<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, 2000
COMMISSION FILE NUMBER 333-33121
LEINER HEALTH PRODUCTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3431709
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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, $1.00 PAR VALUE, OUTSTANDING AT AUGUST 9, 2000
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 JUNE 30, 2000
TABLE OF CONTENTS
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<TABLE>
<S> <C> <C>
PART I. Financial Information.............................................................. 3
ITEM 1. Financial Statements ......................................................... 3
Condensed Consolidated Statements of Operations (Unaudited) -
For the three months ended June 30, 2000 and 1999 ............................ 3
Condensed Consolidated Balance Sheets -
As of June 30, 2000 (Unaudited) and March 31, 2000 .......................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the three months ended June 30, 2000 and 1999 ........................... 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 .................. 16
PART II. Other Information ............................................................... 17
SIGNATURE ................................................................................. 18
</TABLE>
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<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
JUNE 30,
----------------------
2000 1999
---------- ---------
<S> <C> <C>
Net sales $130,093 $120,899
Cost of sales 104,618 90,662
-------- --------
Gross profit 25,475 30,237
Marketing, selling and distribution expenses 18,277 18,132
General and administrative expenses 9,782 8,528
Research and development expenses 2,224 1,732
Amortization of goodwill and other intangibles 1,449 419
Closure of facilities - 1,006
Other (income) charges (13,365) 375
-------- --------
Operating income 7,108 45
Loss on investment in joint venture 65 -
Interest expense, net 8,762 7,160
-------- --------
Loss before income taxes (1,719) (7,115)
Benefit for income taxes (752) (3,027)
-------- --------
Net loss $ (967) $ (4,088)
======== ========
</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>
JUNE 30, MARCH 31,
2000 2000
--------------- ----------------
Unaudited Note 1
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 14,349 $ 3,008
Accounts receivable, net 70,644 127,881
Inventories 209,600 175,529
Prepaid expenses and other current assets 13,935 15,049
-------- --------
Total current assets 308,528 321,467
Property, plant and equipment, net 85,866 87,093
Goodwill and other intangibles, net 75,230 76,744
Other noncurrent assets 27,175 24,156
-------- --------
Total assets $496,799 $509,460
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank checks outstanding, less cash on deposit $ 1,939 $ 13,581
Accounts payable 103,607 103,815
Accrued compensation and benefits 16,273 15,380
Other accrued expenses 15,932 15,018
Customer allowances payable 7,037 7,085
Current portion of long-term debt 4,990 5,006
-------- --------
Total current liabilities 149,778 159,885
Long-term debt 337,864 339,066
Other noncurrent liabilities 4,792 4,894
Contingencies
Shareholder's equity:
Common stock 1 1
Capital in excess of par value 21,851 21,851
Accumulated deficit (17,392) (16,425)
Accumulated other comprehensive (loss) income (95) 188
-------- --------
Total shareholder's equity 4,365 5,615
-------- --------
Total liabilities and shareholder's equity $496,799 $509,460
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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PART I ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------------
2000 1999
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (967) $ (4,088)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 3,519 1,992
Amortization 3,654 2,204
Translation adjustment 283 (66)
Changes in operating assets and liabilities, net of effects of acquisition
of business:
Accounts receivable 57,010 42,924
Inventories (34,519) (17,711)
Bank checks outstanding, less cash on deposit (11,589) (2,518)
Accounts payable 130 (7,821)
Customer allowances payable (88) (1,738)
Accrued compensation and benefits 945 (3,244)
Other accrued expenses 1,680 2,885
Income taxes payable/receivable (1,530) (6,097)
Other 1,738 (1,882)
-------------- ---------------
Net cash provided by operating activities 20,266 4,840
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (4,058) (5,151)
Increase in other noncurrent assets (3,961) (2,938)
-------------- ---------------
Net cash used in investing activities (8,019) (8,089)
FINANCING ACTIVITIES:
Net borrowings (payments) under bank revolving credit facility 984 (25,849)
Borrowings under bank term credit facility - 30,000
Payments under bank term credit facility (437) (361)
Payments on other long-term debt (1,158) (443)
-------------- ---------------
Net cash (used in) provided by financing activities (611) 3,347
Effect of exchange rate changes (295) 43
-------------- ---------------
Net increase in cash and cash equivalents 11,341 141
Cash and cash equivalents at beginning of period 3,008 77
-------------- ---------------
Cash and cash equivalents at end of period $ 14,349 $ 218
============== ===============
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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-5-
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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 months ended June 30, 2000 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 adjustments recorded in
connection with the acquisition of assets accounted for under the purchase
method - Note 2) considered necessary for a fair presentation have been
included. Operating results for the three month period ended June 30, 2000
are not necessarily indicative of the results that may be expected for the
year ended March 31, 2001.
