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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 DECEMBER 31, 1999
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
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COMMON STOCK, $1.00 PAR VALUE, OUTSTANDING AT FEBRUARY 10, 2000
1,000 SHARES
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LEINER HEALTH PRODUCTS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I. Financial Information....................................................... 3
ITEM 1. Financial Statements .................................................. 3
Condensed Consolidated Statements of Operations (Unaudited) -
For the three and nine months ended December 31, 1999 and 1998 ........ 3
Condensed Consolidated Balance Sheets -
As of December 31, 1999 (Unaudited) and March 31, 1999 ............... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the nine months ended December 31, 1999 and 1998 ................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) .......... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 12
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ........... 19
PART II. Other Information ........................................................ 20
SIGNATURE .......................................................................... 21
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PART I ITEM 1
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Leiner Health Products Inc.
Condensed Consolidated Statements of Operations
Unaudited
(in thousands)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------- -----------------------------
1999(A) 1998 1999(A) 1998
----------- ----------- ------------ ------------
Net sales $ 182,687 $ 162,151 $ 448,085 $ 433,888
Cost of sales 137,459 121,206 340,913 323,116
----------- ----------- ------------ ------------
Gross profit 45,228 40,945 107,172 110,772
Marketing, selling and distribution expenses 22,616 19,161 61,403 56,327
General and administrative expenses 9,476 7,679 27,476 26,205
Amortization of goodwill 425 417 1,260 1,253
Closure of facilities (375) 143 493 464
Other charges (income) 383 460 1,133 (228)
----------- ----------- ------------ ------------
Operating income 12,703 13,085 15,407 26,751
Interest expense, net 7,809 7,581 22,847 21,472
----------- ----------- ------------ ------------
Income (loss) before income taxes 4,894 5,504 (7,440) 5,279
Provision (benefit) for income taxes 1,868 2,316 (3,579) 2,244
----------- ----------- ------------ ------------
Net income (loss) $ 3,026 $ 3,188 $ (3,861) $ 3,035
----------- ----------- ------------ ------------
----------- ----------- ------------ ------------
(A) These financial statements include the operating results of the acquired
operations of Granutec, Inc. and Stanley Pharmaceuticals Ltd. for the two
weeks ended December 31, 1999.
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 Balance Sheets
(in thousands)
DECEMBER 31, MARCH 31,
1999 (A) 1999
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UNAUDITED NOTE 1
ASSETS
Current assets:
Cash and cash equivalents $ 2,160 $ 77
Accounts receivable, net 131,038 127,127
Inventories 185,807 151,605
Prepaid expenses and other current assets 17,172 10,738
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Total current assets 336,177 289,547
Property, plant and equipment, net 78,890 61,241
Goodwill, net 53,574 54,334
Deferred financing charges 10,797 10,565
Other noncurrent assets 21,308 9,851
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Total assets $ 500,746 $ 425,538
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LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Bank checks outstanding, less cash on deposit $ 9,259 $ 6,539
Current portion of long-term debt 6,033 4,068
Accounts payable 113,572 82,244
Customer allowances payable 8,310 9,603
Accrued compensation and benefits 10,529 11,120
Other accrued expenses 10,341 9,350
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Total current liabilities 158,044 122,924
Long-term debt 341,508 317,859
Other noncurrent liabilities 4,452 4,253
Commitments and contingent liabilities
Shareholder's deficit:
Common stock 1 1
Capital in excess of par value 21,851 1,851
Accumulated deficit (25,158) (21,297)
Accumulated other comprehensive income (loss) 48 (53)
-------------- ------------
Total shareholder's deficit (3,258) (19,498)
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Total liabilities and shareholder's deficit $ 500,746 $ 425,538
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(A) These financial statements include the balances of the acquired operations
of Granutec, Inc. and Stanley Pharmaceuticals Ltd. as of December 31, 1999.
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)
NINE MONTHS ENDED
DECEMBER 31,
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1999 (A) 1998
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OPERATING ACTIVITIES:
Net (loss) income $ (3,861) $ 3,035
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Depreciation 6,850 5,834
Amortization 7,017 6,164
Deferred income taxes - (20)
Translation adjustment (101) 30
Changes in operating assets and liabilities net of
effects of acquisition of business:
Accounts receivable 16,411 3,028
Inventories (2,903) (46,498)
Bank checks outstanding, less cash on deposit 2,641 5,292
Accounts payable 13,321 (7,425)
Customer allowances payable (1,283) (1,869)
Accrued compensation and benefits (3,443) (3,017)
Other accrued expenses 2,611 1,054
Income taxes payable/receivable (7,460) (2,559)
Other (576) (563)
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Net cash provided by (used in) operating activities 29,224 (37,514)
INVESTING ACTIVITIES:
Acquisition of business (51,949) -
Additions to property, plant and equipment, net (4,295) (9,812)
Increase in other noncurrent assets (4,943) (3,357)
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Net cash used in investing activities (61,187) (13,169)
FINANCING ACTIVITIES:
Net payments under bank revolving credit facility (11,593) (3,296)
Borrowings under bank term credit facility 30,000 59,763
Payments under bank term credit facility (1,235) (998)
Capital contribution from parent 20,000 26
Repurchase of minority interest - (947)
Increase in deferred financing charges (1,614) (995)
Payments on other long-term debt (1,454) (870)
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Net cash provided by financing activities 34,104 52,683
Effect of exchange rate changes (58) (67)
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Net increase in cash and cash equivalents 2,083 1,933
Cash and cash equivalents at beginning of period 77 1,026
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Cash and cash equivalents at end of period $ 2,160 $ 2,959
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(A) These financial statements include the operating results and the balances
of the acquired operations of Granutec, Inc. and Stanley Pharmaceuticals
Ltd. as of and for the two weeks ended December 31, 1999.
