ITEM 1. BUSINESS
GENERAL
NutraMax Products, Inc. (the "Company") was incorporated on April 20, 1987 under the laws of the State of Delaware and is the successor by merger in July 1990 to Aid-Pack, Inc. ("Aid-Pack"), formally a wholly-owned subsidiary of MEDIQ Incorporated ("MEDIQ").
The Company is a private label health and personal care products company. The Company's strategy is to offer a line of quality products equivalent to national brands at lower cost to consumers while providing greater profit potential to retailers than the national brands. National brands dominate health and personal care product categories. However, in recent years private label products have captured increased market share by appealing to value conscious consumers seeking lower cost products of comparable quality. The Company received the 1993 Retail Excellence Award as the private label company of the year, with the selection based on a survey conducted by a major trade journal.
PRODUCTS
FEMININE NEEDS - The Company manufactures disposable douches for sale under its value brands Sweet*n Fresh(R) and Sweet Love(R) and on a private label basis. In February 1996, the Company acquired certain assets of the Hospital Specialty Company Division of the Tranzonic Companies related to the manufacture and sale of feminine hygiene products. Sales of douche products in fiscal 1997 were 19% of net sales, as compared to 23% in 1996 and 24% in 1995. The Company also markets private label feminine yeast infection medication products containing the active ingredient clotrimazole.
COUGH/COLD PRODUCTS - The Company is the leading manufacturer and distributor of private label cough drops and throat lozenges, and also manufactures cough drops on a contract basis. The Company offers an extensive line of solid dosage cough/cold products, including cough drops, throat lozenges, sugar-free products, vitamin C drops and liquid center items. Sales of cough/cold products represented 34%, 31% and 34% of net sales in fiscal 1997, 1996 and 1995 respectively.
BABY CARE - The Company manufactures disposable baby bottle liners on a private label basis and under its value brand Fresh*n Easy(R). The Company manufactures pediatric electrolyte oral maintenance solution, a product which is used to replace minerals lost by children who suffer from diarrhea and vomiting, for sale under its value brand NutraMax Baby Care Pediatric Electrolyte and on a private label basis. During fiscal years 1997, 1996 and 1995, sales of baby care products represented 15%, 15% and 19% of net sales respectively.
OPHTHALMICS - The Company manufactures private label over-the-counter and prescription ophthalmic products for retail and industrial customers, including over-the-counter contact lens solutions, artificial tears and eye drops, as well as generic prescription eye care products. Sales of ophthalmic products represented 10%, 9% and 10% of net sales in fiscal 1997, 1996 and 1995 respectively.
ADULT NUTRITION PRODUCTS - In March 1995, the Company introduced a new line of adult high calorie liquid nutrition products which are sold under its value brand NutraMax Plus High Calorie Liquid Nutrition and on a private label basis. During fiscal 1996, the Company introduced a lower calorie version of this same product sold under its value brand name NutraMax Complete Liquid Nutrition. These products are manufactured by a third party and marketed by the Company through its distribution channels. During fiscal 1997, 1996 and 1995 sales of adult liquid nutrition products represented 4%, 5% and 3% of net sales respectively.
PERSONAL CARE - The Company manufactures ready-to-use disposable enemas for sale under its value brand Pure & Gentle, on a private label basis and for the institutional market. During fiscal 1997, 1996 and 1995 sales of Personal Care products represented 5%, 5% and 6% of net sales respectively.
ORAL CARE - In October 1995, the Company acquired the assets and assumed certain liabilities of Mi-Lor Corporation, Professional Brushes, Inc. and Codent Dental Products, Inc., companies engaged in the manufacturing and marketing of toothbrushes, dental floss and related products for the store brand market. The acquisition was the Company's entry into the private label oral care segment. These products are manufactured in an 88,000 square foot manufacturing facility located in Florence, Massachusetts which was acquired by the Company as part of the transaction. Oral care products are being marketed by the Company through its existing distribution channels and represented 8% and 9% of net sales for fiscal 1997 and 1996, respectively.
FIRST AID PRODUCTS - In September 1997 the Company acquired certain of the assets and assumed certain liabilities of American White Cross, Inc. and Weaver Manufacturing Corporation, companies engaged in the manufacturing and marketing of adhesive bandages and related products for both the store brand and institutional markets. The acquisition is the Company's entry into the private label first aid market. These products are manufactured in a 253,000 square foot leased facility in Houston, Texas. The first aid products are being marketed by the Company through its existing distribution channels. Sales of first aid products represented 2% of net sales for fiscal 1997.