The balance sheet at June 30, 2000 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, 2000.
Certain reclassifications have been made to the fiscal 2000 condensed
consolidated financial statements to conform with the fiscal 2001
presentation.
2. ACQUISITION
On December 17, 1999, Leiner Health Products Inc. acquired substantially all
of the assets of Granutec, Inc. ("Granutec"), a manufacturer and distributor
of private label, over-the-counter pharmaceutical drugs ("OTC's") in the
United States, and Vita Health acquired substantially all of the assets of
Stanley Pharmaceuticals Ltd. ("Stanley"), a manufacturer and distributor of
private label, OTC's and vitamin supplement products in Canada, both of which
were subsidiaries of Novopharm Limited of Ontario, Canada ("Novopharm"). The
Company also acquired certain related assets of Novopharm (collectively, the
"Acquisition"). On June 29, 2000, the Company reached a final settlement
agreement with Novopharm on the working capital adjustment provided for in
the acquisition agreement and, as a result, Novopharm will pay the Company
$1,553,000. The Company will record adjustments to the asset allocation
resulting from the settlement in the second quarter of fiscal year 2001.
In connection with the Acquisition, the Company has recorded approximately
$7,015,000 for accrued restructuring charges. The restructuring plan includes
initiatives to integrate the operations of the Company with those of Granutec
and Stanley, and reduce overhead, primarily through the transfer of certain
manufacturing activities to lower cost facilities. The Company expects these
actions to result in a reduction in workforce. Management is in the process
of finalizing its restructuring plans and, accordingly, the amounts recorded
are based on management's current estimate of those costs. The Company will
finalize these plans during fiscal year 2001, and expects the majority of the
restructuring actions to occur in fiscal year 2001 and 2002.
Certain components of the restructuring plan are based on preliminary estimates
that are still being finalized. While the ultimate resolution of these matters
may result in adjustments to the purchase price allocation, management believes
that such amounts will not be materially different from those previously
recorded.
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
2000 2000
--------------- ---------------
<S> <C> <C>
Raw materials, bulk vitamins and packaging materials.......................... $117,351 $ 55,819
Work-in-process............................................................... 14,618 48,604
Finished products............................................................. 77,631 71,106
--------------- ---------------
$209,600 $175,529
=============== ===============
</TABLE>
4. LONG-TERM DEBT
The Company and certain financial institutions have entered into an Amended
and Restated Credit Agreement (the "Credit Agreement" and together with the
subsequent amendments thereto, the "Amended Credit Agreement").
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
4. LONG-TERM DEBT (CONTINUED)
The Amended Credit Agreement provides 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, 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.
Borrowings under the Amended Credit Agreement bear interest at floating rates
that are based on the lender's base rate (9.50% at June 30, 2000), the
lender's Canadian prime rate (7.50% at June 30, 2000), LIBOR (6.78% at June
30, 2000) or the lender's banker's acceptance rate (5.89% at June 30, 2000),
as the case may be, plus an applicable margin, that is itself based on the
Company's leverage ratio (as defined in the Amended Credit Agreement). 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 U.S. and Canadian revolving
credit borrowings, from 1.0% 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 loans under the Term Facility, from 2.625% to
3.25% for LIBOR-based loans, and from 1.625% to 2.25% for alternate base rate
loans. As of June 30, 2000, the Company's weighted average interest rates
were 9.10% for U.S. borrowings and 8.47% for Canadian borrowings. 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.
In order to manage its interest rate risk under the Amended Credit Agreement,
the Company entered into two interest protection agreements. On July 30,
1997, the Company entered into an interest protection arrangement covering
$29,460,000 of its borrowings under the Amended Credit Agreement. Under this
arrangement, the Company obtained a fixed interest rate of 6.17% on LIBOR,
instead of the fluctuating rate as described above. This agreement expired on
July 30, 2000. On October 8, 1999, the Company entered into an interest
protection agreement with respect to $54,000,000 of its indebtedness under
the Amended Credit Agreement, whereby the Company will not pay any lower than
5.94% on LIBOR rates plus applicable margin on the interest payable thereon.