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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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 and nine months ended December 31, 1999 include the accounts of
Leiner Health Products Inc. (the "Company") and its subsidiaries, including
Vita Health Products Inc. ("Vita Health"). Such financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals and adjustments
recorded in connection with the acquisition of assets accounted for under the
purchase method - Note 2 and adjustments recorded for the closure of
facilities - Note 9) considered necessary for a fair presentation have been
included. Operating results for the three and nine month periods ended
December 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended March 31, 2000.
The balance sheet at March 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1999.
Certain reclassifications have been made to the fiscal 1999 condensed
consolidated financial statements to conform with the fiscal 2000
presentation.
2. ACQUISITION
The Company purchased substantially all of the assets of Granutec, Inc.
("Granutec") and Stanley Pharmaceuticals Ltd. ("Stanley"), both of which are
subsidiaries of Novopharm Limited of Ontario, Canada, as well as certain
related assets of Novopharm Limited, as of December 17, 1999 (the
"Acquisition"). Granutec manufactures and distributes private label,
over-the-counter pharmaceutical drugs in the United States, with facilities
located in Wilson, North Carolina and Largo, Florida. Stanley manufactures
and distributes private label, over-the-counter pharmaceutical drugs and
vitamin supplement products in Canada and is headquartered in Vancouver,
British Columbia.
The company acquired these assets for a purchase price consisting of (i)
$50,000,000 in cash, subject to a net working capital adjustment, (ii) the
assumption by the Company of all liabilities, obligations and commitments of
Granutec relating to certain outstanding industrial development revenue
bonds, including, without limitation, the obligation to repay the outstanding
principal amount of approximately $7,100,000 on such bonds, and (iii) the
assumption by the Company of certain other liabilities of Granutec and
Stanley including trade accounts payable incurred in the ordinary course of
business, but excluding trade accounts payable that have been outstanding for
more than 90 days. The purchase price allocation recorded in connection with
the Acquisition was based on preliminary estimates of fair values and will be
finalized by March 31, 2000 based on the completion of a valuation of the
assets acquired and the completion and approval of a formal plan of
integration. The purchase price was funded in part by a $20,000,000
subscription by affiliates of certain existing shareholders to the capital of
the Company's ultimate parent, Leiner Health Products Group Inc. ("Leiner
Group"), which in turn made a capital contribution in the same amount to the
Company, through PLI Holdings Inc., the Company's direct parent. The balance
of the purchase price was funded from the Company's revolving credit facility.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the Acquisition had occurred at the
beginning of the year presented, and does not purport to be indicative of the
results that would have occurred had the Acquisition occurred at such date or
of results which may occur in the future (in thousands).
Nine months ended
December 31,
---------------------------
1999 1998
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Net sales................................ $545,905 $510,283
Operating income......................... 26,696 28,957
Net income............................... 718 1,540
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31, March 31,
1999 1999
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Raw materials, bulk vitamins and packaging materials ... $ 125,292 $ 86,925
Work-in-process ........................................ 16,330 12,717
Finished products ...................................... 44,185 51,963
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$ 185,807 $ 151,605
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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
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement (together with the amendments described below, the "Credit
Agreement"), which was amended on June 30, 1999 to include an additional U.S.
term loan in the amount of $30,000,000 as described below and on December 16,
1999 (the "Second Amendment") to waive certain limitations that would have
prohibited the Acquisition and to raise the applicable margins (as defined in
the Credit Agreement). Additionally, the Credit Agreement was amended on
February 11, 2000, effective December 16, 1999, principally to adjust the
calculations of the Company's debt covenants to properly account for the
Acquisition. The Credit Agreement provided for one U.S. term loan due
December 30, 2004 in the amount of $68,000,000, two U.S. term loans due
December 30, 2005 in the amounts of $65,000,000 and $30,000,000,
respectively, and a Canadian dollar denominated term loan due December 30,
2004 in the amount of approximately U.S. $12,000,000 (collectively, the "Term
Facility"), and a revolving credit facility in the amount of U.S.
$125,000,000 (the "Revolving Facility") a portion of which is made available
to Vita Health in Canadian dollars. The unpaid principal amount outstanding
on the Revolving Facility is due and payable on June 30, 2003.
Borrowings under the Credit Agreement bear interest at floating rates that
are based on the agent lender's base rate (8.5% at December 31, 1999), the
agent lender's Canadian prime rate (6.5% at December 31, 1999), LIBOR (6.0%
at December 31, 1999) or the lender's banker's acceptance rate (5.1% at
December 31, 1999), as the case may be, plus an applicable margin, as amended
under the Second Amendment, based on the Company's leverage ratio (as defined
in the 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 two Term B loans under
the Term Facility, from 2.625% to 3.125% for LIBOR-based loans, and from
1.625% to 2.125% for alternate base rate-based loans and (c) for the one Term
C loan and the one Term D loan under the Term Facility, from 2.75% to 3.25%
for LIBOR-based loans, and from 1.75% to 2.25% for alternate base rate-based
loans. As of December 31, 1999, the Company's weighted average interest rates
under the Credit Agreement were 9.04% for U.S. borrowings and 7.48% for
Canadian borrowings under the Credit Agreement. In addition to certain agent
and up-front fees, the Credit Agreement requires a commitment fee of up to
0.5% of the average daily unused portion of the Revolving Facility based on
the Company's leverage ratio.
