<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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: April 3, 1999 Commission File Number: 0-18671
NUTRAMAX PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 061200464
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
51 Blackburn Drive, Gloucester, Massachusetts 01930
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 282-1800
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
----- -----
As of April 29, 1999 there were 7,156,266 shares of Common Stock, par value
$.001 per share, outstanding.
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
Thirteen Weeks Ended April 3, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Thirteen and Twenty Six Weeks ended April 3, 1999 and
Thirteen and Twenty Seven Weeks ended April 4, 1998 (Unaudited) 4
Condensed Consolidated Balance Sheets -
April 3, 1999 (Unaudited) and October 3, 1998 5
Condensed Consolidated Statements of Cash Flows -
Twenty Six Weeks ended April 3, 1999 and
Twenty Seven Weeks ended April 4, 1998 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Item 7A. Quantitative and qualitative disclosure about market risk 16
Signatures 17
2
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
Thirteen Weeks Ended April 3, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Seven
Ended Ended Weeks Ended Weeks Ended
-------------- -------------- ----------- ------------
April 3, 1999 April 4, 1998 April 3, 1999 April 4, 1998
-------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
NET SALES $ 31,569 $ 30,829 $62,722 $62,765
COST OF SALES 23,420 22,934 46,316 46,361
-------- -------- ------- -------
GROSS PROFIT 8,149 7,895 16,406 16,404
SELLING, GENERAL & ADMINISTRATIVE EXPENSES 5,088 4,908 9,790 9,604
-------- -------- ------- -------
OPERATING INCOME 3,061 2,987 6,616 6,800
OTHER INCOME (EXPENSE):
Interest expense (1,788) (1,977) (3,656) (4,194)
Interest income 4 5 24 10
Other 13 6 61 8
-------- -------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 1,290 1,021 3,045 2,624
INCOME TAX EXPENSE 490 360 1,157 995
-------- -------- ------- -------
INCOME FROM CONTINUING OPERATIONS 800 661 1,888 1,629
-------- -------- ------- -------
DISCONTINUED OPERATIONS:
Loss from operations of Optopics Division to
be divested (net of income tax benefit) (243) (37) (528) (195)
Estimated loss on divestiture of Optopics Division
including a provision of $1,166 for operating losses
during the phase-out period (net of tax benefit
of $3,311) (5,401) - (5,401) -
-------- -------- ------- -------
(5,644) (37) (5,929) (195)
-------- -------- ------- -------
NET INCOME/(LOSS) $ (4,844) $ 624 (4,041) $ 1,434
BASIC EARNINGS PER SHARE:
EPS from Continuing Operations $ 0.11 $ 0.12 $ 0.30 $ 0.29
======== ======= ======= =======
Loss per Share from Discontinued Operations $ (0.79) $ (0.01) $ (0.93) $ (0.03)
======== ======= ======= =======
Total Basic Earnings (Loss) per Share $ (0.68) $ 0.11 $ (0.63) $ 0.25
======== ======= ======= =======
DILUTED EARNINGS PER SHARE:
EPS from Continuing Operations $ 0.11 $ 0.11 $ 0.29 $ 0.28
======== ======= ======= =======
Loss per Share from Discontinued Operations $ (0.79) $ (0.01) $ (0.93) $ (0.03)
======== ======= ======= =======
Total Diluted Earnings (Loss) per Share $ (0.68) $ 0.11 $ (0.63) $ 0.25
======== ======= ======= =======
Weighted average shares outstanding 7,120 5,648 6,396 5,634
Effect of dilutive securities:
Stock options 87 - 81
Warrants 37 82 37 78
-------- -------- ------- -------
Adjusted weighted average shares 7,157 5,817 6,433 5,793
======== ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 3, October 3,
1999 1998
-------- --------
(Unaudited) (See Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 553 $ 821
Accounts receivable, net 16,146 17,275
Inventories 28,573 30,788
Deferred income taxes 1,263 1,263
Escrow receivable -- 200
Refundable income taxes 1,700 2,800
Prepaid expenses and other 4,108 2,992
Assets to be divested 5,134 6,040
-------- --------
TOTAL CURRENT ASSETS 57,477 62,179
PROPERTY, PLANT AND EQUIPMENT, net 40,757 41,770
ASSETS TO BE DIVESTED 7,798 8,014
RESTRICTED CASH 899 413
GOODWILL, net 21,030 21,462
OTHER ASSETS 5,186 4,913
-------- --------
$133,147 $138,751
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,249 $ 13,758
Accrued payroll and related taxes 1,185 1,256
Accrued Interest 758 656
Accrued expenses - other 1,424 1,690
Current maturities of long-term debt 8,236 14,920
Reserve for discontinued operations 5,279 --
-------- --------
TOTAL CURRENT LIABILITIES 26,131 32,280
Long-Term Debt, less current maturities 80,059 81,625
Deferred Income Taxes and Other Liabilities 3,652 3,652
STOCKHOLDERS' EQUITY 23,305 21,194
-------- --------
$133,147 $138,751
======== ========
</TABLE>
Note: The balance sheet at October 3, 1998 has been condensed from the audited
financial statements at that date.
