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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, 2000
COMMISSION FILE NUMBER 333-33121
LEINER HEALTH PRODUCTS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-3431709
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
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 8, 2001
1,000 SHARES
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PART I ITEM 1
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LEINER HEALTH PRODUCTS INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 2000
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, 2000 and 1999 .................................... 3
Condensed Consolidated Balance Sheets -
As of December 31, 2000 (Unaudited) and March 31, 2000 ........................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
For the nine months ended December 31, 2000 and 1999 ............................................. 5
Notes to Condensed Consolidated Financial Statements (Unaudited) ...................................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................... 13
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk ....................................... 20
PART II. Other Information .................................................................................... 21
SIGNATURE ...................................................................................................... 22
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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,
------------------------------ ------------------------------
2000 1999 (A) 2000 1999 (A)
------------- ------------- ------------- -------------
Net sales $ 159,484 $ 182,687 $ 454,602 $ 448,085
Cost of sales 134,656 137,459 369,149 340,913
------------- ------------- ------------- -------------
Gross profit 24,828 45,228 85,453 107,172
Marketing, selling and distribution expenses 20,083 20,941 57,136 56,784
General and administrative expenses 9,282 9,241 29,302 26,699
Research and development expenses 2,070 1,910 6,823 5,396
Amortization of goodwill and other intangibles 1,396 425 4,217 1,260
Closure of facilities 1,326 (375) 1,338 493
Other (income) charges (4,158) 383 (18,835) 1,133
------------- ------------- ------------- -------------
Operating (loss) income (5,171) 12,703 5,472 15,407
Loss from investment in joint venture 235 - 478 -
Interest expense, net 8,716 7,809 26,480 22,847
------------- ------------- ------------- -------------
(Loss) income before income taxes (14,122) 4,894 (21,486) (7,440)
(Benefit) provision for income taxes (4,517) 1,868 (8,269) (3,579)
------------- ------------- ------------- -------------
Net (loss) income $ (9,605) $ 3,026 $ (13,217) $ (3,861)
============= ============= ============= =============
(A) The statement of operations for the three and nine months ended December
31, 1999 include only two weeks of operations of Granutec, Inc. and Stanley
Pharmaceuticals Ltd., both of which were acquired December 17, 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,
2000 2000
------------------ ---------------
UNAUDITED NOTE 1
ASSETS
Current assets:
Cash and cash equivalents $ 8,235 $ 3,008
Accounts receivable, net 106,020 127,881
Inventories 180,152 175,529
Prepaid expenses and other current assets 13,197 15,049
------------------ ---------------
Total current assets 307,604 321,467
Property, plant and equipment, net 80,821 87,093
Goodwill and other intangibles, net 75,085 76,744
Other noncurrent assets 27,955 24,156
------------------ ---------------
Total assets $491,465 $509,460
================== ===============
LIABILITIES AND SHAREHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Bank checks outstanding, less cash on deposit $ 767 $ 13,581
Accounts payable 104,459 103,815
Accrued compensation and benefits 17,928 15,380
Customer allowances payable 11,868 7,085
Other accrued expenses 7,387 15,018
Current portion of long term debt and capital lease obligations 349,275 5,006
------------------ ---------------
Total current liabilities 491,684 159,885
Long-term debt and capital lease obligations 3,028 339,066
Other noncurrent liabilities 4,762 4,894
Commitments and contingencies
Shareholder's (deficit) equity:
Common stock 1 1
Capital in excess of par value 21,851 21,851
Accumulated deficit (29,642) (16,425)
Accumulated other comprehensive (loss) income (219) 188
------------------ ---------------
Total shareholder's (deficit) equity (8,009) 5,615
------------------ ---------------
Total liabilities and shareholder's (deficit) equity $491,465 $509,460
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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,
-------------------------
2000 1999 (A)
-------- ----------
OPERATING ACTIVITIES:
Net loss $ (13,217) $ (3,861)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 10,557 6,850
Amortization 10,429 7,017
Translation adjustment 407 (101)
Changes in operating assets and liabilities, net of effects of
acquisition of business:
Accounts receivable 21,441 16,411
Inventories (5,361) (2,903)
Bank checks outstanding, less cash on deposit (12,731) 2,641
Accounts payable 1,903 13,321
Accrued compensation and benefits (2,069) (3,443)
Customer allowances payable 4,989 (1,283)
Other accrued expenses 4,327 2,611
Income taxes payable/receivable (12,123) (7,460)
Other 1,766 (576)
---------- ---------
Net cash provided by operating activities 10,318 29,224
INVESTING ACTIVITIES:
Additions to property, plant and equipment, net (6,030) (4,295)
Increase in other noncurrent assets (7,878) (4,943)
Acquisition of business - (51,949)
---------- ---------
Net cash used in investing activities (13,908) (61,187)
FINANCING ACTIVITIES:
Net borrowings (payments) under bank revolving credit facility 13,149 (11,593)
Borrowings under bank term credit facility - 30,000
Payments under bank term credit facility (1,309) (1,235)
Capital contribution from parent - 20,000
Increase in deferred financing charges - (1,614)
Increase on other long term debt 439 -
Payments on other long-term debt (3,086) (1,454)
---------- ---------
Net cash provided by financing activities 9,193 34,104
Effect of exchange rate changes (376) (58)
---------- ---------
Net increase in cash and cash equivalents 5,227 2,083
Cash and cash equivalents at beginning of period 3,008 77
---------- ---------
Cash and cash equivalents at end of period $ 8,235 $ 2,160
========== =========
(A) The statement of cash flows for the nine months ended December 31, 1999
include only two weeks of operations of Granutec, Inc. and Stanley
Pharmaceuticals Ltd., both of which were acquired December 17, 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
GENERAL
The accompanying unaudited condensed consolidated financial statements for
the three and nine months ended December 31, 2000 include the accounts of
Leiner Health Products Inc. and its subsidiaries (the "Company"), 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 reclassification of long-term debt currently
in default to current liabilities - Note 1 Liquidity, and the receipt of
proceeds from the settlement of litigation - Note 7) considered necessary
for a fair presentation have been included. Operating results for the three
and nine months ended December 31, 2000 are not necessarily indicative of the
results that may be expected for the year ended March 31, 2001 or any other
future periods.