The Company has entered into an interest protection arrangement effective
July 30, 1997 with respect to $29,460,000 of its indebtedness under the
Credit Agreement that provides a fixed rate of 6.17% on LIBOR rates plus
applicable margin on the interest rates payable thereon. On October 8, 1999,
the Company entered into an interest protection agreement with respect to
$54,000,000 of its indebtedness under the Credit Agreement, whereby the
Company will not pay any lower than 5.94% on LIBOR rates plus applicable
margin on the interest rates payable thereon. In connection with this
transaction, the Company received $229,500 that is being recorded as a
reduction of interest expense over the period of the agreement, which
terminates October 8, 2001.
The Credit Agreement contains financial covenants that require, among other
things, the Company to comply with certain financial ratios and tests,
including those that relate to the maintenance of specified levels of cash
flow and shareholder's equity. The Company was in compliance with all such
financial covenants as of December 31, 1999. As of December 31, 1999, the
Company had $33,290,000 available under its Revolving Facility.
In connection with the Acquisition, the Company assumed an industrial
development revenue bond loan ("IRB Loan") with an outstanding principal
amount of $7,100,000. The IRB Loan bore interest at the rate of 5.85% as of
December 31, 1999. The interest rate on the IRB Loan is variable and
fluctuates on a weekly basis. The principal amount of the IRB Loan is due and
payable in annual installments of $500,000, with the remaining outstanding
principal amount due and payable May 1, 2014.
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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 December 31, 1999 through fiscal
2004 and thereafter are (in thousands):
Fiscal Year
-----------
2000 .................................. $ 1,871
2001 .................................. 5,421
2002 .................................. 3,342
2003 .................................. 2,620
2004 .................................. 115,395
Thereafter .................................. 218,892
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Total ................................ $ 347,541
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5. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for the three and nine months
ended December 31, 1999 and 1998, are as follows (in thousands):
Three months ended Nine months ended
December 31, December 31,
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1999 1998 1999 1998
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Net income (loss) ....................... $ 3,026 $ 3,188 $ (3,861) $ 3,035
Foreign currency translation adjustment.. 112 24 101 (30)
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Comprehensive income (loss) ............. $ 3,138 $ 3,212 $ (3,760) $ 3,005
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6. RELATED PARTY TRANSACTIONS
On June 30, 1997, Leiner Group, the Company's sole shareholder, and the
Company entered into a consulting agreement with North Castle Partners,
L.L.C. (the "Sponsor") to provide the Company with certain business,
financial and managerial advisory services. Mr. Charles F. Baird, Jr.,
Chairman of Leiner Group's Board of Directors, acts as the managing member of
the Sponsor through Baird Investment Group, L.L.C. In exchange for such
services, Leiner Group and the Company have agreed to pay the Sponsor an
annual fee of $1,500,000, payable semi-annually in advance, plus the
Sponsor's reasonable out-of-pocket expenses. This fee may be reduced upon
completion of an initial public offering of Leiner Group's shares. The
agreement terminates if Baird Investment Group, L.L.C. ceases to be the
managing member of North Castle Partners I, L.L.C., or upon the earliest of
June 30, 2007 or the date that North Castle Partners I, L.L.C. terminates
before that date.
In connection with the Acquisition, the Company received a capital
contribution of approximately $20,000,000 from Leiner Group, through its
direct parent, PLI Holdings Inc.
7. CONTINGENT LIABILITIES
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of January 27, 2000, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 674 lawsuits, of which 671 have been settled.
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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. CONTINGENT LIABILITIES (CONTINUED)
The Company entered into an agreement (the "Agreement") with the Company's
supplier of bulk L-Tryptophan, under which the supplier agreed to assume the
defense of all claims and to pay all settlements and judgements, other than
for certain punitive damages, against the Company arising out of the
ingestion of L-Tryptophan products. To date, the supplier has funded all
settlements and paid all legal fees and expenses incurred by the Company
related to these matters. No punitive damages have been awarded or paid in
any settlement.
Of the remaining three cases, management does not expect that the Company
will be required to make any material payments in connection with their
resolution by virtue of the Agreement, or, in the event that the supplier
ceases to honor the Agreement, by virtue of the Company's product liability
insurance, subject to deductibles with respect to the three currently pending
claims not to exceed $750,000 in the aggregate. Accordingly, no provision has
been made in the Company's consolidated financial statements for any loss
that may result from these remaining actions.
The Company is subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings and
claims cannot be predicted with certainty, management does not believe the
outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position, results of operations or cash
flows.
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 over-the-counter pharmaceutical drugs 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.
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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 (CONTINUED)
Selected financial information for the Company's reportable segments for the
three and nine months ended December 31, 1999 and 1998 is as follows (in
thousands):
Leiner Vita Consolidated
U.S. Health totals
----------- ---------- ---------------
THREE MONTHS ENDED DECEMBER 31, 1999 (A):
External sales $ 169,497 $ 13,190 $ 182,687
Intersegment sales 449 45 494
Segment operating income 11,735 968 12,703
Depreciation and amortization 4,927 272 5,199
Interest expense, net 7,377 432 7,809
Income tax expense 1,608 260 1,868
Segment assets 448,324 52,422 500,746
Expenditures for long-lived assets 1,343 1,285 2,628
THREE MONTHS ENDED DECEMBER 31, 1998:
External sales $ 152,020 $ 10,131 $ 162,151
Intersegment sales 309 31 340
Segment operating income 11,941 1,144 13,085
Depreciation and amortization 4,127 193 4,320
Interest expense, net 7,209 372 7,581
Income tax expense 2,062 254 2,316
Segment assets 388,580 26,735 415,315
Expenditures for long-lived assets (505) 58 (447)
(A) Includes the operating results and the balances for the acquired operations
of Granutec and Stanley as of and for the two weeks ended December 31,
1999.