See notes to condensed consolidated financial statements.
5
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Twenty-Seven
Twenty-Six Weeks Weeks Ended April
Ended April 3, 1999 4, 1998
--------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations 1,888 1,629
Adjustments to reconcile net income from continuing operations
to net cash provided by operating activities:
Non cash items primarily depreciation and amortization 3,548 3,222
Increase (decrease), net of effect of acquisitions:
Accounts receivable 1,129 3,724
Inventories 2,215 (5,900)
Refundable income taxes 300
Accounts payable (4,509) (772)
Pre-paid, accrued expenses and other (551) 102
----------- ------------
Net cash provided by continuing operations 4,020 2,005
CASH FLOWS FROM DISCONTINUED OPERATIONS:
Loss from discontinued operations (5,929) (195)
Changes in operating assets and liabilities 6,401 (1,034)
----------- ------------
Net Cash provided by (used in) discontinued operations 472 (1,229)
----------- ------------
Net cash provided by operating activities 4,492 776
CASH FLOWS FROM INVESTING ACTIVITIES:
Escrow cash received 200 (550)
Restricted Cash (486) (471)
Purchases of property, plant and equipment (1,302) (4,908)
Deferred packaging costs (320) (625)
Other - (652)
----------- ------------
Net cash used in investing activities (1,908) (7,206)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under Revolving Credit Facility and
other Long Term Debt - 7,545
Stock issued in private placement - net 6,113 -
Stock Repurchase - (126)
Proceeds from exercise of stock options - 583
Debt Repayments (8,421) (1,471)
Deferred Financing Costs (661) (181)
Other 117 81
----------- ------------
Net cash provided by (used in) financing activities (2,852) 6,431
----------- ------------
NET INCREASE (DECREASE) IN CASH $ (268) $ 1
CASH:
Beginning of period $ 821 $ 227
----------- ------------
End of period $ 553 $ 228
----------- ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid $ 376 $ 99
----------- ------------
Interest paid $ 3,619 $ 5,029
----------- ------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING & INVESTING ACTIVITIES:
Stock issued for 401k and profit sharing contributions $ 39 $ -
----------- ------------
Equipment financed with capital lease obligations $ 93 $ -
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note A - Basis of Presentation
The condensed consolidated balance sheet of NutraMax Products, Inc. and
Subsidiaries (the "Company") as of April 3, 1999, the condensed consolidated
statements of operations for the thirteen and twenty-six weeks ended April 3,
1999 and the thirteen and twenty-seven weeks ended April 4, 1998, and the
condensed consolidated statements of cash flows for the twenty-six weeks ended
April 3, 1999 and the twenty-seven weeks ended April 4, 1998 have been prepared
by the Company without audit. In the opinion of the Company, all adjustments
(consisting only of normal, recurring adjustments) necessary to present fairly
the financial position, results of operations and cash flows at April 3, 1999,
and for all periods presented, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. These condensed financial statements should
be read in conjunction with the financial statements and notes thereto included
in the Company's October 3, 1998 Annual Report on Form 10-K. The results of
operations for the period ended April 3, 1999 are not necessarily indicative of
the operating results for the full year.