OTHER PRODUCTS - The Company's other products consist principally of a patented line of sterile, prefilled, disposable dilution bottles used in laboratory testing of water, waste water, foods, drug products, pharmaceuticals and cosmetics. Sales of these other products totaled 3%, 3% and 4% of net sales in fiscal 1997, 1996 and 1995 respectively.
NEW PRODUCT STRATEGY
The Company's growth strategy includes the acquisition and development of new products, and the extension and modification of existing product lines to correspond with national branded products and product variations. The Company expects to add new product lines through internal development, acquisition and joint venture or partnership agreements. The Company contemplates that product line expansion will enable the Company to capitalize on its established distribution channels and manufacturing marketing expertise. New products will most likely focus on consumer packaged goods, including health and personal care products. The Company has added a multi-purpose 4 in 1 soft contact lens solution to its ophthalmic product line with sales beginning October 1996 under the Company's value brand Optopics Multi-purpose Solution and on a private label basis. The product is filled by a third party and then labeled and packaged at the Company's Fairton, New Jersey facility and marketed through the Company's distribution channels.
MARKETING AND DISTRIBUTION
The Company utilizes national brand marketing methods to meet the specific needs of its customers. Such marketing methods include designing contemporary packaging to improve point-of-purchase impact and increase consumer appeal. The Company also uses price, display, packaging, bonus and multi-pack promotions to increase sales and retailer support. Sales are made through the Company's sales representatives and independent brokers.
CUSTOMERS
For fiscal years 1997, 1996 and 1995, Walmart Stores, Inc. accounted for 11%, 11% and 9% of net sales respectively, and American Home Products, Inc. accounted for 10%, 11% and 14% of net sales respectively. While the Company seeks to continually expand its distribution and customer base, the loss of one or more of its largest customers, if not replaced with other comparable businesses, could have a material adverse effect on the Company's results of operations.
COMPETITION
The markets in which the Company competes are dominated by nationally advertised brand name products marketed by established consumer packaged goods companies, most of which have greater marketing, financial and human resources than the Company. The Company also competes with several other private label manufacturers and marketers. Competition for consumer health and personal care products is based primarily on product reliability, price, customer service, and the ability to provide tamper resistant/evident packing. Growth in sales of private label products is also dependent on increasing the amount of shelf space available at retail stores in order to maximize brand awareness and consumer trial. The Company experiences aggressive price competition from time to time from branded and other private label competitors. There can be no assurance that such price competition will not have a material adverse effect on the Company's results of operations (see "ITEM 7. Management's Discussion and Analysis of Financial condition and Results of Operations").
GOVERNMENTAL REGULATION AND HEALTH ISSUES
The Company is registered with the Food & Drug Administration ("FDA") as a manufacturer for certain of its products. The primary forms of governmental regulation are the current "good manufacturing practices" and "good laboratory practices" guidelines administered by the FDA, which set forth the protocols to be followed in the manufacture, storage, packaging and distribution of medical products for human use. Certain of the Company's ophthalmic products are subject to additional FDA regulations relating to pre-market approval of products. The Company's operations are also subject to periodic inspections by the FDA. Promotional claims made with respect to health and personal care products are also subject to regulation by the FDA, and by the Federal Trade Commission.
The use of health and personal care products may result in allergic or other adverse reactions in users. Since 1952, a number of studies have been published in medical journals concerning the relationship of douching to the incidence of pelvic inflammatory disease. These studies provide no conclusive results on the issue of whether douching causes this disease. A 1990 study showed an association between douching and the disease and concluded that further studies were needed. A 1993 study stated that the results of the study lend support to the hypothesis that douching can predispose a woman to pelvic inflammatory disease. Although the Company believes its douche products are safe when used in accordance with instructions accompanying the product package, negative publicity resulting from such studies and any
future studies may affect sales of douche products. In such event there could be a material adverse impact on the Company's results of operations.
EMPLOYEES
The Company has approximately 1000 full-time employees engaged in quality control, marketing and sales, general corporate and administrative positions and manufacturing operations. The Company believes that relations with its employees are satisfactory.
ITEM 2.
ITEM 2. PROPERTIES
The Company currently operates the following facilities (which are owned unless otherwise indicated):
(1) Consists of four facilities, of which three are leased. The Company has entered into a lease, effective January 1, 1998, for an 80,000 square foot distribution center which will provide consolidated warehousing of finished goods as well as provide for the consolidated shipping of the Company. (2) Acquired in October 1995. (3) Leased facility effective September, 1997
The Company believes that its present facilities will be adequate for all of its reasonably foreseeable manufacturing, warehousing and distribution requirements, or that alternative facilities can be obtained at a reasonable cost.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company, like other companies in the store brand industry, has been the subject of claims and litigation brought by national brand name companies based on packaging alleged to be similar to competing brand name products. The Company is also subject to certain claims and informal complaints relating to its products which are incidental and routine to its business and for which the Company maintains insurance coverage. The Company knows of no litigation, either pending or threatened, which is likely to have a material adverse effect on the Company's financial position, results of operations or cash flows.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
MARKET INFORMATION
The following table sets forth, for the periods indicated, the high and low prices for the Company's common stock as reported by NASDAQ. The Company's common stock is traded on the NASDAQ SmallCap Market System under the Symbol "NMPC".