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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 (CONTINUED)
Leiner Vita Consolidated
U.S. Health totals
----------- ----------- --------------
NINE MONTHS ENDED DECEMBER 31, 1999 (A):
External sales $ 412,580 $ 35,505 $ 448,085
Intersegment sales 1,068 72 1,140
Segment operating income 12,654 2,753 15,407
Depreciation and amortization 13,176 691 13,867
Interest expense, net 21,594 1,253 22,847
Income tax (benefit) expense (3,958) 379 (3,579)
Segment assets 448,324 52,422 500,746
Expenditures for long-lived assets 2,057 2,238 4,295
NINE MONTHS ENDED DECEMBER 31, 1998:
External sales $ 406,617 $ 27,271 $ 433,888
Intersegment sales 1,439 48 1,487
Segment operating income 24,500 2,251 26,751
Depreciation and amortization 11,450 548 11,998
Interest expense, net 20,451 1,021 21,472
Income tax expense 1,787 457 2,244
Segment assets 388,580 26,735 415,315
Expenditures for long-lived assets 8,775 1,037 9,812
(A) Includes the operating results and the balances for the acquired operations
of Granutec and Stanley as of and for the two weeks ended December 31,
1999.
9. CLOSURE OF FACILITIES
In the second and third quarters of fiscal 2000, the Company closed its
Madison, Wisconsin and Sherburne, New York facilities, respectively. The
Company incurred approximately $1,006,000 in the first quarter of fiscal 2000
for severance and other costs related to the closure of its Madison,
Wisconsin facility, which was offset by a $248,000 reversal of excess
reserves for severance and other costs in the second quarter of fiscal year
2000 and a gain of approximately $230,000 from the sale of the facility.
Additionally, the Company had reserved approximately $340,000 in the second
quarter of fiscal 2000 for severance and other costs related to the closure
of its Sherburne, New York facility.
The Company recorded a gain of approximately $340,000 in the third quarter of
fiscal 2000 from the sale of its Chicago facility, which the Company had
previously closed and written down to fair value in fiscal 1999, and
reversed excess reserves for severance and other costs totaling $35,000
related to the closure of its Madison, Wisconsin facility.
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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 December 31,
1999 ("third quarter of fiscal 2000") and the nine months ended December 31,
1999 and the significant developments affecting its financial condition since
March 31, 1999. The operating results of the acquired operations for
Granutec, Inc. ("Granutec") and Stanley Pharmaceuticals Ltd. ("Stanley") are
included in the Company's financial statements from December 17, 1999 (the
date of acquisition) to December 31, 1999. The following discussion should be
read in conjunction with the Company's audited consolidated financial
statements and notes thereto for the year ended March 31, 1999, which are
included in the Company's Annual Report on Form 10-K, on file with the
Securities Exchange Commission.
ACQUISITION
As of December 17, 1999, the Company purchased substantially all of the
assets of Granutec and Stanley and certain related assets of Novopharm
Limited ("Novopharm") of Ontario, Canada (the "Acquisition"). Granutec
manufactures and distributes private label, over-the-counter pharmaceutical
drugs in the United States, with facilities located in Wilson, North Carolina
and Largo, Florida. Stanley manufactures and distributes private label,
over-the-counter drugs and vitamin supplement products in Canada and is
headquartered in Vancouver, British Columbia.
The Company made the Acquisition for a purchase price consisting of (i) $50
million in cash, subject to a net working capital adjustment, (ii) the
assumption by the Company of all liabilities, obligations and commitments of
Granutec relating to certain outstanding industrial development revenue
bonds, including, without limitation, the obligation to repay the outstanding
principal amount of approximately $7.1 million on such bonds, and (iii) the
assumption by the Company of certain other liabilities of Granutec and
Stanley including trade accounts payable incurred in the ordinary course of
business, but excluding trade accounts payable that have been outstanding for
more than 90 days. The purchase price allocation recorded in connection with
the Acquisition was based on preliminary estimates of fair values and will be
finalized by March 31, 2000 based on the completion of a valuation of the
assets acquired and completion and approval of a formal plan of integration.
The purchase price was funded in part by a $20 million subscription by
affiliates of certain existing shareholders to the capital of the Company's
ultimate parent, Leiner Health Products Group Inc. ("Leiner Group"), which in
turn made a capital contribution in the same amount to the Company, through
PLI Holdings Inc., the Company's direct parent. The balance of the purchase
price was funded from the Company's revolving credit facility.
The following unaudited pro forma financial information presents the
consolidated results of operations as if the Granutec and Stanley acquisition
had occurred at the beginning of the year presented, and does not purport to
be indicative of the results that would have occurred had the acquisition
occurred at such date or of results which may occur in the future (in
millions).
Nine months ended
December 31,
---------------------------
1999 1998
------------ ----------
Net sales................................ $545.9 $510.3
Operating income......................... 26.7 29.0
Net income............................... 0.7 1.5
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.