In connection with this agreement, which terminates October 8, 2001, the
Company received $229,500 that is being recorded as a reduction of interest
expense over the period of the agreement.
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 shareholder's equity. The Company was in compliance with all such
financial covenants as of June 30, 2000. As of June 30, 2000, the Company had
$37,864,000 available under its Revolving Facility.
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
4. LONG-TERM DEBT (CONTINUED)
Principal payments on long-term debt as of June 30, 2000 through fiscal 2005 and
thereafter are (in thousands):
<TABLE>
<CAPTION>
Fiscal Year
----------------
<S> <C>
2001 ................................................. $ 4,406
2002 ................................................. 4,628
2003 ................................................. 2,825
2004 ................................................. 111,333
2005 ................................................. 83,518
Thereafter ................................................. 136,144
--------
Total ................................................. $342,854
========
</TABLE>
5. COMPREHENSIVE LOSS
The components of comprehensive loss for the three months ended June 30, 2000
and 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended
June 30,
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net loss.................................................. $ (967) $(4,088)
Foreign currency translation adjustment................... (283) 66
------------ ------------
Comprehensive loss........................................ $(1,250) $(4,022)
============ ============
</TABLE>
6. 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. ("Baird Investment"). 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 on June 30, 2007,
unless Baird Investment ceases to be the managing member of North Castle
Partners I, L.L.C. ("North Castle"), or upon the earliest of June 30, 2007 or
the date that North Castle terminates the agreement.
7. CONTINGENCIES
On September 27, 1999, the Company filed a civil antitrust lawsuit (the
"Antitrust Lawsuit") against certain of its raw material suppliers and other
alleged co-conspirators. The complaint alleges that the defendants conspired
to fix vitamin prices and allocate vitamin production volume and vitamin
customers in the United States. The complaint seeks
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
7. CONTINGENCIES (CONTINUED)
unspecified damages and injunctive relief. After the lawsuit was filed, it
was consolidated, for pre-trial purposes with other similar cases. Based on
the pretrial schedule set forth by the court, the case will not be ready for
trial until approximately April 2002. At the present time, management cannot
predict the outcome of this lawsuit, nor the estimated damages and potential
recovery, if any.
In June 2000, the Company entered into a settlement agreement with one of its
suppliers named in the Antitrust Lawsuit (the "Settlement Agreement").
Pursuant to the terms of the Settlement Agreement, the Company agreed to
release all claims it may have against the supplier based on the Company's
purchases of various vitamins from the supplier and to opt out of any
settlement in connection with a pending class action lawsuit in so far as it
pertains to the supplier.
In exchange for the Company's release and agreement to opt out of any
settlement in the pending class action lawsuit, the Company received a
settlement payment on June 30, 2000 of approximately $16,734,000, net of
legal fees of approximately $188,000, which is recorded in other operating
(income) charges in the accompanying Statement of Operations for the quarter
ended June 30, 2000. In addition, the Company incurred approximately
$1,680,000 of consulting expenses paid in connection with the lawsuit and a
bonus payment of $1,150,000 awarded to certain of the Company's key
management personnel in recognition of the effect of antitrust activity on
prior years' compensation.
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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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
8. BUSINESS SEGMENT INFORMATION
The Company operated in two reportable segments. One represents the Company's
U.S. operations, including Granutec ("Leiner U.S.") and the other represents
the Company's Canadian operations, including Stanley ("Vita Health"). The
Company's operating segments manufacture a range of vitamins, minerals and
nutritional supplements and OTC's 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 inter-segment profit.
