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 March 31, 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
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(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 May 15, 1996, 6,675,891 shares of Common Stock, $.01 par value were
outstanding.
Total sequentially numbered pages in this filing: 13.
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Part I. Financial Information
Item 1. Financial Statements
AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
1996 1995
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ASSETS (unaudited) (audited)
Current assets:
Cash $ 525 $ 848
Accounts receivable 12,616 10,089
Inventory 30,461 28,171
Prepaid expenses 888 765
Supplies 1,367 1,367
Deferred income taxes 1,061 1,061
Other current assets 1,610 1,875
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Total current assets 48,528 44,176
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Property, plant and equipment 21,839 21,827
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Other assets:
Goodwill 6,520 6,461
Trademarks, licenses and customer list 589 616
Organization and deferred financing costs 959 1,046
Noncompetition agreements 217 242
Deferred income taxes 4,485 4,048
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Total other assets 12,770 12,413
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Total assets $83,137 $78,416
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
March 31, December 31,
1996 1995
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(unaudited) (audited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and
capital lease obligations $24,168 $17,451
Accounts payable 12,401 12,608
Accrued wages 132 199
Other accrued expenses 1,518 1,547
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Total current liabilities 38,219 31,805
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Long-term debt and capital lease obligations,
less current portion 18,645 19,577
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Stockholders' equity:
Preferred stock - -
Common stock 67 67
Additional paid-in capital 33,990 33,990
Accumulated deficit (7,784) (7,023)
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Total stockholders' equity 26,273 27,034
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Total liabilities and stockholders'
equity $83,137 $78,416
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Fiscal Quarter Ended
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March 31, April 2,
1996 1995
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(unaudited)
Sales $22,559 $21,371
Cost of sales 18,180 18,323
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Gross profit 4,379 3,048
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Operating expenses:
Selling 3,246 2,934
General and administrative 1,142 999
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4,388 3,933
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Loss from operations (9) (885)
Interest expense (1,191) (716)
Other income 2 2
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Loss before benefit from income taxes (1,198) (1,599)
Benefit from income taxes (Note 3) 437 574
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Net loss $ (761) $(1,025)
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Net loss per share $ (.11) $ (.15)
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Weighted average shares outstanding 6,676 6,676
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Fiscal Quarter Ended
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March 31, April 2,
1996 1995
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(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(761) $(1,025)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 823 822
Benefit from deferred income taxes (437) (574)
Accretion of subordinated notes payable 65 -
Changes in operating assets and liabilities:
Accounts receivable (2,527) (766)
Inventory (2,290) (2,571)
Prepaid expenses, supplies and other
current assets 142 29
Accounts payable and accrued expenses (304) 2,203
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Net cash used in operating activities (5,289) (1,882)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (641) (372)
Reimbursement of plant and equipment costs - 758
Increase in other assets (102) -
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Net cash (used in) provided by
investing activities (743) 386
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
(In thousands)
Fiscal Quarter Ended
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March 31, April 2,
1996 1995
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(unaudited)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit loan, net $6,717 $2,142
Repayments of long-term debt (994) (955)
Deferred financing costs (14) (3)
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Net cash provided by financing
activities 5,709 1,184
Net decrease in cash (323) (312)
CASH, beginning of period 848 898
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CASH, end of period $ 525 $ 586
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Supplemental Disclosures:
Cash paid during the fiscal quarter-
Interest $1,131 $ 828
Income taxes 18 46
Non-cash transactions-
Capital lease obligations - 463
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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AMERICAN WHITE CROSS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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). Pursuant to the Partnership
Reorganization, the general partner acquired a 51% interest in the
Partnership and the limited partner acquired the remaining 49% interest
in 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 connection with the
Corporate Reorganization and upon completion of the Company's November
1992 public offering, the general partner contributed to the Company its
interest in the Partnership in exchange for 1,326,000 shares of common
stock of the Company. In addition, the limited partner contributed to
the Company its interest in the Partnership in exchange for 574,000
shares of common stock of the Company and $4,550,000, which equals the
net proceeds received by the Company from the sale of 700,000 shares of
common stock.
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. 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.
2.BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
have been prepared by the Company in accordance with generally accepted
accounting principles for interim financial information, and pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements have been condensed or omitted pursuant to such
rules and regulations, although management believes that the disclosures
are adequate to make the information presented not misleading. In the
opinion of management, the accompanying condensed consolidated financial
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statements contain all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the results for the
interim periods presented.
The results for the first fiscal quarter ended March 31, 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.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 has provided, as of March 31, 1996, a $770,000 valuation
allowance relating to state net operating loss carryforwards which
management deems will not be utilized due to the restructuring of the
Company's operations which resulted in reduced levels of operations in
certain states with carryforwards and due to relatively short
carryforward periods for certain state net operating losses. Although
realization is not assured, management believes it is more likely than
not that the value of the deferred tax asset, net of the valuation
allowance, will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
4.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.
5.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
Company assesses the recoverability of this intangible by determining
whether the amortization of the goodwill balance over its remaining life can
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be recovered through projected future results. At this time the Company
expects full recoverability. Therefore, it is management's belief that no
impairment of goodwill has occurred.