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-12-
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of operations
as a percentage of net sales for the three and nine months ended December 31,
1999 and 1998.
PERCENTAGE OF NET SALES
--------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ -----------------------
1999 1998 1999 1998
----------- ---------- --------- ----------
Net sales .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales .............................. 75.2 74.7 76.1 74.5
----------- ---------- --------- ----------
Gross profit ............................... 24.8 25.3 23.9 25.5
Marketing, selling and distribution expenses 12.4 11.8 13.7 13.0
General and administrative expenses ........ 5.2 4.8 6.1 6.0
Amortization of goodwill ................... 0.2 0.3 0.3 0.3
Closure of facilities ...................... (0.2) 0.1 0.1 0.1
Other charges (income) ..................... 0.2 0.2 0.3 0.0
----------- ---------- --------- ----------
Operating income ........................... 7.0 8.1 3.4 6.1
Interest expense, net ...................... 4.3 4.7 5.1 4.9
----------- ---------- --------- ----------
Income (loss) before income taxes .......... 2.7 3.4 (1.7) 1.2
Provision (benefit) for income taxes ....... 1.0 1.4 (0.8) 0.5
----------- ---------- --------- ----------
Net income (loss) .......................... 1.7% 2.0% (0.9)% 0.7%
----------- ---------- --------- ----------
----------- ---------- --------- ----------
Net sales for the third quarter of fiscal 2000 were $182.7 million, an
increase of $20.5 million, or 12.7% versus the third quarter of fiscal 1999.
Granutec and Stanley accounted for $6.1 million of this $20.5 million
increase over the prior year, with most of their sales coming from
over-the-counter pharmaceutical drugs ("OTCs"). The remaining increase of
$14.4 million was caused primarily by an increase of $16.2 million or 11.9%
in the Company's vitamin product sales and an increase of $3.9 million or
114.6% in contract manufacturing sales, offset by a $4.0 million decrease in
sales of OTCs and a $1.8 million decrease in drug repackaging sales. The
increase in the Company's vitamin sales was strongest in private label herbal
products and multi-vitamins, primarily due to increased sales volumes of
these products. Contract manufacturing sales increased primarily due to the
addition of new customers, thereby increasing volumes. The decrease in sales
of private label OTCs was due to lost volume, however management expects the
decline in sales volumes for OTCs to reverse in the future as synergies from
the combined customer base with the Acquisition are realized. Drug
repackaging sales decreased in the three months ended December 31, 1999,
compared to the prior year, due to the Company exiting the drug repackaging
business in July 1999.
For the nine months ended December 31, 1999, net sales increased by $14.2
million, or 3.3% as compared to the comparable period of fiscal 1999. Of this
$14.2 million increase, Granutec and Stanley accounted for $6.1 million.
Excluding these sales from Granutec and Stanley, the Company's vitamin
product sales increased $12.7 million or 3.5% and sales from contract
manufacturing increased approximately $5.2 million or 52.5%. The Company's
increase in vitamin product sales was strongest in private label vitamins,
which grew by $15.7 million primarily due to increased volumes as the Company
acquired a new mass market customer and increased volumes with current
customers. Contract manufacturing sales also increased due to increased
volumes resulting from the addition of new customers during the nine months
ended December 31, 1999 versus the comparable period in fiscal 1999. These
increases were partially offset by a decline in the Company's non-core product
sales of hair and skin care products of $6.7 million in the nine months ended
December 31, 1999, and a decline of approximately $4.9 million in drug
repackaging sales as compared to the comparable period of fiscal 1999. The
Company closed its drug repackaging facility in July 1999.
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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)
Management expects the trend of declining sales volumes for OTCs will reverse
during the remainder of the year, as compared to fiscal 1999, as it builds
these product sales and realizes the synergies from its combined customer base
with the Acquisition.
Gross profit for the third quarter of fiscal 2000 was $45.2 million, an
increase of $4.3 million, or 10.5%, from $40.9 million in the third quarter
of fiscal 1999. Granutec and Stanley accounted for $1.6 million of this
increase. The remainder of the increase in gross profit during the quarter is
primarily attributable to the higher sales volume. Gross profit margin was
24.8% for the third quarter of fiscal 2000, down from 25.3% in the third
quarter of the prior fiscal year due primarily to pricing pressures and to a
change in product mix to sales of lower margin private label products from
higher margin branded products. The pricing pressures are primarily on
vitamin C and E products as declining raw material prices have been
recognized in the sales prices prior to the cost of goods reductions cycling
through inventory. Management expects the gross profit margins to improve
during the fourth quarter of fiscal year 2000 as plant efficiencies continue
to improve, including efficiencies at the Company's new facility in Fort
Mill, South Carolina as the benefits of having completed the start-up phase
of operations are realized there, and as the benefits of reduced raw material
costs for vitamin C and E products are realized.
For the nine months ended December 31, 1999, gross profit decreased by $3.6
million, or 3.3% compared to the same period in fiscal 1999. Excluding the
Granutec and Stanley gross profit of $1.6 million, the Company's gross profit
was $105.6 million for the first nine months of fiscal 2000 versus $110.8
million in the comparable period in fiscal 1999. Gross profit margin was
23.8% excluding Granutec and Stanley, a 1.7 percentage point decrease in the
nine months ended December 31, 1999 from 25.5% in the comparable period in
fiscal 1999. The decrease in gross profit in the first nine months of the
year was primarily due to the shift in product mix, the effect of certain
product line rationalizations, including certain skin care products, liquid
herbal products, the departure from the drug repackaging business, and
certain plant inefficiencies, offset by the increase contributed by Granutec
and Stanley.
