comparable period in fiscal 1999. EBITDA for the first half of
fiscal 2000 was $11.3 million, or $9.4 million less than EBITDA for the first
half of fiscal 1999. EBITDA can be calculated from the financial statements
with the exception of the amortization of deferred debt issuance costs
totaling $0.5 million for the three months ended September 30, 1999 and 1998,
respectively, and $0.9 million and $1.0 million for the six month periods
ended September 30, 1999 and 1998, respectively, which is included in
interest expense in the statement of operations and in amortization expense
in the statement of cash flows. 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. The Company is required to
repay the $171.8 million in term loans outstanding as of September 30, 1999
under the Credit Agreement (defined below) by December 30, 2005 with
scheduled principal payments of $1.7 million for fiscal 2000 through 2003,
$37.0 million for fiscal 2004, $82.3 million for fiscal 2005, and $46.4
million for fiscal 2006. The Company is also required to apply certain asset
sale proceeds, as well as 50% of its excess cash flow (as defined in the
Credit Agreement) unless a leverage ratio test is met, to prepay the
borrowings under the Credit Agreement. All outstanding revolving credit
borrowings under the Credit Agreement will become due on June 30, 2003.
During the first half of fiscal 2000, net cash provided by operating
activities totaled $32.6 million. This resulted primarily from a positive net
change in operating assets and liabilities of $30.8 million. The changes in
the accounts receivable and inventory balances since the beginning of the
second quarter of fiscal 2000 are due primarily to the seasonality of the
Company's business whereby sales are normally higher in the fourth quarter of
the fiscal year when compared to the second quarter of the fiscal year.
Additionally, sales were higher in the third month of the fourth quarter of
fiscal 1999, as compared to the comparable period in fiscal 1998, which
resulted in significantly more cash being received on accounts receivable in
the first quarter of fiscal 2000 versus the first quarter of fiscal 1999. The
increase in accounts payable since March 31, 1999 of $8.4 million was
partially offset by the decrease in bank checks outstanding of $6.2 million.
The changes in these balances are due primarily to the timing of
disbursements at the end of each quarter.
Net cash used in investing activities was $6.1 million in the first half of
fiscal 2000. This was primarily due to an increase in prepaid allowances to
customers, resulting in other non-current assets increasing $4.5 million
during the first half of fiscal 2000. Net capital expenditures increased by
$1.7 million. The major capital expenditures were related to investments in
capacity expansion at the new manufacturing, packaging and distribution
facility in South Carolina.
Net cash provided by financing activities was $24.1 million in the first half
of fiscal 2000. This was primarily the result of increased net borrowings
under the Credit Agreement. On June 30, 1999, the Company entered into a term
loan under its Credit Agreement and received $30.0 million which it used to
pay off outstanding borrowings under its Revolving Facility (defined below).
On October 7, 1999, the Company entered into an agreement to acquire certain
assets and assume certain liabilities of Novopharm Limited of Ontario, Canada.
Upon closing, expected to be in the second half of fiscal 2000, the Company
expects to use approximately $33.0 million of funds available under its
Revolving Facility, assume approximately $7.1 million of debt and receive a
capital contribution from its parent totaling $20.0 million.
- ------------------------------------------------------------------------------
-14-
<PAGE>
PART I ITEM 2
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
FINANCING ARRANGEMENTS
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement, which was amended on June 30, 1999 to include an additional U.S.
term loan in the amount of $30,000,000 as described below ("Credit
Agreement"). The Credit Agreement provided for one U.S. term loan due
December 30, 2004 in the amount of $68,000,000 and two U.S. term loans due
December 30, 2005 in the amounts of $65,000,000 and $30,000,000,
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 amount of U.S.
$125,000,000 (the "Revolving Facility") a portion of which is made available
to Vita Health in Canadian dollars. The unpaid principal amount outstanding
on the Revolving Facility is due and payable on June 30, 2003. As of November
3, 1999, the Company's unused availability under the Credit Agreement was
approximately $60.2 million.
The Revolving Facility includes letter of credit and swingline facilities.
Borrowings under the Credit Agreement bear interest at floating rates that
are based on LIBOR or on the applicable alternate base rate (as defined in
the Credit Agreement), 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 $29.5 million of its indebtedness under the
Credit Agreement that provides a fixed rate of 6.17% on LIBOR rates plus
applicable margin on the interest rates payable thereon. On October 8, 1999,
the Company entered into an interest protection agreement, with respect to
$54.0 million of its indebtedness under the Credit Agreement, whereby the
Company will not pay any lower than 5.94% on LIBOR rates plus applicable
margin on the interest rates payable thereon. In connection with this
transaction, the Company received $0.2 million that will be recorded as a
reduction of interest expense over the period of the agreement, which
terminates October 8, 2001. The 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. On or about the closing date of
the acquisition of certain assets of Novopharm Limited, as discussed
previously, the Company will amend its Credit Agreement primarily to increase
the limit it can spend on this acquisition, as well as the applicable margins
(as defined in the Credit Agreement) included as part of the interest rates
for borrowings under its Revolving and Term Facilities.