The balance sheet at March 31, 2000 has been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 2000. Certain reclassifications
have been made to the fiscal 2000 condensed consolidated financial statements to
conform with the fiscal 2001 presentation.
LIQUIDITY
At December 31, 2000, the Company was not in compliance with certain financial
covenants contained in the Company's Amended and Restated Credit Agreement (the
"Amended Credit Agreement") with certain financial institutions (the "senior
lenders") (Note 4). Such covenant violations constitute events of defaults under
the terms of the Amended Credit Agreement and, as a result, all borrowings under
the Amended Credit Agreement, aggregating $254,978,000 at December 31, 2000,
have been classified as a current liability in the accompanying condensed
consolidated balance sheet to reflect the senior lenders' right to accelerate
maturity of the loans. The Company currently believes that cash flow from
operating activities, combined with its current cash availability, will be
sufficient to fund the Company's anticipated working capital requirements, but
there can be no assurance in this regard.
Should the senior lenders accelerate the maturity of the loans under the Amended
Credit Agreement, all amounts due under the indenture governing $85,000,000 of
Senior Subordinated Notes (the "Subordinated Notes") may also be accelerated. As
a result, the Subordinated Notes have been classified as a current liability in
the accompanying condensed consolidated balance sheet. The Company also has an
outstanding balance of $6,600,000 under an Industrial Development Revenue Bond
(the "IRB Loan") that is secured by a letter of credit issued under the Amended
Credit Agreement. As per the terms of the Amended Credit Agreement, if an event
of default is continuing, upon notice from the senior lenders, the Company would
be obligated to reimburse the issuer for the amount equal to the outstanding
letter of credit. Accordingly, the IRB Loan has been classified as a current
liability in the accompanying condensed consolidated balance sheet.
The Company has entered into a waiver letter with the senior lenders dated as of
February 14, 2001 (the "Waiver") under which the senior lenders have agreed to
waive such events of default and to forbear exercising any of their rights or
remedies under the Amended Credit Agreement for a limited period ending on the
earlier of March 30, 2001 or the occurrence of any additional event of default
under the Amended Credit Agreement (not waived under the Waiver). The Waiver
provides for a one percent increase in the applicable margin effective through
and including March 30, 2001, and a fee of $375,000 to be paid on execution of
the Waiver.
Conditions to the Waiver shall survive the expiration of the Waiver including
the Company's agreement that: (a) interest will be paid monthly instead of
quarterly; and (b) outstanding amounts under the Amended Credit Agreement
cannot be continued as or converted into LIBOR or banker's acceptance rate
loans.
During the waiver period, the Company intends to work with the senior lenders to
develop a revised business plan that would reflect the effects of the
operational restructuring and reengineering initiative discussed below and serve
as the basis for commencing discussions regarding possible amendments and/or
further waivers to the Amended Credit Agreement. In January 2001, the Company
borrowed an additional $27,000,000, which constituted substantially all
remaining amounts available pursuant to the revolving facility under the Amended
Credit Agreement.
Additionally, the Company is not precluded from using its available cash
resources, which approximates $29,000,000 at February 13, 2001, to pay its
liabilities and conduct operations in the normal course of business.
There can be no assurance that the waiver will be extended beyond March 30,
2001. If the senior lenders were to accelerate maturity of amounts due under the
Amended Credit Agreement and other long-term debt became immediately payable as
a result of such action, the Company would not have sufficient funds to repay
its outstanding debt, and no assurance can be given that alternative sources of
sufficient financing would be available on acceptable terms, or at all. These
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or liabilities
that may result from the outcome of these actions.
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
1. BASIS OF PRESENTATION (continued)
OPERATIONAL RESTRUCTURING
In response to ongoing trends and increased price competition in the vitamin,
mineral and supplement market, management has accelerated a reengineering of the
Company's operations (the "initiative") commencing in the fourth quarter of
fiscal 2001 to reduce costs and make the most efficient use of the Company's
resources. The initiative includes the rightsizing of the organization, by
eliminating 500 positions, including those previously identified in the closure
of the Largo, Florida, Kalamazoo, Michigan and Vancouver, British Columbia
facilities. The Company intends to implement complexity reduction programs,
which focus the Company's resources on more profitable product lines and
customers. The reduction in the number of individual products will allow for
lower sales, marketing and product handling expenses, as well as improved
customer service. The Company will continue to develop a global sourcing program
to reduce raw material costs and ensure first to market on private label OTC
switch programs.
This initiative is intended to improve cash flow and liquidity, and its positive
effects should begin to impact the Company's financial statements in the fourth
quarter of fiscal year 2001. The Company expects to take a significant charge
during the fourth quarter of fiscal 2001 to provide for the cost of the
restructuring elements of the initiative while expenditures for costs relating
to the reengineering elements of the initiative will be expensed as incurred.
Management is currently unable to estimate the total cost of the initiative or
the periods in which the costs will be recognized as expenses in the Company's
consolidated financial statements.
2. ACQUISITION
On December 17, 1999, Leiner Health Products Inc. acquired substantially all of
the assets of Granutec, Inc. ("Granutec"), a manufacturer and distributor of
private label, over-the-counter pharmaceutical drugs ("OTCs") in the United
States, and Vita Health acquired substantially all of the assets of Stanley
Pharmaceuticals Ltd. ("Stanley"), a manufacturer and distributor of private
label OTCs, and vitamin supplement products in Canada, both of which were
subsidiaries of Novopharm Limited of Ontario, Canada ("Novopharm"). The Company
also acquired certain related assets of Novopharm (collectively, the
"Acquisition"). On June 29, 2000, the Company reached a final settlement
agreement with Novopharm on the working capital adjustment provided for in the
acquisition agreement and, as a result, Novopharm paid the Company $1,553,000.
The Company recorded the final adjustments to the purchase allocation during the
second quarter of fiscal year 2001.
