SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 for the
quarterly period ended June 30, 1996.
( ) Transition Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
for the transition period from to .
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Commission File Number
0-20240
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AMERICAN WHITE CROSS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 06-1342417
- ------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
349 Lake Road
Dayville, Connecticut
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(Address, including zip code, of principal executive offices)
Registrant's telephone number, including area code: (860) 774-8541
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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
As of August 14, 1996, 6,675,891 shares of Common Stock, $.01 par value, were
outstanding.
Total sequentially numbered pages in this filing: 14.
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Part I. Financial Information
Item 1. Financial Statements
<TABLE>
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<CAPTION>
June 30, December 31,
1996 1995
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<S> <C> <C>
ASSETS (unaudited) (audited)
Current assets:
Cash $ 705 $ 848
Accounts receivable 12,739 10,089
Inventory 28,747 28,171
Prepaid expenses 944 765
Supplies 1,367 1,367
Deferred income taxes 0 1,061
Other current assets 1,582 1,875
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Total current assets 46,084 44,176
------- -------
Property, plant and equipment, net 22,071 21,827
------- -------
Other assets:
Goodwill 6,536 6,461
Trademarks, licenses and customer list 563 616
Organization and deferred financing costs 969 1,046
Noncompetition agreements 192 242
Deferred income taxes 0 4,048
------- -------
Total other assets 8,260 12,413
------- -------
Total assets $76,415 $78,416
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
<PAGE>
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<TABLE>
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<CAPTION>
June 30, December 31,
1996 1995
---------- -----------
(unaudited) (audited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $27,492 $17,451
Accounts payable 12,263 12,608
Accrued wages 217 199
Other accrued expenses 671 1,547
------- -------
Total current liabilities 40,643 31,805
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Long-term debt and capital lease obligations,
less current portion 18,317 19,577
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Stockholders' equity:
Preferred stock - -
Common stock 67 67
Additional paid-in capital 33,990 33,990
Accumulated deficit (16,602) (7,023)
------- -------
Total stockholders' equity 17,455 27,034
------- -------
Total liabilities and stockholders'
equity $76,415 $78,416
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
<PAGE>
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<TABLE>
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
--------------------- -------------------------
June 30, July 2, June 30, July 2,
1996 1995 1996 1995
-------- ------- -------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales $23,359 $23,814 $45,918 $45,185
Cost of sales 20,787 19,301 38,967 37,624
------- ------- ------- -------
Gross profit 2,572 4,513 6,951 7,561
------- ------- ------- -------
Operating expenses:
Selling 3,467 3,583 6,713 6,517
General and
administrative 1,109 940 2,251 1,939
------- ------- ------- -------
4,576 4,523 8,964 8,456
------- ------- ------- -------
Loss from operations (2,004) (10) (2,013) (895)
Interest expense (1,269) (796) (2,460) (1,512)
Other income - - 2 2
------- ------- ------- -------
Loss before provision for
(benefit from)
income taxes (3,273) (806) (4,471) (2,405)
Provision for (benefit from)
income taxes (Note 4) 5,545 (307) 5,108 (881)
------- ------- ------- -------
Net loss $(8,818) $ (499) $(9,579) $(1,524)
======= ======= ======= =======
Net loss per share $ (1.32) $ (.07) $ (1.43) $ (.23)
======= ======= ======= =======
Weighted average shares
outstanding 6,676 6,676 6,676 6,676
======= ======= ======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
<PAGE>
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<TABLE>
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Two Fiscal Quarters Ended
-------------------------
June 30, July 2,
1996 1995
-------- -------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,579) $(1,524)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,623 1,647
Provision for (benefit from) deferred
income taxes 5,108 (881)
Accretion of subordinated notes payable 131 -
Changes in operating assets and liabilities:
Accounts receivable (2,650) (1,162)
Inventory (576) (4,982)
Prepaid expenses, supplies and other
current assets 114 (118)
Accounts payable and accrued expenses (1,203) 1,919