Selected financial information for the Company's reportable segments for the
three months ended June 30, 2000 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
LEINER VITA INTERSEGMENT CONSOLIDATED
U.S. HEALTH ELIMINATIONS TOTALS
------------------ ------------------ ------------------- ----------------
<S> <C> <C> <C> <C>
THREE MONTHS ENDED JUNE 30, 2000:
Net sales $111,433 $ 20,233 $ (1,573) $130,093
Depreciation and amortization 6,334 839 - 7,173
Segment operating income 6,370 738 - 7,108
Interest expense, net 8,152 610 - 8,762
Income tax (benefit) expense (813) 61 - (752)
Segment assets 436,046 60,764 (11) 496,799
Expenditures for long-lived assets 3,827 231 - 4,058
THREE MONTHS ENDED JUNE 30, 1999:
Net sales 110,183 10,944 (228) 120,899
Depreciation and amortization 3,990 206 - 4,196
Segment operating income (893) 932 6 45
Interest expense, net 6,755 405 - 7,160
Income tax (benefit) expense (3,289) 262 - (3,027)
Segment assets 380,369 30,870 (1,385) 409,854
Expenditures for long-lived assets 4,563 588 - 5,151
</TABLE>
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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
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 June 30, 2000
("first quarter of fiscal 2001") and the significant developments affecting
its financial condition since March 31, 2000. The operating results of the
acquired operations for Granutec, Inc. ("Granutec") and Stanley
Pharmaceuticals Ltd. ("Stanley") are included in the Company's financial
statements. 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, 2000, which are included in the Company's Annual Report
on Form 10-K, on file with the Securities Exchange Commission.
ACQUISITION
On December 17, 1999, Leiner Health Products Inc. acquired substantially all
of the assets of Granutec, Inc. ("Granutec"), a manufacturer and distributor
of private label, over-the-counter pharmaceutical drugs ("OTC's") in the
United States, and Vita Health acquired substantially all of the assets of
Stanley Pharmaceuticals Ltd. ("Stanley"), a manufacturer and distributor of
private label, OTC's and vitamin supplement products in Canada, both of which
were subsidiaries of Novopharm Limited of Ontario, Canada ("Novopharm"). The
Company also acquired certain related assets of Novopharm (collectively, the
"Acquisition"). On June 29, 2000, the Company reached a final settlement
agreement with Novopharm on the working capital adjustment provided for in
the acquisition and, as a result, Novopharm will pay the Company $1.6
million. The Company will record adjustments to the asset allocation
resulting from the settlement in the second quarter of fiscal year 2001.
In connection with the Acquisition, the Company has recorded approximately
$7.0 million for accrued restructuring charges. The restructuring plan
includes initiatives to integrate the operations of the Company with those of
Granutec and Stanley, and reduce overhead, primarily through the transfer of
certain manufacturing activities to lower cost facilities. The Company
expects these actions to result in a reduction in workforce. Management is in
the process of finalizing its restructuring plans, and, accordingly, the
amounts recorded are based on management's current estimate of those costs.
The Company will finalize these plans during fiscal year 2001, and expects
the majority of the restructuring actions to occur in fiscal year 2001 and
2002.
Certain components of the restructuring plan are based on preliminary estimates
that are still being finalized. While the ultimate resolution of these matters
may result in adjustments to the purchase price allocation, management believes
that such amounts will not be materially different from those previously
recorded.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(continued)
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 its 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 months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
---------------------------------
THREE MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales.......................................... 100.0% 100.0%
Cost of sales...................................... 80.4 75.0
------- ------
Gross profit....................................... 19.6 25.0
Marketing, selling and distribution expenses....... 14.1 15.0
General and administrative expenses................ 7.5 7.1
Research and development expenses.................. 1.7 1.4
Amortization of goodwill and other intangibles..... 1.1 0.4
Closure of facilities.............................. -- 0.8
Other (income) charges............................. (10.3) 0.3
------- ------
Operating income................................... 5.5 --
Loss from investment in joint venture.............. 0.1 --
Interest expense, net.............................. 6.7 5.9
------- ------
Loss before income taxes........................... (1.3) (5.9)
Benefit for income taxes........................... 0.6 2.5
------- ------
Net loss........................................... (0.7)% (3.4)%
======= ======
</TABLE>
Net sales for the first quarter of fiscal 2001 were $130.1 million, an increase
of $9.2 million, or 7.6% versus the first quarter of fiscal 2000. This increase
was due to the Acquisition, which provided an additional $30.6 million primarily
from sales of OTC's. Excluding sales generated by Granutec and Stanley, net
sales decreased $21.4 million compared to the prior year. The decrease in net
sales excluding Granutec and Stanley was primarily in the vitamin category. This
reflects a general slowdown in the overall U.S. vitamin market for food, drug
and mass merchandisers ("FDM Market") in the first quarter of fiscal 2001 versus
the comparable period in fiscal year 2000. Management estimates that the FDM
Market declined approximately 7.7% in the 13 week period ended June 25, 2000
versus the comparable period in 1999 which had grown by approximately 9.0%.