The components of the purchase price and the purchase price allocation are
as follows (in thousands):
Consideration and acquisition costs:
Cash paid to Novopharm........................ $50,000
Acquisition costs............................. 3,426
Debt assumed.................................. 7,496
Working capital adjustment.................... (1,553)
-------
$59,369
=======
Allocation of purchase price:
Current assets................................ $43,083
Property, plant and equipment................. 20,805
Acquired intangibles.......................... 9,327
Goodwill...................................... 18,179
Debt and other liabilities assumed............ (32,025)
-------
$59,369
=======
In connection with the Acquisition and the finalization of the restructuring
plans in the second quarter of fiscal year 2001, the Company has recorded
approximately $11,472,000, of restructuring charges. As a component of the
purchase price allocation, the restructuring plan includes initiatives to
integrate the operations of the Company with those of Granutec and Stanley, and
reduce overhead, primarily through the consolidation of certain acquired
manufacturing activities to existing facilities. The Company expects these
actions to result in a reduction in the acquired workforce. Management has
finalized its restructuring plans and is now working on their execution. The
Company expects the majority of the restructuring actions to occur in fiscal
years 2001 and 2002.
The following table summarizes the activity in the Company's reserves associated
with the restructuring (in thousands):
Balance at Balance at
March 31, Additions Cash December 31,
2000 to Reserves Payments 2000
-------------- ----------- ----------- -------------
Separation costs for terminated employees........... $ 5,400 $ 3,468 $(1,611) $ 7,257
Facilities closing and downsizing................... 1,615 989 - 2,604
------- ------- ------- -------
Accrued restructuring costs......................... $ 7,015 $ 4,457 $(1,611) $ 9,861
======= ======= ======= =======
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
2. ACQUISITION (CONTINUED)
The following unaudited fiscal year 2001 actual and fiscal year 2000 pro forma
financial information presents the consolidated results of operations as if the
Acquisition had occurred at the beginning of fiscal year 2000, 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):
Three months ended Nine months ended
December 31, December 31,
---------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net sales............................... $159,484 $210,741 $454,602 $545,905
Operating (loss) income................. (5,171) 14,640 5,472 26,733
Net (loss) income....................... $ (9,605) $ 3,634 $(13,217) $ 1,500
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31, March 31,
2000 2000
-------- -------
Raw materials, bulk vitamins and packaging materials............ $110,410 $55,819
Work-in-process................................................. 12,664 48,604
Finished products............................................... 57,078 71,106
-------- -------
$180,152 $175,529
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4. DEBT
Long-term debt and capital lease obligations at December 31, 2000 are
summarized as follows (in thousands):
Credit Facility:
Revolving facility.................................. $ 85,563
Term facility....................................... 169,415
---------
Total credit facility............................... 254,978
Senior subordinated notes.............................. 85,000
Industrial development revenue bond loan............... 6,600
Capital lease obligations.............................. 4,005
Industrial opportunities program loan.................. 1,720
---------
352,303
Less current portion................................... (349,275)
---------
Total long-term debt and capital leases $ 3,028
=========
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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. DEBT (CONTINUED)
The Company and certain financial institutions entered into an Amended Credit
Agreement which provides for one U.S. term loan due December 30, 2004 in the
amount of $68,000,000, two U.S. term loans due December 30, 2005 in the amounts
of $65,000,000 and $30,000,000, respectively, a Canadian dollar denominated term
loan due December 30, 2004 in the amount of approximately U.S. $12,000,000
(collectively, the "Term Facility"), and a revolving credit facility in the
amount of U.S. $125,000,000 (the "Revolving Facility") a portion of which is
made available to Vita Health in Canadian dollars. The unpaid principal amount
outstanding on the Revolving Facility is due and payable on June 30, 2003.
Borrowings under the Amended Credit Agreement bear interest at floating rates
that are based on the lender's base rate (9.5% at December 31, 2000), the
lender's Canadian prime rate (7.5% at December 31, 2000), LIBOR (6.4% at
December 31, 2000) or the lender's banker's acceptance rate (5.22% at December
31, 2000), as the case may be, plus an applicable margin, that is itself based
on the Company's leverage ratio (as defined in the Amended Credit Agreement).
The leverage ratio is defined generally as the ratio of total funded
indebtedness to the consolidated earnings before interest, taxes, depreciation,
amortization expense and other special charges and its effect on the applicable
margin varies as follows: (a) for U.S. and Canadian revolving credit borrowings,
from 1.0% to 2.5% for LIBOR- or banker's acceptance-based loans, and from zero
to 1.5% for alternate base rate- or Canadian prime rate-based loans, (b) for the
loans under the Term Facility, from 2.625% to 3.25% for LIBOR-based loans, and
from 1.625% to 2.25% for alternate base rate loans. As of December 31, 2000, the
Company's weighted average interest rates were 9.27% for U.S. borrowings and
8.52% for Canadian borrowings. In addition to certain agent and up-front fees,
the Amended Credit Agreement requires a commitment fee of up to 0.5% of the
average daily unused portion of the Revolving Facility based on the Company's
leverage ratio.
The Company entered into an interest protection agreement on October 8, 1999,
with respect to $54,000,000 of its indebtedness under the Amended Credit
Agreement, whereby the Company will not pay any lower than 5.94% on LIBOR rates
plus applicable margin on the interest payable thereon. In connection with this
agreement, which terminates October 8, 2001, the Company received $229,500 that
is being recorded as a reduction of interest expense over the period of the
agreement.
The Company's Subordinated Notes bear interest at the rate of 9 5/8% per
annum and are due on June 30, 2007. Interest on the Senior Notes is payable
semiannually on January 1 and July 1 of each year. Under the terms of the
Amended Credit Agreement, the Company is precluded from making interest
payments under the Senior Notes while the Company is out of compliance with
the financial covenants unless a waiver is obtained.
Principal on the IRB Loan is due in annual installments of $500,000, with the
remaining balance due May 1, 2014.
The Amended Credit Agreement contains financial covenants that require, among
other things, the Company to comply with certain financial ratios and tests.
As of December 31, 2000, the Company was not in compliance with certain of
these financial covenants and has received a waiver for a limited period
regarding such noncompliance (Note 1.)