Note B - Inventory
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
<TABLE>
<CAPTION>
April 3, 1999 October 3, 1998
------------------- ---------------
<S> <C> <C>
Raw materialsn $12,857,000 $13,530,000
Finished goods 12,623,000 14,415,000
Work-in-process 961,000 823,000
Machine parts and factory supplies 2,132,000 2,020,000
----------- -----------
$28,573,000 $30,788,000
=========== ===========
</TABLE>
7
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note C - Debt
The Company's Revolving Credit Facility of $25,000,000 had an outstanding
balance of $19,345,000 on April 3, 1999. For the second quarter of fiscal 1999,
the average interest rate on amounts outstanding under the Revolving Credit
Facility was 7.9% based on LIBOR plus 2.5% and a floating base rate based on the
Prime Rate. The Revolving Credit Facility expires on January 1, 2002.
A summary of Debt outstanding as of April 3, 1999 is as follows:
<TABLE>
<S> <C>
Revolving Credit Facility $19,345,000
Term Loans 50,098,000
Subordinated Debt 9,293,000
Industrial Development Bonds 6,100,000
MEDIQ Note 302,000
Mortgages 2,725,000
Capital Lease Obligation 432,000
-----------
$88,295,000
Less: Current maturities of long-term debt 8,236,000
-----------
Long Term Debt $80,059,000
===========
</TABLE>
The agreements evidencing the Senior Debt and the Senior Subordinated Debt
contain certain restrictive covenants including, among others, covenants with
respect to the ratio of total debt to EBITDA, operating cash flows, interest
coverage, capital expenditures, and covenants which prevent the payment of
dividends. On December 29, 1998, the Company executed amendments to its
existing senior and subordinated credit agreements (the "Credit Facility
Amendments"), including amendments to the financial covenants for total debt to
EBITDA, operating cash flows, minimum interest coverage and minimum net worth.
The Company entered into the Credit Facility Amendments in order to permit the
Company to operate without likelihood of default in the foreseeable future. Due
to the financial impact of the discontinued operation, the Company was in
default of its minimum net worth covenant as of April 3, 1999. The Company's
Senior Lender has orally agreed to waive and amend the minimum net worth
covenant in order to permit the Company to operate without likelihood of default
in the foreseeable future.
Note D - Comprehensive Income
The Company adopted SFAS No. 130 effective October 4, 1998. There are no
components of comprehensive income for the periods presented.
Note E - Adoption of New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement, which establishes
standards for the reporting of information about operating segments and requires
the reporting of selected information about operating segments in interim
financial statements, is effective for fiscal years beginning after December 15,
1997, although earlier application is permitted. Reclassification of segment
information for earlier periods presented for comparative purposes is required
under SFAS No. 131. The Company is currently assessing the reporting impact of
this statement. The Company adopted SFAS No. 131 effective October 4, 1998.
8
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The new standard requires that all
companies record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. Management is currently
assessing the impact of SFAS No. 133 on the consolidated financial statements of
the Company. The Company expects to adopt this accounting standard in its
second quarter of its fiscal year ending in September 2000.
Note F - Income Taxes
The provision for income tax expense for the twenty-six weeks ended April 3,
1999 has been computed using an estimated effective tax rate for the year ended
October 2, 1999.
Note G - Litigation and Contingencies
The Company has been named as a defendant in several legal proceedings which
have arisen in the normal course of business. Although the amount of damages
that could result from any litigation cannot be predicted, in the opinion of
management, the Company's potential liability on all known claims would not have
a material adverse effect on the consolidated financial position, cash flows or
results of operations of the Company.
On February 9, 1999, the Commonwealth of Massachusetts Department of Revenue
("DOR") assessed the Company $392,000, including interest and penalties,
relating to tax audits for fiscal years ending 1992 through 1994. Tax years
1995 and 1996 remain open. The amount relates principally to the deductibility
of certain expenses related to the Company's wholly-owned subsidiary, NutraMax
Holdings, Inc., a Delaware corporation. The Company has paid the assessment,
interest and penalties and is awaiting a decision on a similar case currently
being heard in the Massachusetts court system. In the event of a favorable
outcome in this similar case, the Company will seek an appeal of its assessment.