Marketing, selling and distribution expenses, together with general and
administrative expenses (collectively, "Operating Expenses") increased by
$5.3 million, or 19.6% for the third quarter of fiscal 2000 as compared to
the comparable period in fiscal 1999. Excluding Operating Expenses for
Granutec and Stanley, Operating Expenses for the Company were $31.6 million
for the third quarter of fiscal 2000, representing an increase of $4.7
million or 17.7% over the third quarter of fiscal 1999. As a percentage of
net sales without Granutec and Stanley, Operating Expenses were 17.9% for the
three months ended December 31, 1999, representing an increase over the
comparable period in fiscal 1999 when Operating Expenses were 16.6% of net
sales. These Operating Expenses for the third quarter of fiscal 2000
increased primarily as a result of increased sales volumes and infrastructure
development in support of advanced science initiatives along with increased
spending on information systems projects, including those related to the Year
2000 issue (see "Year 2000 Matters"). For the nine months ended December 31,
1999, Operating Expenses excluding Granutec and Stanley, were $88.4 million
or 20.0% of net sales versus $80.9 million or 19.0% in the prior year. The
increase in Operating Expenses for the nine months ended December 31, 1999 is
due primarily to higher fixed costs as a result of infrastructure development
in support of advanced science and product quality initiatives which began in
the first quarter of fiscal 1999 and are expected to continue throughout
fiscal 2000. In addition, the Company increased advertising spending on
branded products in the first nine months of fiscal 2000 in an effort to
better position its products in the marketplace and increased spending for
information systems projects, including those related to the Year 2000 issue
(see "Year 2000 Matters").
In the third quarter of fiscal 2000, the Company recorded a $0.3 million gain
from the sale of its Chicago facility, which was closed in fiscal 1999 and
reversed excess reserves for severance and other costs totaling $0.1 million
related to the closure of its Madison, Wisconsin facility which occurred in
the second quarter of fiscal 2000. During the nine months ended December 31,
1999, the Company incurred $0.5 million of expenses related to the closing of
its facilities in Madison, Wisconsin (thereby exiting its drug repackaging
business) and Sherburne, New York, which was partially offset by the $0.3
million gain on the sale of the Chicago facility.
During the third quarter of fiscal 2000, the Company incurred $0.4 million of
other charges which is consistent with other charges of $0.5 million in the
same period in fiscal 1999. Other charges totaled $1.1 million for the nine
months ended December 31, 1999 compared to other income of $0.2 million in
fiscal 1999. This change was primarily
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-14-
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
attributable to other income generated by a non-recurring settlement in the
second quarter of fiscal 1999 arising from a dispute involving a service
provider and a former employee.
In the third quarter of fiscal 2000, operating income was $12.7 million, a
decrease of $0.4 million or 2.9%, compared to the third quarter of fiscal
1999. The decrease was primarily due to lower gross profit margins and higher
Operating Expenses as previously discussed. For the nine months ended
December 31, 1999, operating income was down $11.3 million or 42.4% from the
nine months ended December 31, 1998. This decrease was primarily due to lower
gross profit margins, higher Operating Expenses, and the increase in other
charges, all noted above.
In the third quarter of fiscal 2000, net interest expense of $7.8 million
represents an increase of $0.2 million from the third quarter of fiscal 1999.
Net interest expense increased by $1.4 million during the nine months ended
December 31, 1999, versus the nine months ended December 31, 1998. This
increase in the three and nine months ended December 31, 1999 was due
primarily to an increase in the average outstanding indebtedness of the
Company and, to a lesser degree, increased interest borrowing rates.
The provision for income taxes for the third quarter of fiscal 2000 was $1.9
million, which was comparable to $2.3 million in the third quarter of fiscal
1999. For the nine months ended December 31, 1999, the benefit for income
taxes was $3.6 million compared to a provision of $2.2 million in the
comparable period in fiscal 1999. Based on the latest estimates, the Company
expects its effective tax rate to be approximately 45.0% for the remainder of
fiscal 2000, and to be higher than the combined federal and state rate of 40%
primarily because of the nondeductibility for income tax purposes of goodwill
amortization.
Primarily as a result of the factors discussed above, net income of $3.0
million was recorded in the third quarter of fiscal 2000 as compared to net
income of $3.2 million in the third quarter of fiscal 1999. For the nine
months ended December 31, 1999, a net loss of $3.9 million was recorded as
compared to the $3.0 million of net income recorded in the comparable period
of fiscal 1999.