5. COMPREHENSIVE (LOSS) INCOME
The components of comprehensive (loss) income for the three and nine months
ended December 31, 2000 and 1999, are as follows (in thousands):
Three months ended Nine months ended
December 31, December 31,
--------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net (loss) income................................... $ (9,605) $ 3,026 $(13,217) $ (3,861)
Foreign currency translation adjustment............. 140 112 (407) 101
-------- -------- -------- --------
Comprehensive (loss)income.......................... $ (9,465) $ 3,138 $(13,624) $ (3,760)
======== ======== ======== ========
6. RELATED PARTY TRANSACTIONS
On June 30, 1997, Leiner Health Products Group Inc. ("Leiner Group"), the sole
shareholder of PLI Holdings, Inc., the holder of all the issued and outstanding
stock of the Company, and the Company entered into a consulting agreement (the
"Consulting Agreement") with North Castle Partners, L.L.C. (the "Sponsor")
pursuant to which the Sponsor is to provide the Company with certain business,
financial and managerial advisory services. Mr. Charles
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
F. Baird, Jr., Chairman of Leiner's Group Board of Directors, acts as the
managing member of the Sponsor through Baird Investment Group, L.L.C. ("Baird
Investment"). In exchange for such services, Leiner Group and the Company have
agreed to pay the Sponsor an annual fee of $1,500,000, payable semi-annually in
advance, plus the Sponsor's reasonable out-of-pocket expenses. This fee may be
reduced upon completion of an initial public offering of Leiner Group's shares.
Payment of this fee is suspended pursuant to the waiver described in Note 1
and can be reinstated with the consent of the lenders holding a majority of
the loans outstanding under the Company's Amended Credit Agreement.
The Consulting Agreement will terminate in the event Baird Investment ceases to
be the managing member of North Castle Partners I, L.L.C. ("North Castle"), or
upon the earlier to occur, June 30, 2007 or the date that North Castle
terminates.
7. CONTINGENCIES
On September 27, 1999, the Company filed a civil antitrust lawsuit (the
"Antitrust Lawsuit") against certain of its raw material suppliers and other
alleged co-conspirators. The complaint alleges that the defendants conspired to
fix vitamin prices and allocate vitamin production volume and vitamin customers
in the United States. The complaint seeks unspecified damages and injunctive
relief. After the lawsuit was filed, it was consolidated for pre-trial purposes
with other similar cases. Based on the pretrial schedule set forth by the court,
the case will not be ready for trial until approximately April 2002. At the
present time, management cannot predict the outcome of this lawsuit, nor the
estimated damages and potential recovery, if any.
During fiscal year 2001, the Company has entered into settlement agreements with
several of its suppliers named in the Antitrust Lawsuit (the "Settlement
Agreements"). Pursuant to the terms of the Settlement Agreements, the Company
agreed to release all claims it may have against the suppliers based on the
Company's purchases of various vitamins from the suppliers and to opt out of any
settlements in connection with the Antitrust Lawsuit in so far as it pertains to
the suppliers.
In exchange for the Company's release and agreement to opt out of any
settlements in connection with the Antitrust Lawsuit, the Company has been
awarded a settlement in the amount of approximately $6,000,000, which was offset
by approximately $1,551,000 of legal and consulting expenses and is recorded in
other (income) charges in the accompanying Statements of Operations for the
quarter ended December 31, 2000. During the nine months ended December 31, 2000,
the Company has been awarded settlements in the aggregate amount of
approximately $24,298,000, which have been offset by approximately $3,139,000 of
legal and consulting expenses and a bonus payment of approximately $1,150,000
awarded to certain of the Company's key management personnel in recognition of
the effect of antitrust activity on prior years' compensation.
The Company is subject to other legal proceedings and claims which arise in the
normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
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PART I ITEM 1
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Leiner Health Products Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited
(continued)
8. CLOSURE OF FACILITIES
During the third quarter of fiscal year 2001, the Company announced its plans to
close its Kalamazoo, Michigan facility. As a result, the Company reserved
approximately $1,430,000 for severance and other costs related to the closure.
In addition, the Company recorded a loss in the amount of approximately $158,000
from the disposal of its Sherburne, New York facility, which the Company closed
during the third quarter of fiscal year 2001, and a gain of approximately
$366,000 from the sale of its Vancouver, British Columbia facility.
9. 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 OTCs, 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)
9. BUSINESS SEGMENT INFORMATION (CONTINUED)
Selected financial information for the Company's reportable segments for the
three and nine months ended December, 31, 2000 and 1999 is as follows (in
thousands):
LEINER VITA INTERSEGMENT CONSOLIDATED
U.S. HEALTH ELIMINATIONS TOTALS
---------- ---------- ---------- ----------
THREE MONTHS ENDED DECEMBER 31, 2000
Net sales $ 142,864 $ 17,296 $ (676) $ 159,484
Depreciation and amortization 5,882 908 - 6,790
Segment operating (loss) income (6,172) 1,020 (19) (5,171)
Interest expense, net 8,214 502 - 8,716
Income tax (benefit) expense (4,767) 250 - (4,517)
Segment assets 441,558 61,497 (11,590) 491,465
Expenditures for long-lived assets 1,023 (487) - 536
THREE MONTHS ENDED DECEMBER 31, 1999
Net sales $ 169,946 $ 13,235 $ (494) $ 182,687
Depreciation and amortization 4,927 272 - 5,199
Segment operating income 11,762 952 (11) 12,703
Interest expense, net 7,377 432 - 7,809
Income tax expense 1,608 260 - 1,868
Segment assets 448,524 52,284 (62) 500,746
Expenditures for long-lived assets 1,343 1,285 - 2,628
NINE MONTHS ENDED DECEMBER 31, 2000
Net sales $ 398,534 $ 57,910 $ (1,842) $ 454,602
Depreciation and amortization 18,348 2,638 - 20,986
Segment operating income 2,695 2,735 42 5,472
Interest expense, net 24,695 1,785 - 26,480
Income tax (benefit) expense (8,727) 458 - (8,269)
Segment assets 441,558 61,497 (11,590) 491,465
Expenditures for long-lived assets 5,981 49 - 6,030
NINE MONTHS ENDED DECEMBER 31, 1999
Net sales $ 413,648 $ 35,577 $ (1,140) $ 448,085
Depreciation and amortization 13,176 691 - 13,867
Segment operating income 12,728 2,720 (41) 15,407
Interest expense, net 21,594 1,253 - 22,847
Income tax (benefit) expense (3,958) 379 - (3,579)
Segment assets 448,524 52,284 (62) 500,746
Expenditures for long-lived assets 2,057 2,238 - 4,295
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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, 2000 ("third
quarter of fiscal 2001") and the nine months ended December 31, 2000, and the
significant developments affecting its financial condition since March 31, 2000.