COMMON STOCK HOLDERS
The Company believes there are approximately 2,500 holders of common stock, including shares held in street name by brokers.
DIVIDENDS
The Company has never declared or paid any cash dividends. The declaration of dividends by the Company in the future will at all times be subject to the sole discretion of the Company's Board of Directors, and will depend upon operating results, capital requirements, financial position and bank covenant compliance. The Company's Senior and Subordinated Debt agreements prohibit the payment of dividends. See notes to the consolidated financial statements included elsewhere herein.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below has been derived from the audited financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Company's Consolidated Financial Statements included elsewhere herein.
(1) In September 1997, the Company acquired certain assets of a manufacturer of first aid products for $37,170,000 in cash plus transaction related expenses of approximately $700,000, $233,000 of which was paid by fiscal year end, which was financed by additional term loan and revolving credit facility borrowings and the private placement of 846,154 shares of the Company's common stock. (See note B to the consolidated financial statements)
(2) In December 1996, the Company repurchased 4,037,258 shares of its common stock from MEDIQ, Inc. for $36,335,000. The transaction was financed by a combination of term loans and subordinated debt. (See Note M to the consolidated financial statements).
(3) In February 1996, the Company acquired certain assets of a manufacturer of feminine hygiene products for $2,367,000 in cash which was financed by additional term loan borrowings.
(4) In October 1995, the Company acquired the assets of a manufacturer of private label toothbrushes and dental floss for $1,800,000 in cash and liabilities assumed of $363,000, and the transaction resulted in related expenses of $681,000 which was financed from the Company's revolving credit facility.
(5) In December 1993, the Company acquired a manufacturer and distributor of private label cough/cold products for $13,500,000 which was financed with proceeds from a revolving credit facility.
(6) In June 1993, the Company acquired a manufacturer of private label over-the-counter and prescription ophthalmic products, for approximately 202,000 shares of the Company's common stock with a market value of $2,846,000.
Litigation and Contingencies - See Note O to the consolidated financial statements.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated Financial Statements and notes thereto, contained elsewhere herein.
RESULTS OF OPERATIONS
The consolidated Statements of Operations include the results of operations of acquired companies and businesses from the dates acquired; certain assets of American White Cross, Inc. and Weaver Manufacturing Corporation, ("American White Cross") (September 1997); certain assets of the Hospital Specialty Company Division of the Tranzonic Companies (February 1996); certain assets of Mi-Lor Corporation, ("Mi-Lor"), Professional Brushes, Inc. ("Professional Brushes") and Codent Dental Products, Inc. ("Codent") (October 1995). The following table sets forth, for all periods indicated, the percentage relationship that items in the Consolidated Statements of Operations bear to net sales.
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
Net sales for 1997 were $94,331,000, an increase of $13,852,000 or 17% over 1996 net sales of $80,479,000. The net sales increase is primarily attributable to Cough/Cold sales volume increases resulting from increased distribution both in the private label and contract manufacturing markets and Ophthalmics and Pediatric Electrolyte sales volume increases as a result of increased distribution.
Gross profit for 1997 was $22,603,000 or 24% of net sales, as compared to 22,793,000 or 28% of net sales in 1996. The decrease in gross margin is primarily attributable to a delay in the completion of a major capital expansion program at the Cough/Cold division. New production capacity, centered around a new continuous cooking line used to manufacture cough drops, became operational later than planned. This delay, coupled with increased Cough/Cold product orders resulted in delayed shipments and underabsorbed labor and overhead.
Selling, general and administrative expense for 1997 was $13,947,000 or 15% of net sales as compared to $11,662,000 or 14% of net sales for 1996. The dollar increase is primarily attributed to increases in freight expense, broker commissions, amortization of financing costs, professional services and promotion expense related to increased sales volumes and additional debt refinancing costs. The percentage increase is primarily related to increased freight expense resulting from shipping inefficiencies related to the capacity expansion delay at the Cough/Cold division.