Management plans to focus on the development of new product programs to attract
consumers from specialty retail channels to existing customer stores.
Gross profit for the first quarter of fiscal 2001 was $25.5 million, a decrease
of $4.7 million, or 15.8%, from $30.2 million in the first quarter of fiscal
2000. Gross profit margin was 19.6% for the first quarter of fiscal 2001, down
from 25.0% in the first quarter of the prior fiscal year. The increase in sales
volume generated as a result of the Acquisition provided additional gross profit
of $5.7 million, which was offset by the gross profit reduction of $7.2 million
from decreased sales, primarily vitamin sales, in the Company's other
operations. Additional regulatory and internal quality requirements for the
production and packaging of pharmaceutical drug products versus vitamin
products, generated lower gross profit margin in the three months ended June 30,
2000 versus the three months ended June 30, 1999. The significant shift in
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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)
the Company's product mix from the first quarter of fiscal year 2000 to
the first quarter of fiscal year 2001, due to the Acquisition and the
continuing slowdown in the vitamin market, was the primary reason for the
decrease in the gross profit margin.
Marketing, selling and distribution expenses, together with general and
administrative expenses, and research and development expenses (collectively,
"Operating Expenses") increased by $1.9 million, or 6.7% for the first
quarter of fiscal 2001 as compared to the comparable period in fiscal 2000.
Excluding Operating Expenses for Granutec and Stanley, Operating Expenses for
the Company were $27.3 million for the first quarter of fiscal 2001,
representing a decrease of $1.1 million or 3.8% over the first quarter of
fiscal 2000. Operating Expenses for Granutec and Stanley were $3.0 million
during the first quarter of fiscal year 2001. As a percentage of net sales,
Operating Expenses were 23.3% during the three months ended June 30, 2000,
slightly lower than 23.5% during the comparable period in fiscal year 2000.
The decrease in Operating Expenses as a percentage of net sales was the
result of lower fixed spending on consultants and advertising.
Amortization of goodwill and other intangibles increased by $1.0 million in
the first quarter of fiscal year 2001 versus the first quarter of fiscal year
2000, primarily as a result of the Acquisition.
During the first quarter of fiscal 2001, the Company recorded $13.4 million
of other income compared to other charges of $0.4 million in the three months
ended June 30, 1999. This change was primarily attributable to other income
generated by a settlement arising from a supplier dispute in the amount of
$16.7 million, which is net of legal fees of approximately $0.2 million. In
connection with this settlement, the Company incurred approximately $1.7
million of consulting expenses, and awarded a bonus of approximately $1.1
million to certain of the Company's key management personnel in recognition
of the effect of antitrust activity on prior years' compensation. Other
operating (income) charges also includes management fees of $0.4 million and
other operating charges of $0.1 million.
In the first quarter of fiscal 2001, net interest expense of $8.8 million
represents an increase of $1.6 million from the first quarter of fiscal 2000.
This increase in the three months ended June 30, 2000 was due primarily to an
increase in the average outstanding indebtedness of the Company due to the
Acquisition and, to a lesser degree, an increase in interest borrowing rates.
The benefit for income taxes for the first quarter of fiscal 2001 was $0.8
million, compared to a $3.0 million benefit in the first quarter of fiscal
2000. Based on the latest estimates, the Company expects its effective tax
rate to be approximately 52% for the remainder of fiscal 2001, 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 $1.0
million was recorded in the first quarter of fiscal 2001 compared to a net
loss of $4.1 million in the first quarter of fiscal 2000.