The operating results of the acquired operations for Granutec, Inc. ("Granutec")
and Stanley Pharmaceuticals Ltd. ("Stanley") are included in the Company's
financial statements from the date of acquisition of December 17, 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,
2000, which are included in the Company's Annual Report on Form 10-K, on file
with the Securities Exchange Commission.
ACQUISITION
On December 17, 1999, Leiner Health Products Inc. acquired substantially all of
the assets of Granutec, Inc. ("Granutec"), a manufacturer and distributor of
private label, over-the-counter pharmaceutical drugs ("OTCs") in the United
States, and Vita Health acquired substantially all of the assets of Stanley
Pharmaceuticals Ltd. ("Stanley"), a manufacturer and distributor of private
label, OTCs and vitamin supplement products in Canada, both of which were
subsidiaries of Novopharm Limited of Ontario, Canada ("Novopharm"). The Company
also acquired certain related assets of Novopharm (collectively, the
"Acquisition"). On June 29, 2000, the Company reached a final settlement
agreement with Novopharm on the working capital adjustment provided for in the
acquisition agreement and, as a result, Novopharm paid the Company approximately
$1.5 million. The Company recorded the final adjustments to the purchase
allocation during the second quarter of fiscal year 2001.
The components of the purchase price and the purchase price allocation are
as follows (in millions):
Consideration and acquisition costs:
Cash paid to Novopharm ................. $ 50.0
Acquisition costs ...................... 3.4
Debt assumed ........................... 7.5
Working capital adjustment ............. (1.5)
-------
$ 59.4
=======
Allocation of purchase price:
Current assets ......................... $ 43.1
Property, plant and equipment .......... 20.8
Acquired intangibles ................... 9.3
Goodwill ............................... 18.2
Debt and other liabilities assumed ..... (32.0)
-------
$ 59.4
=======
In connection with the Acquisition, and the finalization of the restructuring
plan in the second quarter of fiscal year 2001, the Company has recorded
approximately $11.5 million of restructuring charges. As a component of the
purchase price allocation, the restructuring plan includes initiatives to
integrate the operations of the Company with those of Granutec and Stanley,
and reduce overhead, primarily through the consolidation of certain acquired
manufacturing activities to existing facilities. The Company expects these
actions to result in a reduction in the acquired workforce. Management has
finalized its restructuring plans, and is now working on their execution. The
Company expects the majority of the restructuring actions to occur in fiscal
year 2001 and 2002.
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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)
The following table summarizes the activity in the Company's reserves associated
with the restructuring (in millions):
Balance at Balance at
March 31, Additions Cash December 31,
2000 to Reserve Payments 2000
-------- -------- ------- --------
Separation costs for terminated employees....... $ 5.4 $ 3.5 $ (1.6) $ 7.3
Facilities closing and downsizing............... 1.6 1.0 -- 2.6
-------- -------- ------- --------
Accrued restructuring costs..................... $ 7.0 $ 4.5 $ (1.6) $ 9.9
======== ======== ======= ========
The following unaudited fiscal year 2001 actual and fiscal year 2000 pro forma
financial information presents the consolidated results of operations as if the
Acquisition had occurred at the beginning of fiscal year 2000, 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).
Three months ended Nine months ended
December 31, December 31,
---------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
Net sales............................. $ 159.5 $ 210.7 $ 454.6 $ 545.9
Operating (loss) income............... (5.2) 14.6 5.5 26.7
Net (loss) income..................... $ (9.6) $ 3.6 $ (13.2) $ 1.5
Pro forma results for the three and nine month periods ending December 31,
1999 include the benefit to Granutec of the initial retail distribution of
Ranitidine, the generic version of Zantac. The former Granutec Division of
Novopharm was operating under a six month period of exclusivity for the sale
and distribution of this product. This period of exclusivity began in July
1999 and provided Granutec with unusually high sales and margin results for
the exclusivity period which ended in January 2000.
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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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, 2000
and 1999.
PERCENTAGE OF NET SALES PERCENTAGE OF NET SALES
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Net sales ...................................... 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales .................................. 84.4 75.2 81.2 76.1
--------- --------- --------- ---------
Gross profit ................................... 15.6 24.8 18.8 23.9
Marketing, selling and distribution expenses.... 12.6 11.5 12.6 12.6
General and administrative expenses ............ 5.8 5.1 6.4 6.0
Research and development expenses .............. 1.3 1.0 1.5 1.2
Amortization of goodwill and other intangibles.. 0.9 0.2 0.9 0.3
Closure of facilities .......................... 0.8 (0.2) 0.3 0.1
Other (income) charges ......................... (2.6) 0.2 (4.1) 0.3
--------- --------- --------- ---------
Operating (loss) income ........................ (3.2) 7.0 1.2 3.4
Loss from investment in joint venture .......... 0.1 -- 0.1 --
Interest expense, net .......................... 5.5 4.3 5.8 5.1
--------- --------- --------- ---------
(Loss) income before income taxes .............. (8.8) 2.7 (4.7) (1.7)
(Benefit) provision for income taxes ........... (2.8) 1.0 (1.8) (0.8)
--------- --------- --------- ---------
Net (loss) income .............................. (6.0)% 1.7 % (2.9)% (0.9)%
========= ========= ========= =========
A net loss of $9.6 million was recorded in the third quarter ended December
31, 2000 compared to net income of $3.0 million in the corresponding
three-month period of the prior fiscal year. This loss was due primarily to
reported decreases of $23.2 million and $20.4 million, respectively, in net
sales and gross profit. Among the factors unfavorably impacting gross profit
in the quarter ended December 31, 2000 were: $5.0 million of unfavorable
production variances resulting from production inefficiencies caused by the
lower production levels of vitamins and herbs; $5.0 million from price
decreases in certain products without corresponding benefits from newly
negotiated contracts with suppliers; and $2.5 million in provisions for
certain obsolete inventory. Another factor contributing to the $12.6 million
decrease in net income in the quarter ended December 31, 2000 as compared to
the corresponding period of the prior year was the provision of $1.4 million
for severance and other costs related to the closure of the Company's plant
in Kalamazoo, Michigan. These unusual charges were offset in part by $4.4
million of other income resulting from a $6.0 million settlement with a
supplier, net of consulting and legal fees of approximately $1.6 million, and
income tax benefits of $6.4 million.