6.LONG-TERM DEBT
As of March 31, 1996, the Company had approximately $18,955,000 outstanding
under its revolving credit facility. Borrowings bear interest at a rate per
annum equal to the prime rate plus 1 3/4% and are secured by the Company's
accounts receivable and inventories. The credit facility contains financial
and other covenants requiring the Company to maintain certain levels of
working capital and tangible net worth, as defined, and prohibits the
payment of dividends without the lender's consent. As of March 31, 1996,
the Company had approximately $4,460,000 available for additional borrowings
under this credit facility. The formula for determining the amount of
available borrowings reverts gradually to the pre-amendment formula starting
in June 1996. The term of the facility expires on May 25, 1998 and provides
for a termination fee of 1% through May 26, 1996 which is reduced to 1/2% if
termination should occur on or prior to May 25, 1997, with no fee should
termination occur after May 27, 1997. 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 March 31, 1996 and
December 31, 1995.
As of March 31, 1996, the Company had approximately $12,096,000
outstanding under its term loans consisting of $9,324,000 outstanding
under its original term loan dated September 1, 1994 and $2,772,000
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% 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.
The term loans contain covenants similar to the Company's revolving
credit facility, as well as a minimum debt service coverage ratio which
is effective beginning March 31, 1996.
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
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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 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 $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
quarter ended March 31, 1996, $65,000 has been recorded as additional
interest expense related to the fair value assigned to the warrants.
The revolver, term loans and subordinated debt agreements contain
financial and other covenants requiring the Company to maintain certain
minimum debt service coverage ratios and certain levels of working
capital and tangible net worth, as defined, and prohibit the payment of
dividends without the lender's consent. After giving effect to certain
waivers received by the Company, the Company was in compliance with all
covenants for the quarter ended March 31, 1996.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales for the first fiscal quarter of 1996 were $22,559,000 as compared
to $21,371,000 for the same period in 1995. This $1,188,000 (6%)
increase was primarily due to new retail 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
licensed character adhesive bandages. These gains were partially offset
by decreased sales of adhesive bandages produced on a contract basis for
other distributors and timing related demand for first aid kits.
Cost of sales in the first fiscal quarter of 1996 was $18,180,000, or
80.6% of sales, compared to $18,323,000, or 85.7% of sales in the first
fiscal quarter of 1995. This decrease in cost of sales percentage is
attributable to significant reductions in costs related to the relocation
of certain of the Company's manufacturing processes to more modern, lower
cost facilities. These savings, which primarily impacted direct and
support labor costs, were partially offset by higher raw material cost as
well as an increased level of inter-facility freight.
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Selling expenses in the first fiscal quarter of 1996 of $3,246,000, or
14.4% of sales, were higher than the $2,934,000, or 13.7% of sales in the
same period last year. The increase in cost relates 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 its Dayville,
Connecticut and Houston, Texas facilities, and will discontinue use of
its separately leased distribution facility in Connecticut effective June
1, 1996.
General and administrative expenses of $1,142,000, or 5.1% of sales, were
$143,000 higher than in the prior year due to higher salary, travel,
telephone and amortization costs partially offset by lower bad debts
expenses and professional fees.
Interest expense of $1,191,000 was 5.3% of sales for the first fiscal
quarter of 1996 compared to $716,000, or 3.4% of sales in the same period
of 1995. This increase is related to both a higher level of debt
outstanding as well as a higher average interest rate during the quarter.
The Company operated at approximately a break-even level from operations
in the first fiscal quarter of 1996 compared to a loss of $885,000 in the
same period of 1995. The improvement was primarily due to higher sales
volume and manufacturing cost savings related to the restructuring of the
Company's facilities completed in late 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had working capital of $10,309,000 and a
current ratio of 1.3 to 1 as compared to $12,371,000 and 1.4 to 1 at
December 31, 1995.
During the first fiscal quarter of 1996, the Company used $5,289,000 of
cash for operating activities principally due to a $2,527,000 increase in
accounts receivable and a $2,290,000 increase in inventory levels in
anticipation of the increased sales volume expected in the second and
third fiscal quarters.
The Company used $641,000 in cash for the purchase of new plant and
equipment during the first fiscal quarter of 1996.
As of March 31, 1996, the Company had approximately $4,460,000 available
for additional borrowings under its revolving credit facility based upon
current levels of eligible receivables and inventory.
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In April 1996, the Company refinanced the subordinated note payable to
National Patent Medical, Inc. in the principal amount of $1,800,000,
originally due 50% in each of April 1996 and April 1997, for a cash
payment of $50,000 and a new note in the amount of $1,750,000 with
principal payments due over a 27 month period. Amounts outstanding under
the new note are convertible into a maximum number of 1,129,032 shares of
the Company's common stock, with such number decreasing with each payment
of principal. The interest rate remains at prime plus one-half percent,
however all such interest will be payable on the final maturity date of
the new note in shares of the Company's common stock.
Presently, the Company's primary cash requirements are for normal
operating activities. Management believes that the combination of the
borrowing availability under the Company's revolving credit facility,
existing working capital and funds anticipated to be generated from
improvements in operating and financing activities will be sufficient to
meet the Company's operating and capital needs for the foreseeable
future.
Part II. OTHER INFORMATION
Item 5. OTHER INFORMATION
Effective January 6, 1996, Richard M. Rodnick resigned from the Company's
Board of Directors.
Effective March 21, 1996 Diane M. Smith was elected to the Company's
Board of Directors.
Item 6. 8-K
There were no reports on Form 8-K filed by the Company during the first
quarter of 1996.
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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
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Thomas M. Rallo
Senior Vice President, Finance & Administration and
Chief Accounting Officer
Date: May 15, 1996