Note H - Commitments
Leases - The Company leases certain of its administrative, manufacturing,
distribution and warehouse facilities under operating leases. The Company also
leases certain equipment under operating and capital leases. The Company's
annual future minimum payments with respect to operating and capital leases are
approximately $1,400,000 and $127,000, respectively.
Note I - Private Placement
On January 13, 1999, the Company completed a private placement transaction under
Section 4(2) of the Securities Act with Cape Ann Investors, L.L.C., the
Company's largest stockholder, Donald E. Lepone, the Chief Executive Officer,
President and a Director of the Company, and Bernard J. Korman, the Chairman of
the Board of the Company. Pursuant to the private placement, which was approved
by the Company's shareholders at the annual meeting held on January 12, 1999,
the Company issued and sold an aggregate of 1,441,860 shares of the Company's
common stock at a price per share of $4.30, for an aggregate purchase price of
$6,200,000. The purchase price of $4.30 per share represented a premium of 11%
to the closing price per share on October 21, 1998, the date on which the Board
of Directors of the Company agreed in principle to the terms of the private
placement. The proceeds of the private placement were used to pay $4,500,000 of
indebtedness outstanding under its senior credit facilities and $1,039,000 of
trade payables as required by the Credit Facility Amendments. The remainder of
the proceeds were used to pay amendment fees associated with Senior Debt and the
Senior Subordinated Debt.
9
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note J - Discontinued Operations
On February 23, 1999(the "Measurement Date"), the Company formalized its
decision to divest Optopics Laboratories Corporation, its Opthalmics division
located in Fairton, New Jersey. The Opthalmics division is a FDA compliant
manufacturing facility, with a fully validated sterile products filling line
capable of producing more than 20 million units of small volume bottles The
Company has retained the services of Prospection International for purposes of
selling this manufacturing division. Management intends to sell the Optopics
division by the end of September 1999, however, there can be no assurance that
such a sale will occur within the intended time period. The Optopics Division
represented a separate line of business and, accordingly, its net operating
results have been reported, net of applicable income taxes, as discontinued
operations for all periods up through the Measurement Date. The book value of
assets to be sold is approximately $13,000,000 as of April 3, 1999 and consist
primarily of Property, Plant & Equipment, Intangible assets and Inventory. Net
sales and cost of sales of the discontinued operation, from the Measurement Date
to the balance sheet date was approximately $720,000 and $798,000, respectively.
Selling, general and administrative expenses of the discontinued operation
approximated $90,000 and interest expense was $28,000. The operating loss before
income tax benefit of the discontinued operation was $196,000 and the net
operating loss was $122,000.
Note K - Subsequent Event
Due to the financial impact of the discontinued operation, the Company was in
default of its minimum net worth covenant as of April 3, 1999. The Company's
Senior Lender has orally agreed to waive and amend the minimum net worth
covenant in order to permit the Company to operate without likelihood of default
in the foreseeable future.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
The following discussion addresses the financial condition of the Company as of
April 3, 1999 and its results of operations for the thirteen weeks then ended,
compared with the respective fourteen week period of last year. As more fully
described in Note J to the Consolidated Financial Statements, the Company
formalized its plan to dispose of its Optopics Division. This discussion
reflects the fact that in accordance with generally accepted accounting
principles, the Company is reporting the results of operations from the Optopics
Division as discontinued operations and that the Company's Consolidated
Financial Statements for the periods presented, including prior periods, have
been revised to reflect this accounting treatment of the Optopics Division in
those periods. The following discussion should be read in conjunction with the
Management's Discussion and Analysis section included in the Company's Annual
Report on Form 10-K, for the year ended October 3, 1998 to which the reader is
directed for additional information.