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Net cash used in operating activities (7,032) (5,101)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,505) (1,672)
Reimbursement of plant and equipment costs - 976
Increase in other assets (162) (106)
------- -------
Net cash used in
investing activities (1,667) (802)
------- -------
</TABLE>
<PAGE>
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<TABLE>
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
<CAPTION>
Two Fiscal Quarters Ended
-------------------------
June 30, July 2,
1996 1995
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(unaudited)
<S> <S> <S>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit loan, net $10,314 $6,960
Repayments of long-term debt (1,662) (1,619)
Deferred financing costs (96) (6)
------ ------
Net cash provided by financing
activities 8,556 5,335
Net decrease in cash (143) (568)
CASH, beginning of period 848 898
------ ------
CASH, end of period $ 705 $ 330
====== ======
Supplemental Disclosures:
Cash paid during the period-
Interest $2,338 $1,553
Income taxes 40 78
Non-cash transactions-
Capital lease obligations - 463
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
<PAGE>
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(UNAUDITED)
1.ORGANIZATION
American White Cross, Inc. (the Company) manufactures and markets a wide
variety of health and personal care products. The Company's business was
founded in 1925, became a division of National Patent Development
Corporation (NPDC) in 1972 (the Division) and was reorganized in April
1991 (the Partnership Reorganization) as National Patent Medical
Partnership, L.P. (the Partnership).
In November 1992, NPM Healthcare Products, Inc., which was formed for
such purpose, succeeded to the assets, liabilities and business of the
Partnership (the Corporate Reorganization).
In May 1993, the Company acquired all of the outstanding capital stock of
The American White Cross Laboratories, Inc. (AWCL) and its wholly owned
subsidiary, Weaver Manufacturing Corporation (Weaver). In March 1994,
AWCL was merged into the Company and the Company changed its name from
NPM Healthcare Products, Inc. to American White Cross, Inc.
See Note 3 for a discussion of the Company's filing for protection under
Chapter 11 of the U.S. Bankruptcy Code subsequent to June 30, 1996.
2.BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the results of the Company and its wholly-owned subsidiaries,
Weaver and Acme Chaston Puerto Rico, Inc. (ACPR). These statements have
been prepared on a going concern basis, which assumes continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, such realization of assets and
liquidation of liabilities is subject to significant uncertainty in light
of the Company's filing of voluntary petitions under Chapter 11 ("Chapter
11 Filings")(see Note 3 - "Bankruptcy Proceedings").Such financial
statements, consequently, do not reflect any adjustments that have or may
result from the Company's Chapter 11 filings and related matters.
Under the reorganization proceedings , the Company may sell or otherwise
realize assets, and liquidate or settle liabilities, for amounts other
than those reflected in the condensed consolidated financial statements.
The amounts reported in the condensed consolidated financial statements
do not give effect to any adjustments to the carrying value of assets or
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amounts and classifications of liabilities that might be necessary
pursuant to a plan of reorganization.
The results for the second fiscal quarter and first two fiscal quarters
ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year. It is suggested that these condensed
consolidated financial statements be read in conjunction with the
financial statements and the notes thereto included in the Company's Form
10-K.
3.BANKRUPTCY PROCEEDINGS
On July 17, 1996 (the "Filing Date"), the Company and its wholly owned
consolidated subsidiaries, ACPR and Weaver, filed voluntary petitions for
reorganization under Chapter 11 of Title 11 of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court") and are currently operating
their respective businesses as debtors-in-possession pursuant to section
1107 and 1108 of the Bankruptcy Code. On July 29, 1996, a single
unsecured creditors' committee was appointed by the U.S. Trustee for the
district of Delaware pursuant to Section 1102 of the Bankruptcy Code (the
"Creditors' Committee"). The Creditors' Committee has the right to
review and object to certain business transactions and is expected to
participate in the negotiation of the Company's plan of reorganization.
In July 1996, the Company concluded that the Chapter 11 filing was
necessary in order to preserve the value of its assets and to ensure
that the business had sufficient cash resources to continue operations
while it completed the financial restructuring process.