Interest expense for 1997 was $5,042,000 as compared to $1,479,000 for 1996. The increase is primarily attributable to the increased borrowings associated with the MEDIQ Stock Repurchase. (see MEDIQ Stock Repurchase below)
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net sales for 1996 were $80,479,000, an increase of $17,368,000 or 28% over 1995 net sales of $63,111,000. The net sales increase was primarily attributable to the addition of the Oral Care division as a result of the Mi-Lor, Professional Brushes and Codent acquisition, Cough/Cold sales volume increases resulting from increased distribution and a more traditional cough/cold season, a full year of Adult Liquid Nutrition sales introduced in March 1995, increased douche sales resulting from the acquisition of certain assets of the Hospital Specialty Company Division of the Tranzonic Companies and Pediatric Electrolyte sales volume increases resulting from increased distribution.
Gross profit for 1996 was $22,793,000, or 28% of net sales, as compared to $17,195,000, or 27% of net sales in 1995. Increases in gross margin are a result of increased production levels for Cough/Cold products and Feminine Hygiene products, higher gross margin associated with initially high production levels for the Oral Care Division not expected to continue in 1996 and lower raw material costs, principally plastic resin and plastic film.
Selling, general and administrative expense for 1996 was $11,662,000 or 14% of net sales as compared to $8,694,000 or 14% of net sales in 1995. The dollar increase in selling, general and administrative expense is primarily attributable to increases in bad debt expense, broker commission expense, freight expense and promotional expense, all related to increased sales volume and increases in incentive compensation expense.
Interest expense for 1996 was $1,479,000 as compared to $1,427,000 in 1995. The increase is a result of higher borrowing levels.
SEASONALITY
During the last four months of the calendar year, retailers focus their merchandising efforts on, and devote more shelf space to, seasonal and holiday merchandise. As a result, sales of certain of the Company's products tend to be weaker in the Company's first quarter (ending in December), and normally strengthen in the second quarter as retailers replenish their shelves with health and personal care products. Sales of Pediatric Electrolyte and Cough/Cold products may help mitigate weaker sales in the Company's first quarter, as the Company's customers purchase such products to stock inventories in anticipation of an increase in winter sales. Consequently, the results of any one quarter may not necessarily be indicative of results of future quarters.
LIQUIDITY AND CAPITAL RESOURCES
As of September 27, 1997, the Company's working capital increased to $38,602,000 from $9,491,000 on September 28, 1996. Net cash provided by operating activities decreased to $3,939,000 in 1997 from $4,724,000 in 1996 which was primarily attributable to a decrease in net income and increases in inventory offset by increases in accounts payable, accrued expenses and deferred income taxes as a result of increased sales volumes. The net increase in working capital is the result of the acquisition of the assets and the assumption of certain liabilities of American White Cross as well as increases in inventories and the refinancing of the Company's revolving credit facility offset by a reduction in restricted cash.
Net cash used in investing activities was $41,874,000 and consists primarily of the acquisition of certain of the assets less the assumption of certain of the liabilities of the first aid business of American White Cross, ($37,403,000) capital expenditures ($9,109,000) (primarily for additional capacity), offset by restricted cash used for equipment purchases at the Oral Care and Powers facilities as well as a building expansion at Powers which represented the proceeds from the variable rate Industrial Development Bonds. The Company anticipates capital expenditures of approximately $9,500,000 in fiscal 1998 for additional manufacturing capacity and the purchase of a currently leased facility. These expenditures will be financed with existing working capital and approximately a $2,000,000 mortgage loan.
Net cash provided from financing activities totaled $37,341,000 and included borrowings of $74,615,000 related to the MEDIQ Stock Repurchase (proceeds from the sale of approximately 846,000 shares of the Company's stock in connection with the American White Cross acquisition) and debt refinancing, borrowings for the American White Cross acquisition, working capital borrowings and proceeds from the exercise of stock options offset by debt repayments, the MEDIQ Stock Repurchase and deferred financing costs.
On December 31, 1996 pursuant to the terms of an Amended and Restated Stock Purchase Agreement (the "Stock Purchase Agreement") dated November 20, 1996 among MEDIQ Inc., MEDIQ Investment Services, Inc. and the Company, the Company purchased from MEDIQ all 4,037,258 shares of the Company's common stock owned by MEDIQ (the "MEDIQ Shares"), of which 657,194 were held in escrow (the "MEDIQ Escrowed Shares") as of September 27, 1997 in support of MEDIQ's 7.5% Subordinated Debentures due 2003 (the "MEDIQ Bonds"). The aggregate purchase price of the MEDIQ Shares was $36,335,000 representing a purchase price of $9.00 per share (the "Purchase Price"). The Company paid MEDIQ $19,963,000 of the $36,335,000 purchase price in cash and delivered to MEDIQ a promissory note (the "MEDIQ Note") for the remaining $16,372,000 of the purchase price. The balance of the note as of September 27, 1997 was $5,915,000. The MEDIQ Note is payable in installments as MEDIQ Escrowed Shares are released from escrow, pursuant to the indenture (the "MEDIQ Indenture") and escrow agreement relating to the MEDIQ Bonds, together with interest at the annual rate of 7.5%, reduced, however, to 5%, 4% and 3% if the note remains outstanding longer than 18, 30, and 42 months, respectively.