Some of the information presented in this report contains forward looking
statements within the meaning of Section 27A of the Securities Section 21E of
the Exchange Act. Although the Company believes that its expectations are based
on reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance that actual results will not differ
materially from those set fourth in the forward-looking statements. Certain
factors that might cause such a difference include the following: the timing of
new products introduced by the Company, the timing of orders received from
customers, the gain or loss of significant customers, changes in the products
sold, competition from brand name and other private label manufacturers,
seasonal changes in the demand for the Company's products, increases in the cost
of raw materials, changes in the retail market for health and beauty aids in
general, expenses or delays incurred in connection with the identification and
upgrade or replacement by the Company of its non-year 2000 compliant systems,
including embedded technology, the year 2000 compliance of material third
parties and the ability of the Company to divest the Optopic division on
satisfactory terms within the intended time period. For additional information
concerning these and other important factors which may cause the Company's
actual results to differ materially from expectations and underlying
assumptions, please refer to the Company's Annual Report on Form 10-K for the
year ended October 3, 1998 and other reports filed with the Securities and
Exchange Commission.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
relationship that items in the Company's Condensed Consolidated Statements of
Operations bear to net sales.
<TABLE>
<CAPTION>
Thirteen Weeks Thirteen Weeks Twenty-Six Twenty-Seven
Ended Ended Weeks Ended Weeks Ended
------------- -------------- ----------- ------------
April 3, 1999 April 4, 1998 April 3, 1999 April 4, 1998
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES 100% 100% 100% 100%
COST OF SALES 74 74 74 74
------------- -------------- ----------- ------------
GROSS PROFIT 26 26 26 26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 16 16 16 15
------------- -------------- ----------- ------------
OPERATING INCOME 10 10 10 11
OTHER EXPENSE 6 7 5 7
------------- -------------- ----------- ------------
INCOME BEFORE INCOME TAX EXPENSE 4 3 5 4
INCOME TAX EXPENSE 1 1 2 1
------------- -------------- ----------- ------------
NET INCOME 3% 2% 3% 3%
============= ============== =========== ============
</TABLE>
Second Quarter 1999 Compared to Second Quarter 1998
Net sales for the second quarter ended April 3, 1999 were $31,569,000, an
increase of $740,000, or 2%, from second quarter 1998 net sales of $30,829,000.
Although sales were consistent quarter over quarter, the Company experienced a
19% increase in Cough/Cold product sales which off-set slight sales declines in
most other product categories.
11
<PAGE>
Gross profit for the second quarter of 1999 was $8,149,000 or 26% of net sales,
as compared to $7,895,000 or 26% of net sales for the prior year's quarter.
Gross margins are comparable to the same quarter of the prior year.
Selling, general and administrative expenses for second quarter of 1999 were
$5,088,000, or 16% of net sales, as compared to $4,908,000 or 16% of net sales
for the prior year's second quarter. Selling, general and administrative
expenses are comparable to the same quarter of the prior year.
Interest expense for the second quarter of 1999 was $1,788,000 as compared to
$1,977,000 in the prior year's second quarter. This decrease is a result of the
decrease in debt outstanding combined with a reduction in interest rates.
The effective income tax rate for the second quarter of fiscal 1999 was 38%
which is 3% higher than the prior year's second quarter. The increase is a
result of the Company's implementation of certain state tax planning strategies
in 1998 which required an adjustment in the second quarter of fiscal 1998 in
order to reduce the cumulative effective tax rate to 38%. The effective tax
rate of 38% recorded in the second quarter of 1999 is consistent with the
estimated annual effective tax rate for 1999.
The estimated loss from the discontinued operation was $5,644,000 for the second
quarter of 1999, which includes an operating loss of $243,000 from the
discontinued operation prior to the Measurement Date. The loss from the
discontinued operation was $37,000 for the second quarter of 1998.
Twenty-Six Weeks ended April 3, 1999 Compared to Twenty-Seven Weeks
Ended April 4, 1998
Net Sales for the twenty-six weeks ended April 3, 1999 were $62,722,000, a
decrease of $43,000, or 0.1% from the twenty-seven week period ended April 4,
1998 sales of $62,765,000. Although net sales for the twenty-six week period
are consistent with the similar period in 1998, net sales are up approximately
4% on a twenty-six week comparative basis. The increase is primarily
attributable to strong sales in cough/cold products off-set by slight declines
in most other product categories.
Gross profit for the twenty-six week period in 1999 was $16,406,000 or 26% of
net sales, compared to $16,404,000 or 26% of net sales for the twenty-seven week
period last year. Gross margins are comparable to the same period of the prior
year.