As of the Filing Date, actions to collect pre-petition indebtedness have
been automatically stayed pursuant to Section 362 of the Bankruptcy Code
(subject to order of the Bankruptcy Court) and, in certain circumstances,
other pre-petition contractual obligations may not be enforced against
the Company. In addition, the Company may reject pre-petition executory
contracts and lease obligations, and parties affected by these rejections
may file claims with the Bankruptcy Court in accordance with the
reorganization process. Substantially all liabilities as of the Petition
Date are subject to being paid or compromised under a plan of
reorganization to be voted upon by all impaired classes of creditors and
equity security holders and approved by the Bankruptcy Court.
On July 17, 1996, the Company entered into a ratification and amendment
of its loan agreement (the "Congress Financing") to provide a working
<PAGE>
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capital, Debtor-In-Possession facility (the "DIP Facility") to the
Company through December 31, 1996. The availability of the borrowings
under the DIP facility increased the amount the Company could borrow by
up to $1,500,000. In exchange for this increase, the Company, (i)
pledged previously unencumbered collateral, (ii) granted a second lien
position to Congress on certain machinery and equipment and, (iii) paid a
$50,000 facility fee. The interest rate increased to 2% above prime rate
(from 1 3/4%). The DIP facility, approved by the Bankruptcy Court on
August 13, 1996, contains certain financial covenants and other customary
covenants and conditions consistent with similar financings.
4.INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
The benefit from income taxes includes federal and state income taxes on
earnings generated in the United States, Puerto Rican income taxes on
earnings generated in Puerto Rico and taxes due upon repatriation of
Puerto Rican earnings and is based on the expected tax rate to be
incurred for the full fiscal year.
The Company had provided, as of December 31, 1995, a $770,000 valuation
allowance relating to state net operating loss carryforwards which
management deemed would not be utilized due to the reduced levels of
operations in certain states with carryforwards and due to relatively
short carryforward periods for certain state net operating losses. As a
result of continuing losses incurred by the Company during the quarter
ended June 30, 1996, management determined it was no longer more likely
than not that the value of the remaining deferred tax asset would be
realized. As a result, the Company recorded an additional valuation
allowance of $5,545,000 which was reflected as a provision for income
taxes in the accompanying statements of operations for the fiscal quarter
ended June 30, 1996.
5.NET LOSS PER SHARE
Net loss per share has been calculated using the weighted average number
of shares outstanding. The effect of stock options and warrants during
each period is not dilutive and, therefore, not considered.
6.GOODWILL
Goodwill, which represents the excess of the purchase price over the fair
values of net assets acquired in connection with certain acquisitions, is
amortized on a straight-line basis over an expected forty year life. The
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recoverability of this intangible is subject to uncertainty as a result of
the Bankruptcy Proceedings and may be affected by a plan of reorganization .
No provision for impairment of the recorded balance has been made as of June
30, 1996 (see Note 2.).
7.LONG-TERM DEBT
As of June 30, 1996, the Company had approximately $22,553,000 outstanding
under its revolving credit facility. Pre-petition borrowings bore interest
at a rate per annum equal to the prime rate plus 1 3/4% and were secured by
the Company's accounts receivable, inventories and intangible assets. In
order to comply with a consensus issued in November 1995 set forth by the
Emerging Issues Task Force in EITF 95-22 regarding classification of certain
debt instruments that include provisions for a lock box requirement and
allow the lender certain subjective acceleration rights, all outstanding
amounts are reflected as a component of current portion of long-term debt
and capital lease obligations in the accompanying consolidated balance
sheets as of June 30, 1996 and December 31, 1995.
As of June 30, 1996, the Company had approximately $11,786,000
outstanding under its term loans consisting of $9,054,000 outstanding
under its original term loan dated September 1, 1994 and $2,732,000
outstanding under two term loans which were effective September 1,
1995.These term loans are secured by all of the Company's machinery and
equipment, other than the machinery and equipment which collateralizes
capital lease obligations, and bear interest at a fixed rate of 9% per
annum and 11.57%, respectively. Payments on the three term loans are due
in equal monthly installments of principal and interest over a five-year
term.