Pursuant to the Stock Purchase Agreement, to the extent that any holder of a MEDIQ Bond (other than MEDIQ) presents such MEDIQ Bond for exchange for MEDIQ Escrowed Shares in accordance with the terms of the MEDIQ Indenture and MEDIQ delivers MEDIQ Escrowed
Shares to such holder, (i) the principal amount of the MEDIQ Note shall be reduced by an amount equal to the product of the number of MEDIQ Escrowed Shares so delivered by MEDIQ to such holder and $9.00, and (ii) the principal amount of the MEDIQ Note shall further be reduced by an amount (the "Excess Cash Amount") equal to the product of the number of Escrowed Shares so delivered by MEDIQ and the number which is equal to the difference between (x) $1,000 divided by the then exchange rate of the MEDIQ Bonds provided in the indenture, and (y) $9.00; provided, however, that in lieu of such further reduction in the principal amount of the MEDIQ note under the foregoing clause (ii), the Company may elect to receive an amount in cash from MEDIQ equal to the Excess Cash Amount.
The Company's revolving credit facility expired on December 31, 1996 and was refinanced in connection with the MEDIQ Stock Repurchase. In addition, the Company had term loans with the same commercial lender which were also refinanced.
In connection with the MEDIQ Stock Repurchase, the Company obtained senior financing in the aggregate principal amount of $60,000,000 (the "Senior Debt Financing") and senior subordinated financing in the aggregate principal amount of $10,000,000 (the "Subordinated Debt Financing").
Pursuant to the Senior Debt Financing, the Company had senior secured credit facilities in the aggregate principal amount of $60,000,000 (the "Senior Debt"), consisting of (i) a $20,000,000 term loan (the "Term Loan A"), (ii) a $15,000,000 term loan (the "Term Loan B" and, together with the Term Loan A, the "Term Loans"), (iii) a $20,000,000 letter of credit to support the MEDIQ Note relating to the MEDIQ Stock Repurchase (the "Stock Repurchase Letter of Credit"), (iv) a $17,300,000 revolving credit facility (the "Revolving Credit Facility"), and (v) a $8,100,000 letter of credit to support the Company's Industrial Development Bonds (the "IDB Letter of Credit" and, together with the Stock Repurchase Letter of Credit, the "Letters of Credit"). The purpose of obtaining the Senior Debt Financing was to permit the Company to finance the MEDIQ Stock Repurchase, to refinance the Company's existing indebtedness and to satisfy the Company's working capital requirements. At the closing of the Senior Debt Financing on December 31, 1996 (the "Senior Debt Closing"), $18,628,000 of the Term Loan A was drawn by the Company and the Stock Repurchase Letter of Credit was issued by the senior lender. As of September 27, 1997, $19,250,000 was outstanding under Term Loan A, $9,085,000 was outstanding under Term Loan B and $12,790,000 was outstanding under the Revolving Credit Facility, with interest rates of 8.27%, 9.5% and 9.5% ,respectively.
Pursuant to the Subordinated Debt Financing, the Company's subordinated lender has provided the Company with an aggregate principal amount of $10,000,000 (the "Senior Subordinated Debt") in the form of senior subordinated notes (the "Senior Subordinated Notes") issued to the subordinated lender. The Senior Subordinated Notes mature on December 31, 2003 and bear interest at 11.5%. Interest on the Senior Subordinated Notes is payable quarterly in arrears, commencing on the first calendar quarter of calendar 1997. In connection with the Subordinated Debt Financing, the Company issued to the subordinated lender warrants to purchase 273,419 shares of common stock of the Company (representing approximately 4.5% (on a fully diluted basis) of the total outstanding common stock as of December 31, 1996) at $9.00 per share, subject to certain adjustments to prevent dilution, exercisable for a ten year period beginning with the date of issue.
In connection with the acquisition of certain of the assets of the first aid business of American White Cross, the Company amended its Senior Debt agreement to provide for an increase in the Senior Secured Credit Facility consisting of a $30,000,000 term loan (the "Additional Term Loan A"), (ii) a $27,000,000 term loan (the "Additional Term Loan B" and, together with Term Loan A, the "Additional Term Loans") and (iii) a $25,000,000 revolving credit facility (the "Additional Revolving Credit Facility").