Selling, general and administrative expenses for the twenty-six week period in
1999 was $9,790,000 or 16% of net sales, compared to $9,604,000 or 15% of net
sales for the twenty-seven week period last year. Selling, general and
administrative expenses are consistent with the same period of the prior year.
Interest expense for the twenty-six week period in 1999 was $3,656,000 or 6% of
net sales, compared to $4,194,000 or 7% of net sales for the twenty-seven week
period last year. This decrease is a result of the decrease in debt outstanding
combined with a reduction in interest rates.
The effective income tax rate for the quarter was 38% which is consistent with
the comparable prior year period.
The estimated loss from the discontinued operation was $5,929,000 for the
twenty-six weeks ended April 3, 1999, which includes an operating loss of
$528,000 from the discontinued operation prior to the Measurement Date. The
loss from the discontinued operation was $195,000 for the twenty-seven weeks
ended April 4, 1998.
12
<PAGE>
Liquidity and Capital Resources
As of April 3, 1999, the Company had working capital of $31,346,000 as compared
to working capital of $29,899,000 as of October 3, 1998. The increase in
working capital was primarily attributable to decreased accounts payable and a
decrease in the current portion of long-term debt as well as an increase in pre-
paid and other current assets.
Net cash provided by operating activities was $4,492,000 for the twenty-six
weeks ended April 3, 1999, as compared to $776,000 provided by operating
activities for the twenty-seven weeks ended April 4, 1998. This increase was
primarily attributable to a reduction in inventory offset slightly by a
reduction in accounts payable.
Net cash used in investing activities was $1,908,000 for the thirteen weeks
ended April 3, 1999, consisting primarily of funds used for purchases of capital
equipment. The Company anticipates incurring additional capital expenditures of
less than $1,000,000 for the remainder of fiscal 1999. These expenditures
relate primarily to maintenance of the Company's current manufacturing capacity.
These expenditures are expected to be financed through cash generated from
operations.
Net cash used in financing activities was $2,852,000 for the thirteen weeks
ended April 3, 1999, consisting of debt repayments of $8,421,000 and $661,000 of
fees incurred in connection with the amendments to the Company's existing senior
and subordinated debt agreements off-set by net proceeds of $6,113,000 received
in connection with the stock issued in the private placement transaction
discussed below.
On January 13, 1999, the Company completed a private placement transaction under
Section 4(2) of the Securities Act with Cape Ann Investors, L.L.C., the
Company's largest stockholder, Donald E. Lepone, the Chief Executive Officer,
President and a Director of the Company, and Bernard J. Korman, the Chairman of
the Board of the Company. Pursuant to the private placement, which was approved
by the Company's shareholders at the annual meeting held on January 12, 1999,
the Company issued and sold an aggregate of 1,441,860 shares of the Company's
common stock at a price per share of $4.30, for an aggregate purchase price of
$6,200,000. The purchase price of $4.30 per share represented a premium of 11%
to the closing price per share on October 21, 1998, the date on which the Board
of Directors of the Company agreed in principle to the terms of the private
placement. The proceeds of the private placement were used to pay $4,500,000 of
indebtedness outstanding under its senior credit facilities and $1,039,000 of
trade payables as required by the Credit Facility Amendments. The remainder of
the proceeds were used to pay amendment fees associated with Senior Debt and the
Senior Subordinated Debt.
The Company's Revolving Credit Facility of $25,000,000 had an outstanding
balance of $19,345,000 on April 3, 1999. For the second quarter of fiscal 1999,
the average interest rate for amounts outstanding under the Revolving Credit
Facility was 7.9% based on LIBOR plus 2.5% and a floating base rate based on the
Prime Rate. The Revolving Credit Facility expires on January 1, 2002.
The Company believes that its existing working capital, anticipated funds to be
generated from operations, and funds available under the Revolving Credit
Facility will be sufficient to meet the Company's operating and capital needs
during fiscal 1999. However, depending upon future growth of the Company's
business, additional financing may be required.
Year 2000 Compliance
The statements in the following section include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
13
<PAGE>
The Company's State of Readiness - The Company has undertaken an assessment of
the ability of its mission critical information and non-information systems to
function properly with respect to dates in the Year 2000 and thereafter.