On December 1, 1995, the Company entered into an agreement with certain
investors to issue senior subordinated notes for proceeds of $9,000,000.
The senior subordinated notes are subordinate in right of payment to the
revolving credit facility and to the term loans (up to a maximum
aggregate principal amount of $44,000,000) and are guaranteed by the
Company's subsidiaries. The notes are due on December 1, 2003 and bear
interest at an annual rate of 8% through December 1, 1996. The interest
rate increases by 2% annually until December 1, 1999 at which time the
rate will be 16%. Interest expense is being recorded using the effective
yield method. There is no penalty for early repayment. The agreement
also requires an annual monitoring fee of $75,000 to be paid by the
Company.
Warrants were also issued to the investors in the senior subordinated
notes to purchase up to 1,334,511 shares of the Company's common stock at
an exercise price of $1 per share. The estimated fair value of
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$2,086,000 was recorded as a reduction in the carrying value of the debt
and is being recorded as additional interest expense using the effective
yield method. For the six months ended June 30, 1996, $131,000 has been
recorded as additional interest expense related to the fair value
assigned to the warrants.
Please see Note 3. Bankruptcy Proceedings and Item 3. Defaults Upon
Senior Securities as they relate to the Company's long-term debt.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales for the second fiscal quarter of 1996 were $23,359,000 as compared
to $23,814,000 for the same period in 1995. This $455,000 (2%) decrease
was primarily due to lower shipments of branded character adhesive
bandages and promotional cotton swabs, partially offset by an increase in
sales of healthcare products and private label adhesive strips. Sales
for the first two fiscal quarters of $45,918,000 were 2% higher than for
the prior year reflecting new distribution of the Company's First Aid
brand adhesive bandages, the impact of selling liquid nutritional
supplement products in 1996 and higher sales of the Company's healthcare
products. These gains were partially offset by decreased sales of
promotional cotton swabs and character adhesive bandages produced both
for distribution by the Company and on a contract basis for other
distributors.
Cost of sales in the second fiscal quarter of 1996 was $20,787,000, or
89.0% of sales, compared to $19,301,000, or 81.0% of sales in the second
fiscal quarter of 1995. Year to date cost of sales of $38,967,000, or
84.9% compared unfavorably to prior year cost of sales of $37,624,000, or
83.2%. The increase in cost of sales percentage is attributable to a
higher level of discounting and promoting the Company's products in order
to stimulate sales and cash flow, increased interfacility freight and the
writedown of inventories related to the discontinuance of certain
product lines in the second fiscal quarter.
Selling expenses in the second fiscal quarter of 1996 of $3,466,000, or
14.8% of sales , were lower than the $3,583,000, or 15.0% of sales in the
same period last year. The decrease in cost reflects lower sales and
marketing costs due to the prior year introduction of the Looney Tunes
adhesive strips, partially offset by higher distribution costs related to
the establishment of a second distribution center, located at the
Company's Houston, Texas plant. This facility was established in order
to increase service levels and decrease customer response time, as well
as overall freight costs. The Company plans to distribute its products
from both of its manufacturing facilities, and terminated its lease on
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the distribution facility in Connecticut on June 1, 1996. Year to date
selling expenses of $6,713,000, or 14.6% of sales, were higher than prior
year spending of $6,517,000, or 14.4% due to the aforementioned
distribution spending, partially offset by lower spending in sales and
marketing.
General and administrative expenses for the quarter and year to date of
$1,109,000 (4.7% of sales) and $2,251,000 (4.9%), respectively, were
higher than the prior years results of $940,000 (3.9%) and $1,939,000
(4.3%), respectively, due to higher personnel costs, travel and bank and
professional fees.