As of September 27, 1997, $10,000,000 was outstanding under the Additional Term Loan A, $12,000,000 under the Additional Term Loan B and $4,243,000 under the Additional Revolving Credit Facility with interest rates of 8.75%, 10% and 9.5%, respectively.
The agreements evidencing the Senior Debt and the Senior Subordinated Debt contain certain restrictive covenants including, without limitation, covenants with respect to the ratio of total debt to earnings before interest, taxes, depreciation and amortization (" EBITDA"), operating cash flow, interest coverage, capital expenditures and prevent the payment of dividends.
On May 3, 1996, the Company completed a $4,300,000 IDB financing. Proceeds from the financing were used to reduce the outstanding balance under the Company's revolving credit facility which was used to fund the Oral Care acquisition and for the capital expenditures made and scheduled to be made over the next twelve months for the Oral Care operation. As of September 28, 1996 $2,728,000 of the proceeds of the IDB financing had been used to repay a portion of the Company's outstanding balance under it's existing revolving credit facility and to pay for equipment purchases. In 1997 $1,735,000 of the proceeds plus interest of the IDB financing were used for equipment purchases. The variable interest rate on the bond as of September 27, 1997 and September 28, 1996 was 3.65% and 3.85% , respectively and interest is payable monthly. Principal payments are funded monthly and are payable annually at $400,000 per year through May 1, 2003, $200,000 due May 1, 2004 and $100,000 per year thereafter through May 1, 2016. The IDB is supported by a letter of credit that contains certain financial covenants with respect to minimum quarterly net earnings, tangible net worth, indebtedness to net worth ratios and cash flows. The IDB contains certain restrictions including limiting capital expenditures made for the Oral Care operation to $10,000,000 over a period of three years.
On June 7, 1996, the Company completed a second IDB financing for $3,500,000 for the purpose of funding the expansion of the Powers Pharmaceutical manufacturing facility and the purchase of additional manufacturing equipment at the facility. As of September 28, 1996 $447,000 of the proceeds of the bond had been used to pay for equipment purchases. In 1997, $3,095,000 of the proceeds plus interest was used for equipment purposes and building expansion. The variable interest rate on the bond as of September 27, 1997 and September 28, 1996 was 3.65% and 3.85%, and interest is payable monthly. Principal payments are funded monthly and are payable annually beginning at $400,000 per year, through May 1, 2001 and $100,000 per year thereafter through May 1, 2016. The IDB is supported by a letter of credit
with State Street Bank and Trust Company that contains certain financial covenants with respect to minimum quarterly net earnings, tangible net worth, indebtedness to net worth ratios and cash flows. The IDB contains certain restrictions including limiting capital expenditures made for the Powers Pharmaceutical operations to $10,000,000 over a three year period.
The Company has an additional mortgage which bears interest at 8.5% and is payable in monthly installments of $7,000 including interest, with a final payment of approximately $641,000 due December 31, 1997.
The Company believes that its existing working capital, anticipated funds to be generated from future operations and funds available under the Senior and Subordinated Debt Financing will be sufficient to meet all of the Company's operating and capital needs through fiscal 1998. However, depending upon future growth of the business, additional financing may be required.
PURCHASE OF AMERICAN WHITE CROSS, INC. AND WEAVER MANUFACTURING CORPORATION
On September 11, 1997, the Company purchased certain assets and assumed certain liabilities related to the first aid business of American White Cross, Inc. and Weaver Manufacturing Corporation ("American White Cross") for $37,170,000 in cash plus transaction related expenses of approximately $700,000. The transaction was accounted for using the purchase method of accounting and the results of operations of the acquired entity for the period September 12, 1997 through September 27, 1997 are included in the consolidated financial statements of the Company (see footnote B to the consolidated financial statements).
In addition to the increased Senior Debt Financing, the Company, pursuant to the Stock Purchase Agreement by and between NutraMax Products, Inc. and Cape Ann Investors, L.L.C., dated August 12, 1997, (the "Stock Purchase Agreement'), sold 846,154 shares of its stock at $13.00 per share yielding $11,000,000 of total proceeds used in conjunction with the additional Senior Debt proceeds to finance the transaction.
RECENT DEVELOPMENTS
The Company has conducted a review of its computer systems to identify those areas that could be affected by Year 2000 failures. The Company believes that its integrated manufacturing, accounting, distribution and order entry system has built-in Year 2000 compliance. The impact of the Year 2000 on the Company's customers and vendors is not yet known.
On October 29, 1997 the Company announced that it would purchase from its stockholders in a Dutch Auction self tender up to 450,000 shares of its common stock ("the Shares") at a purchase price not greater than $12.75 per share nor less than $11.00 per share. The purpose of the offer was to provide added market liquidity for stockholders who wished to sell their shares as a result of the Company's fourth quarter 1997 performance.