OTHER INFORMATION
Earnings before interest, taxes, depreciation, amortization, other non-cash
charges and the charges related to the closure of facilities ("EBITDA")
totaled $17.0 million for the third quarter of fiscal 2000, down slightly
from $17.1 million in the comparable period in fiscal 1999. EBITDA for the
nine months of fiscal 2000 was $28.4 million, or $9.4 million less than
EBITDA for the comparable period of fiscal 1999. EBITDA can be calculated
from the financial statements with the exception of the amortization of
deferred debt issuance costs totaling $0.5 million and $0.4 million for the
three months ended December 31, 1999 and 1998, respectively, and $1.4 million
for both the nine month periods ended December 31, 1999 and 1998, which is
included in interest expense in the statement of operations and in
amortization expense in the statement of cash flows. The Company believes
that EBITDA provides useful information regarding the Company's debt service
ability, but should not be considered in isolation or as a substitute for the
statements of operations or cash flow data.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash has historically been used to fund capital expenditures,
working capital requirements and debt service. The Company is required to
repay the $171.6 million in term loans outstanding as of December 31, 1999
under the Credit Agreement (defined below) by December 30, 2005 with
scheduled principal payments of $1.7 million for fiscal 2000 through 2003,
$37.1 million for fiscal 2004, $82.4 million for fiscal 2005, and $46.4
million for fiscal 2006. The Company is also required to apply certain asset
sale proceeds, as well as 50% of its excess cash flow (as defined in the
Credit Agreement) unless a leverage ratio test is met, to prepay the
borrowings under the Credit Agreement. All outstanding revolving credit
borrowings under the Credit Agreement will become due on June 30, 2003.
During the first nine months of fiscal 2000, net cash provided by operating
activities totaled $29.4 million. This resulted primarily from a positive net
change in operating assets and liabilities of $19.3 million. Collections on
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-15-
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
the accounts receivable balance, excluding accounts receivables for Granutec
and Stanley, provided $16.6 million of cash during the nine months ended
December 31, 1999. Excluding the increase in inventory resulting from the
acquisition of Granutec and Stanley, inventory only increased $2.9 million in
the first nine months of fiscal 2000 compared to an increase of $46.5 million
for the comparable period in fiscal 1999. Management has focused on
optimizing the Company's inventory levels throughout fiscal 2000 and has been
successful at managing inventory levels at a minimal growth rate. The
increase in accounts payable since March 31, 1999 of $13.3 million was due
primarily to the timing of disbursements at the end of each quarter and
purchases of inventory at the end of the third quarter of fiscal 2000 in
anticipation of heavy sales volumes expected in the fourth quarter of fiscal
2000.
Net cash used in investing activities was $61.2 million in the nine months
ended December 31, 1999. This was due primarily to the acquisition of
Granutec and Stanley. Upon closing of this acquisition, the Company used
approximately $30.0 million of funds available under its Revolving Facility
and a $20.0 million capital contribution it received from its parent to fund
the purchase price. The Company also assumed approximately $7.1 million of
debt and certain other liabilities in connection with the Acquisition. Net
capital expenditures in fiscal 2000 totaled $4.3 million. The major capital
expenditures were related to investments in capacity expansion at the new
manufacturing, packaging and distribution facility in South Carolina.
Net cash provided by financing activities was $34.1 million in the first nine
months of fiscal 2000. This was primarily the result of increased net
borrowings under the Credit Agreement and a $20.0 million capital
contribution from the Company's parent. On June 30, 1999, the Company entered
into a term loan under its Credit Agreement and received $30.0 million which
it used to pay off outstanding borrowings under its Revolving Facility
(defined below).
FINANCING ARRANGEMENTS
On May 15, 1998, the Company entered into an Amended and Restated Credit
Agreement (together with the amendments described below, the "Credit
Agreement"), which was amended on June 30, 1999 to include an additional U.S.
term loan in the amount of $30,000,000 as described below and on December 16,
1999 (the "Second Amendment") to waive certain limitations that would have
prohibited the Acquisition and to raise the applicable margins (as defined in
the Credit Agreement). Additionally, the Credit Agreement was amended on
February 11, 2000, effective December 16, 1999, principally to adjust the
calculations of the Company's debt covenants to properly account for the
Acquisition. The Credit Agreement provided for one U.S. term loan due
December 30, 2004 in the amount of $68 million and two U.S. term loans due
December 30, 2005 in the amounts of $65 million and $30 million,
respectively, and a Canadian dollar denominated term loan due December 30,
2004 in the amount of approximately U.S. $12 million (collectively, the "Term
Facility"), and a revolving credit facility in the amount of U.S. $125
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 February 7,
2000, the Company's unused availability under the Credit Agreement was
approximately $33.7 million.
The Revolving Facility includes letter of credit and swingline facilities.
Borrowings under the Credit Agreement bear interest at floating rates that
are based on LIBOR or on the applicable alternate base rate (as defined in
the Credit Agreement), and accordingly the Company's financial condition and
performance is and will continue to be affected by changes in interest rates.
The Company has entered into an interest protection arrangement effective
July 30, 1997 with respect to $29.5 million of its indebtedness under the
Credit Agreement that provides a fixed rate of 6.17% on LIBOR rates plus
applicable margin on the interest rates payable thereon. On October 8, 1999,
the Company entered into an interest protection agreement, with respect to
$54.0 million of its indebtedness under the Credit Agreement, whereby the
Company will not pay any lower than 5.94% on LIBOR rates plus applicable
margin on the interest rates payable thereon. In connection with this
transaction, the Company received 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 Credit Agreement imposes certain
restrictions on the Company, including restrictions on its ability to
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-16-
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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
Credit Agreement. The indenture governing the Notes imposes certain
restrictions on the Company and its subsidiaries, including restrictions on
its ability to incur additional debt, make dividends, distributions or
investments, sell or otherwise dispose of assets, or engage in certain other
activities.
A portion of the outstanding borrowings under the Credit Agreement, amounting
to approximately U.S. $28.9 million as of December 31, 1999, is denominated
in Canadian dollars. All other outstanding borrowings under the Credit
Agreement, and all of the borrowings under the Notes, are denominated in U.S.
dollars.