The Company may be required to purchase the Notes upon a Change of Control
(as defined in the indenture) and in certain circumstances with the proceeds
of asset sales. The Notes are subordinated to the indebtedness under the
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 Credit Agreement, amounting
to approximately U.S. $19.5 million as of September 30, 1999, is denominated
in Canadian dollars. All other outstanding borrowings under the Credit
Agreement, and all of the borrowings under the Notes, are denominated in U.S.
dollars.
At September 30, 1999, borrowings under the Credit Agreement bore interest at
a weighted average rate of 8.3% per annum. The Notes bear interest at a rate
of 9.6% per annum.
The Company currently believes that cash flow from operating activities,
together with revolving credit borrowings available under the 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 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 Facility matures, by extending, renewing, replacing or
otherwise refinancing the Revolving Facility. No assurance can be given that
any such extension, renewal, replacement or refinancing can be successfully
accomplished.
- ------------------------------------------------------------------------------
-15-
<PAGE>
PART I ITEM 2
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
YEAR 2000 MATTERS
Many existing systems use only two-digit date fields to identify a year in
the date field, without considering the impact of the upcoming change in the
century (i.e., the number "01" is recognized as the year "1901"). Other
systems do not correctly process "leap year" dates. As a result, such systems
could fail or create erroneous results unless corrected to process data
related to the Year 2000 and beyond. The problems are expected to increase in
frequency and severity as the Year 2000 approaches, and are commonly referred
to as the "Year 2000 problem." The Company relies on its systems,
applications and devices in operating and monitoring all major aspects of its
business, including systems such as purchasing, order entry, sales, inventory
control, general ledger, accounts payable, billing, customer service,
manufacturing and lab equipment, embedded computer chips and networks and
telecommunications devices. These systems may severely affect the Company
unless these systems are made Year 2000 ready.
STATE OF READINESS. With the assistance of Year 2000 consultants, in May of
1997, the Company commenced a review of its internal information systems
("IS") to identify applications that are not Year 2000 ready and assess the
impact of the Year 2000 problem for the rest of its operations. The Company
has developed an overall plan to modify its internal systems to be Year 2000
ready and is well underway to implementing all phases and tasks depicted in
the plan. The Company has also formed a Year 2000 Steering Committee to
provide support and oversight to the Company's Year 2000 readiness activities
in IS and non-IS areas, the assessment of Year 2000 risks in connection with
third-party relationships, and the development of contingency plans.
The Company has identified the following three key areas of its business that
may be affected:
INTERNAL BUSINESS SYSTEMS. The Year 2000 problem could affect the systems,
transaction processing computer applications and devices used by the Company
to operate and monitor all major aspects of its business, including
financial systems (such as general ledger, accounts payable and billing),
customer service, infrastructure, materials requirement planning, master
production scheduling, networks and telecommunications systems. The Company
has completed its assessment phase and believes that it has identified
substantially all of the major systems, software applications and related
equipment used in connection with its internal operations that must be
modified or upgraded in order to minimize the possibility of a material
disruption to its business. The Company has substantially completed its
remediation phase of modifying and upgrading all affected systems which are
critical to the operations of the business. The Company is currently
performing the necessary testing to certify the Year 2000 readiness of all
of its systems. The Company estimates that all systems will be Year 2000
ready by the end of November 1999. However, any unforeseen problems which
occur during the testing phase may adversely affect the Company's Year 2000
readiness.
THIRD-PARTY SUPPLIERS. The Company relies, directly and indirectly, on
external systems utilized by its suppliers for products used in the
manufacture of its products. The Company has requested confirmation from its
major suppliers of their Year 2000 compliance. For its mission critical
business suppliers, the Company will perform the necessary due diligence to
seek additional assurances that these suppliers will be Year 2000 ready.
Third-party supplier Year 2000 readiness inquiries were completed by the end
of October 1999. There can be no assurance that these suppliers will resolve
any or all Year 2000 problems with their systems in a timely manner. Any
failure of these third parties to resolve their Year 2000 problems in a
timely manner could result in the material disruption of the business of the
Company. Any such disruption could have a material adverse effect on the
Company's business, financial condition and results of operations. Although
the Company believes that this is the worst case Year 2000 scenario, it is
developing additional contingency programs that could potentially offset any
negative impact.