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PART I ITEM 2
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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 $13.7 million for the first quarter of fiscal 2001, compared to $4.8
million in the comparable period in fiscal 2000. EBITDA can be calculated
from the financial statements with the exception of the amortization of
deferred debt issuance costs totaling $0.5 million and $0.4 million for the
three months ended June 30, 2000 and 1999, 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 $170.4 million in term loans outstanding as of June 30, 2000 under
the Amended Credit Agreement (defined below) by December 30, 2005 with
scheduled principal payments of $1.3 million for fiscal 2001, $1.7 million
for fiscal 2002 and 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 50% of its excess cash flow (as
defined in the Amended Credit Agreement) unless a leverage ratio test is 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 three months of fiscal year 2001, net cash provided by
operating activities totaled $20.3 million. This resulted primarily from a
net loss of $1.0 million combined with $7.5 million of non cash charges to
operations and changes in operating assets and liabilities totaling $13.8
million. Changes in operating assets and liabilities are comprised of
collections of accounts receivable of $57.0 million, and an increase of $2.8
million in accounts payable and other accrued expenses net of, a decrease in
the bank checks outstanding of $11.6 million, and an increase in inventory
spending of $34.5 million. The decrease in accounts receivable and increase
inventory is due primarily to the seasonality of the Company's business
whereby sales are normally higher in the fourth quarter of the fiscal year.
During the first three months of fiscal year 2001, net cash used in investing
activities totaled $8.0 million. This was primarily due to net capital
expenditures of $4.1 million, and a $2.2 million investment in a joint
venture. The major capital expenditures related to investments in capacity
expansion at the Company's manufacturing, packaging and distribution facility
in South Carolina.
Net cash used in financing activities during the first quarter of fiscal year
2001 totaled $0.6 million, which primarily related to the payment of the
Company's long term debt.
In June 2000, the Company entered into a settlement agreement with one of its
suppliers named in the Antitrust Lawsuit. Pursuant to the terms of the
Settlement Agreement, the Company agreed to release all claims it may have
against the supplier based on the Company's purchases of various vitamins
from the supplier and to opt out of any settlement in connection with a
pending class action lawsuit in so far as it pertains to the supplier.
In exchange for the Company's release and agreement to opt out of any
settlement in the pending class action lawsuit, the Company received a
settlement payment on June 30, 2000 of approximately $16.7 million, net of
legal fees of approximately $0.2 million, which is recorded in other
operating (income) charges in the accompanying Statement of Operations and
generated a positive impact in the Company's working capital during the three
months ended June 30, 2000.
FINANCING ARRANGEMENTS
The Company and certain financial institutions have entered into an Amended
and Restated Credit Agreement (the "Credit Agreement" and together with the
subsequent amendments thereto the "Amended Credit Agreement").
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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)
The Amended Credit Agreement provides for one U.S. term loan due December 30,
2004 in the amount of $68.0 million, two U.S. term loans due December 30,
2005 in the amounts of $65.0 million and $30.0 million, respectively, a
Canadian dollar denominated term loan due December 30, 2004 in the amount of
approximately U.S. $12.0 million (collectively, the "Term Facility"), and a
revolving credit facility in the amount of U.S. $125.0 million (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 August 8, 2000, the
Company's unused availability under the Amended Credit Agreement was
approximately $28.3 million.
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
in the Amended Credit Agreement), plus applicable margins, and accordingly
the Company's financial condition and performance is and will continue to be
affected by changes in interest rates. The Company entered into an interest
protection arrangement effective July 30, 1997 with respect to $29.5 million
of its indebtedness under the Amended Credit Agreement that provides a fixed
rate of 6.17% on LIBOR. The agreement expired on July 30, 2000. On October 8,
1999, the Company entered into an interest protection agreement, with respect
to $54.0 million of its indebtedness under the Amended Credit Agreement,
whereby the Company will not pay any lower than 5.94% on LIBOR rates plus
applicable margin on the interest payable thereon. In connection with this
transaction, the Company received approximately $0.2 million that is being
recorded as a reduction of interest expense over the period of the agreement,
which terminates October 8, 2001. 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 in the indenture) 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. $28.5 million as of June 30, 2000, 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.
At June 30, 2000, borrowings under the Amended Credit Agreement bore interest
at a weighted average rate of 9.1% for U.S. borrowings and 8.47% for Canadian
borrowings per annum. The Notes bear interest at a rate of 9.6% per annum.
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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)
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 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.
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, 2000 (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.
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<PAGE>
PART I ITEM 3
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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, 2000. No significant changes have occurred during the first
quarter of fiscal 2001.
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<PAGE>
PART II OTHER INFORMATION
--------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
The information in Note 7 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 - June 30, 2000
(b) Reports on Form 8-K:
None
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<PAGE>
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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/ STEPHEN P. MILLER
------------------------
Stephen P. Miller
Senior Vice President and
Chief Financial Officer
Date: August 14, 2000
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