Mission critical systems are those systems the failure of which pose a risk of
disruption to the Company's ability to manufacture and ship product, collect
revenue, meet safety standards and comply with legal requirements. The
Company's mission critical information systems include its integrated
manufacturing, accounting, order entry and distribution systems. The Company's
mission critical non-information systems include the machinery and equipment
used to manufacture and distribute its products, its telephone systems and its
alarm and sprinkler systems. The assessment is based upon communications with
software vendors, literature supplied with software, literature received in
connection with maintenance contracts and test evaluations of the Company's
systems. The Company has substantially completed its Year 2000 assessment with
respect to both its mission critical information systems and its mission
critical non-information systems. The Company has also substantially completed
an assessment of the Year 2000 risks of its material third parties as discussed
below.
The Company identified potential problems in its electronic data interface order
entry system. The Company has replaced this software system and has completed
testing of the new system both individually and on an integrated basis in order
to ensure the remediation of all Year 2000 risks. In all other mission critical
information and non-information systems, the Company believes that Year 2000
compliance has been achieved with the existing systems, replacement components
or upgrades of software or embedded technology.
Costs to Remedy the Company's Year 2000 Issues - The Company anticipates that
all future remediation costs will be negligible.
To date, the Company has incurred $175,000 in total Year 2000 remediation costs.
The costs incurred to date are primarily related to the replacement or upgrade
of components, systems and software and the payroll of employees of the
Company's information technology department. The Company does not separately
track the internal costs of its Year 2000 compliance program. The Company's
Year 2000 remediation costs are expensed as incurred.
Year 2000 Risks of Material Third Parties - The Company has substantially
completed the assessment of the Year 2000 risks of third parties with whom the
Company has a material relationship. These material third parties include
vendors, major customers, service suppliers, communications providers and banks.
The Company circulated Year 2000 questionnaires to each of these parties in
order to verify their Year 2000 readiness. In addition, the Company has tested
the interaction of the Company's systems with such third parties' systems where
appropriate. Based upon the foregoing, the Company does not anticipate any
material Year 2000 complications with respect to its material third parties.
Year 2000 Risks: Contingency Plan - It is the Company's belief that the results
of the assessment to date indicate that all of the Company's mission critical
information and non-information systems, including its integrated manufacturing,
accounting, distribution and order entry systems, are Year 2000 compliant, and
that the Year 2000 issue is not likely to have a material impact on the
Company's operations. However, there can be no assurances that such systems, or
that the systems or software of third parties on which the Company relies, will
be compliant or that the Company will not be adversely affected by the failure
of such systems and software to be made Year 2000 compliant.
The Company believes that its most reasonable likely worst case scenario is the
potential loss of electricity or water to one or more of the Company's
manufacturing locations which would inhibit the Company's ability to produce
product and fill orders. In the event major customers experience Year 2000
complications, such customers may become unable to process orders or receive
shipments. As a result, the Company could experience a backlog of inventory and
lost revenue. In the event vendors, service suppliers, communication providers
and banks experience Year 2000 difficulties, the Company's ability to
manufacture, process and ship product maybe impeded and the Company may
experience lost revenues and increased expenses. The Company is not currently
able to
14
<PAGE>
quantify the potential losses upon the occurrence of any of the foregoing;
however, the Company believes that any such occurrence could have a material
adverse effect on the business, operations and financial performance of the
Company.
The Company has developed a contingency plan in the event of certain 2000
complications. Currently, the Company's contingency plan includes a plan to
address isolated utility outages at certain of the Company's facilities. For
example, in the event of a power and water disruption at one or more of the
Company's facilities, the Company will focus its resources towards manufacturing
locations without utility problems until utilities are restored at the affected
locations. If the power is disrupted at the corporate location, the Company
will relocate the Corporate Information System to another manufacturing location
within one week of a power outage. As part of its contingency plan, the Company
will purchase and connect a portable power generator which will provide an
uninterrupted communications link to all Company locations and which will
support the Company's information systems. In addition, the contingency plan
contemplates the manual performance of certain tasks which would otherwise be
automated. The plan also includes maintaining a safety stock of major customer
inventories ranging from 2 - 8 weeks supply prior to the year 2000 which will
allow the Company to service these customer accounts in the event manufacturing
issues arise.