Net sales for the third quarter of fiscal 2001 were $159.5 million, a
decrease of $23.2 million or 12.7% versus the third quarter of fiscal 2000.
The decrease was due to a decrease of $41.7 million in the Company's sales of
vitamins and a decrease of $7.3 million in sales of other non-core products,
which were offset by an increase in sales of OTCs of $25.8 million. Sales of
OTCs increased primarily as a result of the Acquisition, and the decrease in
sales volume in the vitamin category was primarily in sales of vitamin C and
E, multivitamins and herbs. The Company provided certain of its retail
customers pricing decreases to match reductions offered by the Company's
competitors. These price reductions amounted to more than $5.0 million for
the quarter ended December 31, 2000. Management estimates that the food, drug
and mass market ("FDM Market") declined approximately 8.5% in the thirteen
week period ended December 24, 2000 versus the comparable period in 1999.
During the nine months ended December 31, 2000 net sales increased $6.5
million or 1.5% compared to the prior year. Sales of OTCs increased by $83.4
million primarily as a result of the Acquisition, and the vitamin category
decreased by $69.1 million, primarily from decreases in the sales volume of
vitamin C and E, multivitamins and herbs. The significant shift in the
Company's sales during the first three quarters of the fiscal year reflects
the impact of the slowdown in the FDM Market for vitamins and the additional
sales in OTCs due to the Acquisition. Price reductions on key items amounted
to approximately $7.0 million for the nine month period ended December 31,
2000. These price reductions matched offers provided by certain of the
Company's primary competitors.
Gross profit for the third quarter of fiscal 2001 was $24.8 million, a
decrease of $20.4 million, or 45.1%, from $45.2 million in the third quarter
of fiscal 2000. The gross profit percentage was 15.6% for the third quarter
of fiscal 2001, down from 24.8% in the third quarter of the prior fiscal
year. The decrease in gross profit as a percentage of sales is due to a
number of factors including approximately $5.0 million in reduced plant
efficiencies as a result of lower production volumes. The price reductions
described above, combined with the effect of the decrease in sales of higher
margin vitamin products and a $2.5 million write down of inventory associated
with discontinued products, contributed to a decline in gross profit as a
percentage of sales. During the nine months ended December 31, 2000, gross
profit decreased $21.7 million versus the first nine months of fiscal year
2000. As a percentage of sales, gross profit margin decreased to 18.8% versus
23.9% in the prior year. The decrease in gross profit as a percentage of
sales during the first nine months of fiscal 2001 versus fiscal 2000, is the
result of volume related reductions in plant efficiencies, increased
inventory reserves for discontinued products and the shift in the product mix
from sales of higher margin vitamin products to lower margin OTCs.
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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)
Marketing, selling and distribution expenses, together with general and
administrative expenses, and research and development expenses (collectively,
"Operating Expenses") decreased by $0.7 million, or 2.0% for the third quarter
of fiscal 2001 as compared to the comparable period in fiscal 2000. Excluding
operating expenses for Stanley and Granutec, Operating Expenses for the Company
were $29.4 million for the third quarter of fiscal 2001, compared to $31.6
million during the third quarter of fiscal 2000. As a percentage of net sales,
Operating Expenses were 19.7% during the three months ended December 31, 2000,
up from 17.6% during the comparable period in fiscal year 2000. The increase in
Operating Expenses as a percentage of sales during the quarter is the result of
a decline in sales volume during the quarter compared to the prior fiscal year.
For the first nine months of fiscal year 2001, Operating Expenses increased $4.4
million. The increase is primarily the result of the Acquisition. Operating
Expenses for Granutec and Stanley accounted for $8.1 million; versus $0.5 during
the comparable period of the prior fiscal year. Excluding the Acquisition,
Operating Expenses decreased by $3.2 million during the nine months ended
December 31, 2000 compared to the same period of fiscal year 2000. The decrease
is the result of lower variable expenses due to the lower sales volume and lower
fixed spending on marketing and promotional expenses during the first three
quarters of the fiscal year, compared to the same three quarters of fiscal 2000.
Amortization of goodwill and other intangibles increased by $1.0 million in the
third quarter of fiscal year 2001 and $3.0 million during the first nine months
of the fiscal year versus the comparable periods in fiscal year 2000, primarily
as a result of the Acquisition.
During the third quarter of fiscal year 2001, the Company announced its plans to
close its Kalamazoo, Michigan facility in the fourth quarter of fiscal year
2001. As a result, the Company reserved approximately $1.4 million for severance
and other costs related to the closure during the quarter ended December 31,
2000. In addition, the Company recorded a loss in the amount of approximately
$0.2 million from the disposal of its Sherburne, New York facility, which the
Company closed during the third quarter of fiscal year 2001 and a gain in the
amount of approximately $0.4 million from the disposal of its Vancouver, British
Columbia facility.
During the third quarter of fiscal 2001, the Company recorded $4.2 million of
other income compared to other charges of $0.4 million in the three months ended
December 31, 1999. This change was primarily attributable to other income
generated by a settlement arising from a supplier dispute in the amount of
approximately $6.0 million, which was offset by consulting and legal fees
incurred in the amount of approximately $1.6 million. Other operating (income)
charges also includes management fees of $0.4 million for both the three months
ended December 31, 2000 and 1999. During the nine months ended December 31,
2000, other income was $18.8 million compared to $1.1 million of other charges
during the comparable period of the prior fiscal year. Other income includes
settlements arising from supplier disputes, in the aggregate amount of $24.3
million which has been offset by consulting and legal fees of $3.1 million. In
connection with these settlements, the Company awarded a bonus of approximately
$1.2 million to certain of the Company's key management personnel in recognition
of the effect of antitrust activity on prior years' compensation. In addition,
other (income) charges include $1.1 million of management fees.
In the third quarter of fiscal 2001, net interest expense of $8.7 million
represents an increase of $0.9 million from the third quarter of fiscal 2000.
Net interest expense increased by $3.6 million during the nine months ended
December 31, 2000 versus the nine months ended December 31, 1999. This increase
in the three and nine months ended December 31, 2000 was due primarily to an
increase in the average outstanding indebtedness of the Company due to the
Acquisition and to an increase in interest borrowing rates.