The offer expired on November 28, 1997. A total of 250,668 shares were purchased and retired by the Company at a price of $12.75 per share. The offer was financed by sales by the Company of Shares as follows: (i) to Cape Ann Investors, L.L.C. ("Cape Ann"), the Company's largest stockholder, pursuant to an agreement dated as of October 14, 1997, as amended on October 16, 1997 by and between the Company and Cape Ann; (193,104 shares), (ii) to Bernard J. Korman ("Mr. Korman"), the Company's Chairman of the Board, pursuant to an agreement dated as of October 14, 1997 by and between the Company and Mr. Korman; (50,134 shares), (iii) to Donald E. Lepone ("Mr. Lepone"), the Company's Chief Executive Officer, pursuant to an Agreement dated as of October 14, 1997 by and between the Company and Mr. Lepone; (5,013 shares) and (iv) to Donald M. Gleklen ("Mr. Gleklen"), a member of the Board of Directors of the Company, pursuant to an agreement dated as of October 16, 1997 by and between the Company and Mr. Gleklen; (2,507 shares).
In connection with the Dutch Auction Self Tender, the Company received from its Senior and Subordinated Lenders a waiver to allow for the purchase of its common stock.
Effective September 29, 1996, the Company adopted, prospectively, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets be reviewed for impairment whenever circumstances indicate that the carrying value of an asset may not be recoverable. The adoption of SFAS No. 121 did not have a significant effect on the Company's consolidated financial position or results of operations for the year ended September 27, 1997.
Effective September 29, 1996, the Company adopted SFAS No. 123, "Accounting For Stock-Based Compensation." As permitted by SFAS No. 123, the Company has continued to account for its stock-based transactions to employees in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees. As required under SFAS No. 123, for stock option grants to non- employees, the Company calculates compensation expense using a fair value based method and amortizes compensation expense over the vesting period.
In March 1997, the Financial Accounting Standards Board ("FASB") released SFAS No. 128, "Earnings per Share," which will be effective for the first quarter of fiscal 1998. SFAS No. 128 will require the Company to restate amounts
previously reported as earnings per share to comply with the requirements of the new standard; while the Company is in process of evaluating the impact of SFAS No. 128, it does not expect that adoption will have a dilutive effect on previously reported earnings per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which will be effective for the Company beginning in fiscal 1999. SFAS No. 131 redefines how operating segments are determined and requires disclosure of certain financial and descriptive information about a company's operating segments. The Company anticipates with the adoption of SFAS No. 131, it will expand its segment disclosures to include separate segments. The Company has not yet completed its analysis of which operating segments it will report on.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Section 21E of the Exchange Act. Although the Company believes its expectations are based upon reasonable assumptions within the bounds of its knowledge of its business operations, there can be no assurance that actual results will not differ materially from those set fourth in the forward-looking statements. Certain factors that might cause such a difference include the following: the timing of new products introduced by the Company, the timing of orders received from customers, the gain or loss of significant customers, changes in the products sold, competition from other private label manufacturers, seasonal changes in the demand for the Company's products, increases in the cost of raw materials and changes in the retail market for health and beauty aids in general. For additional information concerning these and other important factors which may cause the Company's actual results to differ materially from expectations and underlying assumptions, please refer to the reports filed by the Company with the Securities and Exchange Commission.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Election of Directors" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion responsive thereto under the following captions in the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders:
"Election of Directors" and "Executive Compensation"
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this items is incorporated by reference from the discussion responsive thereto under the caption "Principal Shareholders" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Certain Transactions" in the Company's Proxy Statement relating to the 1997 Annual Meeting of Shareholders.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders NutraMax Products, Inc. Gloucester, Massachusetts
We have audited the accompanying consolidated balance sheets of NutraMax Products, Inc. and subsidiaries (the "Company") as of September 27, 1997 and September 28, 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended September 27, 1997. Our audits also included the financial statement schedule listed in Item 14
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The response to this portion of Item 14 is submitted as a separate section of this report commencing on page 10.
(a) (2) FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts and Reserves
Other schedules are omitted because of the absence of conditions under which they are required.