The company is currently unable to ascertain the additional costs it will incur
if it is required to implement its contingency plan. There can be no assurance
that the Company's contingency plan will successfully avoid disruption of the
Company's business and operations or that such disruption would not have a
material adverse effect on the financial performance of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been named as a defendant in several legal proceedings which
have arisen in the normal course of business. Although the amount of damages
that could result from any legal proceedings cannot be predicted, in the opinion
of management, the Company's potential liability on all known claims would not
have a material adverse effect on the consolidated financial position, cash
flows or results of operations of the Company.
On February 9, 1999, the Commonwealth of Massachusetts Department of Revenue
("DOR") assessed the Company $392,000, including interest and penalties,
relating to tax audits for fiscal years ending 1992 through 1994. Tax years
1995 and 1996 remain open. The amount relates principally to the deductibility
of certain expenses related to the Company's wholly-owned subsidiary, NutraMax
Holdings, Inc., a Delaware corporation. The Company has paid the assessment,
interest and penalties and is awaiting a decision on a similar case currently
being heard in the Massachusetts court system. In the event of a favorable
outcome in this similar case, the Company will seek an appeal of this
assessment.
Item 2. Changes in Securities and Use of Proceeds
On January 13, 1999, the Company completed a private placement transaction under
Section 4(2) of the Securities Act with Cape Ann Investors, L.L.C., the
Company's largest stockholder, Donald E. Lepone, the Chief Executive Officer,
President and a Director of the Company, and Bernard J. Korman, the Chairman of
the Board of the Company. Pursuant to the private placement, which was approved
by the Company's shareholders at the annual meeting held on January 12, 1999,
the Company issued and sold an aggregate of 1,441,860 shares of the Company's
common stock at a price per share of $4.30, for an aggregate purchase price of
$6,200,000. The purchase price of $4.30 per share represented a premium of 11%
to the closing price per share on October 21, 1998, the date on which the Board
of Directors of the Company agreed in principle to the terms of the private
15
<PAGE>
placement. The proceeds of the private placement were used to pay $4,500,000 of
indebtedness outstanding under its senior credit facilities and $1,039,000 of
trade payables as required by the Credit Facility Amendments. The remainder of
the proceeds were used to pay amendment fees associated with Senior Debt and the
Senior Subordinated Debt.
Item 4. Submission of Matters to a Vote of Security Holders
On January 12, 1999, the Company held its annual meeting of stockholders at
which the following proposals were approved;
1) the re-election of each of the existing members of the Board of Directors
of the Company; and
2) the approval of the issuance of up to an aggregate of 1,441,860 shares of
the Company's common stock to certain existing stockholders of the
Company in a private placement transaction.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 -Financial Data Schedule appears on page 17.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K on January 25, 1999 with
respect to a private placement transaction consummated on
January 13, 1999.
Item 7A. Quantitative and qualitative disclosure about market risk
The Company is exposed to interest rate risk primarily through its borrowing
activities. The Company's policy has been to utilize United States dollar
denominated borrowings to fund its working capital and investment needs. Short
term debt, if required, is used to meet working capital requirements and long
term debt is generally used to finance long term investments. There is inherent
roll-over risk for borrowings as they mature and are renewed at current market
rates. The extent of this risk is not quantifiable or predictable because of
the variability of future interest rates and the Company's future financing
requirements. At April 3, 1999, the Company had total long term debt
outstanding of $88,295,000 of which $8,236,000 is current. The majority of the
Company's outstanding debt instruments have a variable interest rate or a
variable interest rate component. Using a yield to maturity analysis and
assuming a 10% upward fluctuation in the interest rate on this debt, interest
rate variability on this debt could have a material adverse effect on the
Company's financial results.
Currently, the Company does not enter into financial instruments transactions
for trading or other speculative purposes or to manage interest rate exposure.
16
<PAGE>
NUTRAMAX PRODUCTS, INC. AND SUBSIDIARIES
Thirteen Weeks Ended April 3, 1999
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.
NutraMax Products, Inc.
--------------------------------
(Registrant)
May 18, 1999
----------------
(Date) /s/ Robert F. Burns
------------------------------------
Robert F. Burns
Vice President and
Chief Financial Officer
17
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