The benefit for income taxes for the third quarter of fiscal 2001 was $4.5
million, compared to a provision of $1.9 million in the third quarter of fiscal
2000. During the first nine months of fiscal year 2001, the benefit for income
taxes was $8.3 million compared to a benefit of $3.6 million during the
comparable period of fiscal year 2000. Based on the latest estimates, the
Company expects its effective tax rate to be approximately 33.0% for the
remainder of fiscal 2001.
Primarily as a result of the factors discussed above, a net loss of $9.6 million
was recorded in the third quarter of fiscal 2001 compared to net income of $3.0
million in the third quarter of fiscal 2000. For the nine months ended December
31, 2000, the Company recorded a net loss of $13.2 million versus a net loss of
$3.9 million recorded in the comparable period of fiscal year 2000.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
OTHER INFORMATION
Earnings before interest, taxes, depreciation, amortization, other non-cash
charges and the charges related to the closure of facilities ("EBITDA") totaled
$2.2 million for the third quarter of fiscal 2001, compared to $17.0 million in
the comparable period in fiscal 2000. EBITDA for the three quarters of fiscal
year 2001, was $25.7 million or $2.7 million lower than EBITDA recorded during
the first three quarters ending December 31, 1999. EBITDA can be calculated from
the financial statements with the exception of the amortization of deferred debt
issuance costs totaling $0.5 million for the three months ended December 31,
2000 and 1999, and $1.6 million and $1.4 million during the nine months ended
December 31, 2000 and 1999, respectively, which is included in interest expense
in the statement of operations and in amortization expense in the statement of
cash flows. The Company believes that EBITDA provides useful information
regarding the Company's debt service ability, but should not be considered in
isolation or as a substitute for the statements of operations or cash flow data.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal year 2001, net cash provided by operating
activities totaled $10.3 million. This resulted primarily from a net loss of
$13.2 million offset by $21.4 million of non cash charges to operations and
changes in operating assets and liabilities totaling $2.1 million. Changes in
operating assets and liabilities are comprised of a reduction in accounts
receivable of $21.4 million, an increase of $1.9 million in accounts payable, a
decrease in other accrued expenses of $3.1 million, a decrease in the bank
checks outstanding of $12.7 million, and an increase in inventory spending of
$5.4 million. The decrease in accounts receivable resulted from accelerated
payment terms negotiated by the Company with certain customers.
During the first nine months of fiscal year 2001, net cash used in investing
activities totaled $13.9 million. This was primarily due to net capital
expenditures of $6.0 million, $6.3 million in advances related to the
negotiation of long term supply arrangements, a $1.9 million investment in a
joint venture, partly offset by a decrease of $0.3 million in other non current
assets. The major capital expenditures related to investments in capacity
expansion at the Company's manufacturing, packaging and distribution facility in
South Carolina.
Net cash provided by financing activities during the first nine months of fiscal
year 2001 totaled $9.2 million, which primarily related to borrowings of $13.1
million on the Company's revolving facilities and payments in the amount of $4.0
million on other long term debt.
FINANCING ARRANGEMENTS
The Company has entered into an Amended and Restated Credit Agreement (the
"Amended Credit Agreement") with certain financial institutions (the "senior
lenders"). The Amended Credit Agreement provides for one U.S. term loan due
December 30, 2004 in the amount of $68.0 million, two U.S. term loans due
December 30, 2005 in the amounts of $65.0 million and $30.0 million,
respectively, a Canadian dollar denominated term loan due December 30, 2004 in
the amount of approximately U.S. $12.0 million (collectively, the "Term
Facility"), and a revolving credit facility in the amount of U.S. $125.0 million
(the "Revolving Facility"), a portion of which is made available to Vita Health
in Canadian dollars. The unpaid principal amount outstanding on the Revolving
Facility is due and payable on June 30, 2003.
Borrowings under the Amended Credit Agreement bear interest at floating rates
that are based on LIBOR or on the applicable alternate base rate (as defined in
the Amended Credit Agreement), plus applicable margins, and accordingly, the
Company's financial condition and performance is and will continue to be
affected by changes in interest rates. On October 8, 1999, the Company entered
into an interest protection agreement, with respect to $54.0 million of its
indebtedness under the Amended Credit Agreement, whereby the Company will not
pay any lower than 5.94% on LIBOR rates plus applicable margin on the interest
payable thereon. In connection with this transaction, the Company received
approximately $0.2 million that is being recorded as a reduction of interest
expense over the period of the agreement, which terminates October 8, 2001. The
Amended Credit Agreement imposes certain restrictions on the Company, including
restrictions on its ability to incur additional debt, enter into sale-leaseback
transactions, incur contingent liabilities, pay dividends or make distributions,
incur or grant liens, sell
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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)
or otherwise dispose of assets, make investments or capital expenditures,
repurchase or prepay its Subordinated 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 Senior Subordinated Notes (the
"Subordinated Notes") upon a Change of Control (as defined in the indenture) and
in certain circumstances with the proceeds of asset sales. The Subordinated
Notes are subordinated to the indebtedness under the Amended Credit Agreement.
The indenture governing the Subordinated Notes imposes certain restrictions on
the Company and its subsidiaries, including restrictions on its ability to incur
additional debt, make dividends, distributions or investments, sell or otherwise
dispose of assets, or engage in certain other activities.
A portion of the outstanding borrowings under the Amended Credit Agreement,
amounting to approximately U.S. $25.2 million as of December 31, 2000, is
denominated in Canadian dollars. All other outstanding borrowings under the
Amended Credit Agreement, and all of the borrowings under the Subordinated
Notes, are denominated in U.S. dollars.
At December 31, 2000, borrowings under the Amended Credit Agreement bore
interest at a weighted average rate of 9.27% for U.S. borrowings and 8.52% for
Canadian borrowings per annum. The Subordinated Notes bear interest at a rate of
9.6% per annum.
LIQUIDITY
At December 31, 2000, the Company was not in compliance with certain
financial covenants contained in the Company's Amended and Restated Credit
Agreement (the "Amended Credit Agreement") with certain financial
institutions (the "senior lenders"). Such covenant violations constitute
events of defaults under the terms of the Amended Credit Agreement and, as a
result, all borrowings under the Amended Credit Agreement, aggregating $255
million at December 31, 2000, have been classified as a current liability in
the accompanying condensed consolidated balance sheet to reflect the senior
lenders' right to accelerate maturity of the loans. The Company currently
believes that cash flow from operating activities, combined with its current
cash availability, will be sufficient to fund the Company's anticipated
working capital requirements, but there can be no assurance in this regard.