MANUFACTURING AND FACILITY SYSTEMS. Systems such as heating, sprinklers,
elevators, security, test equipment, lab devices, and manufacturing
equipment at the Company's facilities, warehouses, and manufacturing plants
may also be affected by the Year 2000 problem. The Company has contacted the
facility owners and third-party vendors seeking assurances of Year 2000
compliance. The Company's testing of mission critical equipment and devices
has started and the Company estimates that such testing will be completed by
the end of November 1999.
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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)
There can be no assurance that all Year 2000 related problems would be
uncovered and remediated through vendor assurances or testing processes.
Any failure of these systems could result in material disruption of the
business of the Company and such disruption could have a material effect
on the Company's business, financial condition and results of operations.
CONTINGENCY PLANNING. The Company recognizes the need for developing
contingency plans to address the Year 2000 issues that may pose a significant
risk to its on-going operations. Such plans could include the implementation
of manual procedures and controls to mitigate risk and compensate for system
deficiencies. The Company's Year 2000 Project Office developed a Company-wide
contingency plan to address the Company's at-risk critical business functions
and processes as a result of Year 2000 issues. It should be noted that in the
normal course of business, the Company maintains disaster recovery plans
designed to address various potential IS-related interruptions. For example,
the Company has the capability of operating its information systems at a
third-party vendor site in the case of a disaster at its corporate computer
facility. Although these plans are not Year 2000 specific, they may be
applicable to address limited Year 2000 failures or interruptions by some
third parties resulting from their failure to be Year 2000 ready. There can
be no assurance that any Year 2000 contingency plans developed and
potentially deployed by the Company would be adequate to meet the Company's
needs without materially impacting its operations, that any such plan would
be successful or that the Company's results of operations would not be
materially and adversely affected by the delays and inefficiencies inherent
in conducting operations in an alternative manner.
COSTS TO ADDRESS YEAR 2000 READINESS. The Company has incurred approximately
$0.5 million of expenses in the first half of fiscal 2000 to address its Year
2000 issues. The Company presently estimates that the total cost of
addressing its Year 2000 issues will be approximately $3.5 million. This
estimate was derived utilizing numerous assumptions, including the assumption
that the Company has already identified its most significant Year 2000 issues
and that the plans of its third party suppliers will be fulfilled in a timely
manner without cost to the Company. However, there can be no guarantee that
these assumptions are accurate, and actual results could differ materially
from those anticipated.
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the
euro. The participating countries agreed to adopt the euro as their common
legal currency on that date.
As of January 1, 1999, the participating countries no longer control their
own monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro, is exercised by the new
European Central Bank.
Following introduction of the euro, the legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During the transition period, public and private parties may pay for goods
and services using either the euro or the participating country's legacy
currency.
The impact of the euro is not expected to materially affect the results of
operations of the Company. The Company operates primarily in U.S.
dollar-denominated purchase orders and contracts, and the Company neither has
a large customer nor vendor base within the countries participating in the
euro conversion.
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
- ------------------------------------------------------------------------------
-17-
<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
Form 10-K for the fiscal year ended March 31, 1999 (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. The Company
undertakes no obligation to republish revised forward-looking statements to
reflect the occurrence of unanticipated events.
- ------------------------------------------------------------------------------
-18-
<PAGE>
PART I ITEM 3
- ------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has material exposure to interest rate,
foreign currency exchange rate or other relevant market risks. See
disclosures under Item 7a. "Quantitative and Qualitative Disclosures about
Market Risks" in the Company's Annual Report on Form 10-K for the fiscal year
ended March 31, 1999. No significant changes have occurred during the second
quarter of fiscal 2000.
- ------------------------------------------------------------------------------
-19-
<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
(a) Exhibits:
27 Financial Data Schedule - September 30, 1999
(b) Reports on Form 8-K:
None.
- ------------------------------------------------------------------------------
-20-
<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.
LEINER HEALTH PRODUCTS INC.
By: /s/ MICHAEL S. YUSKO
---------------------------
Michael S. Yusko
Vice President and
Chief Financial Officer
Date: November 15, 1999
- ------------------------------------------------------------------------------
-21-
<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, 1999 AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1999. 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-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 2,339
<SECURITIES> 0
<RECEIVABLES> 78,939
<ALLOWANCES> 3,871
<INVENTORY> 158,669
<CURRENT-ASSETS> 255,222
<PP&E> 94,285
<DEPRECIATION> 35,950
<TOTAL-ASSETS> 390,012
<CURRENT-LIABILITIES> 118,200
<BONDS> 293,687
0
0
<COMMON> 1
<OTHER-SE> (26,375)
<TOTAL-LIABILITY-AND-EQUITY> 390,012
<SALES> 265,398
<TOTAL-REVENUES> 265,398
<CGS> 203,454
<TOTAL-COSTS> 203,454
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,038
<INCOME-PRETAX> (12,334)
<INCOME-TAX> (5,447)
<INCOME-CONTINUING> (6,887)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,887)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