Interest expense of $1,269,000 was 5.4% of sales for the second fiscal
quarter of 1996 compared to $796,000, or 3.3% of sales in the same period
of 1995. This increase, as well as the year to date increase from
$1,512,000 to $2,460,000 is related to both a higher level of debt
outstanding as well as a higher average interest rate expensed during the
periods.
The Company's pretax loss in the second quarter was $3,271,000 as
compared to $806,000 in the prior year, due primarily to the write-down
of inventories related to the discontinuance of certain product lines,
extensive pricing and promotional discounts, increased interplant freight
and distribution costs and higher interest costs.
The Company recognized a $5,545,000 write-off of its deferred tax assets
as a provision for taxes in the second fiscal quarter reflecting
management's current assessment of the potential realization of this
asset (see Note 4.).
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital of $5,441,000 and a
current ratio of 1.1 to 1 as compared to $12,371,000 and 1.4 to 1 at
December 31, 1995.
During the two fiscal quarters ended June 30, 1996, the Company used
$7,032,000 of cash for operating activities principally due to continued
operating losses, increases in accounts receivable, increases in
inventory due to lower than expected second quarter sales and a reduction
of accounts payable and accrued expenses due to less favorable terms from
vendors.
The Company used $1,505,000 in cash for the purchase of new plant and
equipment during first six months of 1996.
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On July 17, 1996, the Company filed for protection from creditors under
Chapter 11 of the United States Bankruptcy Code and entered into the DIP
Facility, thereby increasing advance rates on inventory and receivables
by up to $1,500,000. This DIP Facility was approved by the Bankruptcy
Court on August 13, 1996. Availability under the DIP Facility on August
13, 1996 was approximately $1,600,000.
Management expects to finance the Company's short-term working capital
and capital expenditures requirements through borrowing availability
through the DIP Facility, existing working capital and funds anticipated
to be generated from improvements in operating activities. However,
there can be no assurance that such facilities will be sufficient to
enable the Company to meet its liquidity requirements. Due to the
Chapter 11 filing, many vendors have demanded cash on delivery or cash in
advance of delivery. If the Company is unable to secure terms from
vendors, its ability to meet its short-term cash requirements may be
adversely affected. The Company's financing requirements for long-term
growth, future capital expenditures and debt service cannot be determined
until a plan of reorganization is developed and confirmed by the
Bankruptcy Court.
Part II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
As of June 30, 1996, the Company was in default under various loan
agreement covenants, including payment defaults (See Notes 3. and 7.).
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on May 30,
1996. At the Annual Meeting, the shareholders elected two members to the
Board of Directors to serve for a term of three years. There were
6,675,891 shares of the Company's Common Stock outstanding and entitled
to vote.
With respect to the election of Clifford J. Gundle and Diane M. Smith to
the Board of Directors, 5,981,990 shares were voted in favor of their
election, 150,640 shares were voted against their election and 543,261
shares were not voted.
Item 6. 8-K
Forms 8-K dated April 22, 1996 and July 17, 1996 were filed on April 22,
1996 and July 17, 1996, respectively.
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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.
AMERICAN WHITE CROSS, INC.
By: s/ Thomas M. Rallo
----------------------------------------------
Thomas M. Rallo
Senior Vice President, Finance & Administration and
Chief Accounting Officer
Date: August 19, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 705
<SECURITIES> 0
<RECEIVABLES> 12739
<ALLOWANCES> 0
<INVENTORY> 28747
<CURRENT-ASSETS> 46084
<PP&E> 38850
<DEPRECIATION> 16779
<TOTAL-ASSETS> 76415
<CURRENT-LIABILITIES> 40643
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 33990
<TOTAL-LIABILITY-AND-EQUITY> 76415
<SALES> 45918
<TOTAL-REVENUES> 45918
<CGS> 38967
<TOTAL-COSTS> 38967
<OTHER-EXPENSES> 8964
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2460
<INCOME-PRETAX> (4471)
<INCOME-TAX> 5108
<INCOME-CONTINUING> (9579)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (9579)
<EPS-PRIMARY> (1.43)
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</TABLE>