(a) (3) AND (C) EXHIBITS (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT INDEX
EXHIBIT INDEX
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1 on July 5, 1991, and incorporated herein by reference. (2) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1992, and incorporated herein by reference. (3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1994, and incorporated herein by reference. (4) Filed as an Exhibit to the Company's Annual Meeting on Form 10-K for Fiscal Year 1995 and incorporated herein by reference. (5) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended May 31, 1990, and incorporated herein by reference. (6) Filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 on August 15, 1991, and incorporated herein by reference. (7) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal year 1991, and incorporated herein by reference. (8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for fiscal 1993, and incorporated herein by reference. (9) Filed herewith. (10) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the period ended June 29, 1996. (11) Filed as an exhibit to the Company's Current Report on Form 8-K dated September 11, 1997 and incorporated herein by reference. (12) Filed as an exhibit to the Company's Issued Tender Offer Statement on Schedule 13E-4 dated October 29, 1997 and incorporated herein by reference. (13) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal year 1996, and incorporated herein by reference (14) Filed as an exhibit to the Company's Annual Report on Form 10-K for fiscal year 1996, and incorporated herein by reference
(b) REPORTS ON FORM 8-K FILED IN THE FOURTH QUARTER OF FISCAL 1997.
Current Report on Form 8-K dated September 11, 1997
Item 2. Acquisition or Disposition of Assets. Purchase of American White Cross, Inc. and Weaver Manufacturing Corp.
Item 7. Financial Statements and Exhibits
The following financial statements of the business acquired and pro forma financial information are to be filed as an amendment to the NutraMax Products, Inc. Form 8-K, dated September 11, 1997(*)
(a) Financial statements of business acquired
(1) The financial statements required pursuant to Article 3, 210.3-05 (b) for the year ended December 31, 1996, and for the interim period ended June 30, 1997
(2) Pursuant to Rule 2-02 of Regulation S-X[17 CFR 210.2- 02] a manually signed accountants report for the audit of the year ended December 31, 1996 financial statements.
(b) Pro forma financial information
(1) The pro forma unaudited condensed consolidated financial information required pursuant to Article 11, 210.11-02(b) for the year ended December 31, 1996 and the period ended June 30, 1997
(c) The following exhibits have been filed as part of the NutraMax Products, Inc. Form 8-K dated September 11, 1997:
Exhibit Name ------- ---- 2.1 Asset Purchase Agreement dated as of July 21, 1997 (the "Asset Purchase Agreement") by and among NutraMax Products, Inc., American White Cross, Inc. and Weaver Manufacturing Corporation (**)
2.2 Amendment No. 1 to Asset Purchase Agreement dated as of August 15, 1997 by and among NutraMax Products, Inc., American White Cross, Inc., and Weaver Manufacturing Corporation.
2.3 Stock Purchase Agreement dated as of August 12, 1997 (the "Stock Purchase Agreement") by and between NutraMax Products, Inc. And Cape Ann Investors, L.L.C. (**)
2.4 Amendment No. 1 to Stock Purchase Agreement dated as of September 9, 1997 by and among NutraMax Products, Inc. And Cape Ann Investors, L.L.C.
2.5 Amendment No. 1 dated as of September 11, 1997 to the Revolving Credit and Term Loan Agreement dated as of December 30, 1996 among NutraMax Products, Inc., the Banks (as defined therein) and BankBoston, N.A., as agent (**)
(*) The Registrant has not yet filed the required Form 8-KA amendment to the Form 8-K filed on September 11, 1997. The Form 8-KA amendment has not yet been filed due to the acquisition occurring late in the Registrant's fourth quarter, and the Registrant requires additional time to complete the required audited historical financial statements and pro forma information. The Registrant expects to file the Form 8-KA as soon as all of the necessary information is available.
(**) Schedules are omitted. The Registrant hereby agrees to furnish supplementally a copy of any omitted schedule to the Commission upon request.
SIGNATURES
Pursuant to requirements of Section 13 or 15(d) 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.
Dated: January 8, 1998 NUTRAMAX PRODUCTS, INC.
By: /s/ Donald E. Lepone ------------------------------ Donald E. Lepone, President and Chief Executive Officer
By: /s/ Robert F. Burns ------------------------------ Robert F. Burns, Vice President, Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include at least a majority of the Board of Directors on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures Title Date - ---------- ----- ----
/s/ Bernard J. Korman Chairman of the Board January 8, 1998 - --------------------- Bernard J. Korman
/s/ Donald E. Lepone President, Chief January 8, 1998 - -------------------- Executive Officer and Donald E. Lepone Director
/s/ Donald M. Gleklen Director January 8, 1998 - ---------------------- Donald M. Gleklen
/s/ Dennis M. Newnham Director January 8, 1998 - ---------------------- Dennis M. Newnham
/s/ David M. Schulte Director January 8, 1998 - ---------------------- David M. Schulte
NUTRAMAX PRODUCTS, INC. SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FISCAL YEARS 1997, 1996 AND 1995
(1) Includes allowance from acquisition of Oral Care in 1996. (2) Represents accounts directly written-off net of recoveries.