At December 31, 1999, borrowings under the Credit Agreement bore interest at
a weighted average rate of 8.9% per annum. The Notes bear interest at a rate
of 9.6% per annum.
In connection with the Acquisition, the Company assumed an industrial
development revenue bond loan ("IRB Loan") with an outstanding principal
amount of $7.1 million. The IRB Loan bore interest at the rate of 5.85% as of
December 31, 1999. The interest rate on the IRB Loan is variable and
fluctuates on a weekly basis. The principal amount of the IRB Loan is due and
payable in annual installments of $0.5 million, with the remaining
outstanding principal amount due and payable May 1, 2014.
The Company currently believes that cash flow from operating activities,
together with revolving credit borrowings available under the Credit
Agreement, will be sufficient to fund the Company's currently anticipated
working capital, capital spending and debt service requirements until the
maturity of the Revolving Facility (June 30, 2003), but there can be no
assurance in this regard. The Company expects that its working capital needs
will require it to obtain new revolving credit facilities at the time that
the Revolving Facility matures, by extending, renewing, replacing or
otherwise refinancing the Revolving Facility. No assurance can be given that
any such extension, renewal, replacement or refinancing can be successfully
accomplished.
YEAR 2000 MATTERS
The Company has completed the review of its internal computer systems,
including addressing the use of only two-digit date fields to identify a year
in the date field, and the correct processing of "leap year" dates, commonly
referred to as the "Year 2000 problem". The Company completed third party
inquiries and necessary due diligence to seek additional assurances from its
vendors of Year 2000 compliance. In addition, the Company developed a
Company-wide contingency plan to address various potential information system
related interruptions, including manual procedures and controls to mitigate
risk and compensate for system deficiencies.
The Company believes all its critical systems are Year 2000 compliant.
However, there is no guarantee that the Company has discovered all possible
system failures, including failure to identify all systems, and non-ready
third parties whose systems and operations impact the Company. Any internal
system failure or any failure of such third parties to identify and correct
their systems and operation could result in material disruption of the
business of the Company which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company incurred approximately $0.8 million of expenses in the first nine
months of fiscal 2000 to address its Year 2000 issues, and approximately $2.5
million since the Company began to address its Year 2000 issues in May of
1997.
As of February 10, 2000, the Company has not experienced any significant Year
2000 issues with any of its internal systems.
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-17-
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
THE EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union (the "participating countries") established fixed conversion rates
between their existing sovereign currencies (the "legacy currencies") and the
euro. The participating countries agreed to adopt the euro as their common
legal currency on that date.
As of January 1, 1999, the participating countries no longer control their
own monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro, is exercised by the new
European Central Bank.
Following introduction of the euro, the legacy currencies are scheduled to
remain legal tender in the participating countries as denominations of the
euro between January 1, 1999 and January 1, 2002 (the "transition period").
During the transition period, public and private parties may pay for goods
and services using either the euro or the participating country's legacy
currency.
The impact of the euro is not expected to materially affect the results of
operations of the Company. The Company operates primarily in U.S.
dollar-denominated purchase orders and contracts, and the Company neither has
a large customer nor vendor base within the countries participating in the
euro conversion.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Certain of the statements contained in this report (other than the financial
statements and other statements of historical fact) are forward-looking
statements, including statements regarding, without limitation, (i) the
Company's growth strategies; (ii) trends in the Company's business; and (iii)
the Company's future liquidity requirements and capital resources.
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with management's expectations or that the effect of
future developments on the Company will be those anticipated by management.
The important factors described elsewhere in this report and in the Company's
Form 10-K for the fiscal year ended March 31, 1999 (including, without
limitation, those factors discussed in the "Business - Risk Factors" section
of Item 1 thereof), on file with the Securities and Exchange Commission,
could affect (and in some cases have affected) the Company's actual results
and could cause such results to differ materially from estimates or
expectations reflected in such forward-looking statements. In light of these
factors, there can be no assurance that events anticipated by the
forward-looking statements contained in this report will in fact transpire.
The Company undertakes no obligation to republish revised forward-looking
statements to reflect the occurrence of unanticipated events.
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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, 1999. No significant changes have occurred during the third
quarter of fiscal 2000.
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-19-
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:
4.1 Second Amendment, dated December 16, 1999, to the Amended and
Restated Credit Agreement, among Leiner Health Products Inc.,
Vita Health Products Inc., and the banks and other financial
institutions party thereto, as Lenders.
4.2 Loan Agreement, dated as of May 1, 1994, by and between The
Wilson County Industrial Facilities and Pollution Control
Financing Authority, and Granutec, Inc.
4.3 Third Amendment, dated February 11, 2000 to the Existing
Credit Agreement, among Leiner Health Products Inc., Vita
Health Products Inc., and the banks and other financial
institutions party thereto, as Lenders.
27 Financial Data Schedule - December 31, 1999
(b) Reports on Form 8-K:
(1) Form 8-K dated October 25, 1999, announcing the definitive
agreement signed by the Company and Novopharm Limited of
Ontario, Canada, to purchase substantially all of the assets
of two of its divisions, Stanley Pharmaceuticals Ltd. and
Granutec, Inc. The agreement was subject to various
conditions including regulatory approvals.
(2) Form 8-K dated December 30, 1999, announcing the purchase of
substantially all of the assets of Granutec, Inc. and Stanley
Pharmaceuticals Ltd., both of which are subsidiaries of
Novopharm Limited of Ontario, Canada, as well certain related
assets of Novopharm Limited.
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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: February 14, 2000
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