Should the senior lenders accelerate the maturity of the loans under the
Amended Credit Agreement, all amounts due under the indenture governing $85
million of Senior Subordinated Notes (the "Subordinated Notes") may also be
accelerated. As a result, the Subordinated Notes have been classified as a
current liability in the accompanying condensed consolidated balance sheet.
The Company also has an outstanding balance of $6.6 million under an
Industrial Development Revenue Bond (the "IRB Loan") that is secured by a
letter of credit issued under the Amended Credit Agreement. As per the terms
of the Amended Credit Agreement, if an event of default is continuing, upon
notice from the senior lenders, the Company would be obligated to reimburse
the issuer for the amount equal to the outstanding letter of credit.
Accordingly, the IRB Loan has been classified as a current liability in the
accompanying condensed consolidated balance sheet.
The Company has entered into a waiver letter with the senior lenders dated as
of February 14, 2001 (the "Waiver") under which the senior lenders have
agreed to waive such events of default and to forbear exercising any of their
rights or remedies under the Amended Credit Agreement for a limited period
ending on the earlier of March 30, 2001 or the occurrence of any additional
event of default under the Amended Credit Agreement (not waived under the
Waiver). The Waiver provides for a one percent increase in the applicable
margin effective through and including March 30, 2001, and a fee of $0.4
million to be paid on execution of the Waiver.
Conditions to the Waiver shall survive the expiration of the Waiver including
the Company's agreement that: (a) interest will be paid monthly instead of
quarterly; and (b) outstanding amounts under the Amended Credit Agreement
cannot be continued as or converted into LIBOR or banker's acceptance rate
loans.
During the waiver period, the Company intends to work with the senior lenders
to develop a revised business plan that would reflect the effects of the
operational restructuring and reengineering initiative discussed below and
serve as the basis for commencing discussions regarding possible amendments
and/or further waivers to the Amended Credit Agreement. In January 2001, the
Company borrowed an additional $27.0 million which constituted substantially
all remaining amounts available pursuant to the revolving facility under the
Amended Credit Agreement.
Additionally, the Company is not precluded from using its available cash
resources, which approximates $29.0 million at February 13, 2001, to pay its
liabilities and conduct operations in the normal course of business.
There can be no assurance that the waiver will be extended beyond March 30,
2001. If the senior lenders were to accelerate maturity of amounts due under
the Amended Credit Agreement and other long-term debt became immediately
payable as a result of such action, the Company would not have sufficient
funds to repay its outstanding debt, and no assurance can be given that
alternative sources of sufficient financing would be available on acceptable
terms, or at all. These financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and
classification of assets or liabilities that may result from the outcome of
these actions.
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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)
OPERATIONAL RESTRUCTURING
In response to ongoing trends and increased price competition in the vitamin,
mineral and supplement market, management has accelerated a reengineering of
the Company's operations (the "initiative") commencing in the fourth quarter
of fiscal 2001 to reduce costs and make the most efficient use of the
Company's resources. The initiative includes the rightsizing of the
organization, by eliminating 500 positions, including those previously
identified in the closure of the Largo, Florida, Kalamazoo, Michigan and
Vancouver, British Columbia facilities. The Company intends to implement
complexity reduction programs, which focus the Company's resources on more
profitable product lines and customers. The reduction in the number of
individual products will allow for lower sales, marketing and product
handling expenses, as well as improved customer service. The Company will
continue to develop a global sourcing program to reduce raw material costs
and ensure first to market on private label OTC switch programs.
This initiative is intended to improve cash flow and liquidity, and its
positive effects should begin to impact the Company's financial statements in
the fourth quarter of fiscal year 2001. The Company expects to take a
significant charge during the fourth quarter of fiscal 2001 to provide for
the cost of the restructuring elements of the initiative while expenditures
for costs relating to the reengineering elements of the initiative will be
expensed as incurred. Management is currently unable to estimate the total
cost of the initiative or the periods in which the costs will be recognized
as expenses in the Company's consolidated financial statements.
PENDING ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS No. 133"). SFAS No. 133 establishes new standards
for recording derivatives in interim and annual financial reports requiring that
all derivative instruments be recorded as assets or liabilities, measured at
fair value. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000, and therefore, the Company will adopt the new requirements effective with
the filing of the Quarterly Report on Form 10-Q for the quarter ended June 30,
2001. The Company does not anticipate that the adoption of SFAS No. 133 will
have significant impact on its results of operations, financial position or cash
flows.
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 reengineering initiatives; (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
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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)
will be those anticipated by management. The important factors described
elsewhere in this report and in the Company's Form 10-K for the fiscal year
ended March 31, 2000 (including, without limitation, those factors discussed in
the "Business - Risk Factors" section of Item 1 thereof), on file with the
Securities and Exchange Commission, could affect (and in some cases have
affected) the Company's actual results and could cause such results to differ
materially from estimates or expectations reflected in such forward-looking
statements. In light of these factors, there can be no assurance that events
anticipated by the forward-looking statements contained in this report will in
fact transpire. The Company undertakes no obligation to republish revised
forward-looking statements to reflect the occurrence of unanticipated events.
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PART I ITEM 3
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe that it has material exposure to interest rate,
foreign currency exchange rate or other relevant market risks. See disclosures
under Item 7a. "Quantitative and Qualitative Disclosures about Market Risks" in
the Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2000. No significant changes have occurred during the third quarter of fiscal
2001.
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PART II OTHER INFORMATION
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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
In response to this Item, the information set forth in Note 1 to Notes
of Condensed Consolidated Financial Statements contained in Part I of
this Quarterly Report on Form 10-Q is hereby incorporated by reference.
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:
4.26 Notice of Events of Default and Reservation of Rights,
presented by the Bank of Nova Scotia
4.27 Waiver Letter, dated February 14, 2001, pursuant to the
Amended and Restated Credit Agreement between the Company
and other financial institutions party thereto, as lenders.
(b) Reports on Form 8-K:
None
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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, 2001
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