<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1997
REGISTRATION NO. 333-33121
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------
LEINER HEALTH PRODUCTS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 2834 95-3431709
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
------------------------
901 EAST 233RD STREET
CARSON, CALIFORNIA 90745
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
WILLIAM B. TOWNE
LEINER HEALTH PRODUCTS INC.
901 EAST 233RD STREET
CARSON, CALIFORNIA 90745
(310) 952-1341
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPY TO:
DAVID A. BRITTENHAM
DEBEVOISE & PLIMPTON
875 THIRD AVENUE
NEW YORK, NEW YORK 10022
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS AMOUNT TO BE OFFERING MAXIMUM AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
9 5/8% Senior Subordinated Notes due
2007.................................... $85,000,000 100% $85,000,000 $25,758.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f) under the Securities Act of 1933, as amended.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 5, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS
TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS
LEINER HEALTH PRODUCTS INC.
OFFER TO EXCHANGE 9 5/8% SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL EXISTING NOTES (AS DEFINED BELOW)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1997, UNLESS EXTENDED.
AS DESCRIBED HEREIN, WITHDRAWAL RIGHTS WITH RESPECT TO THE EXCHANGE OFFER ARE
EXPECTED TO
EXPIRE AT THE EXPIRATION OF THE EXCHANGE OFFER.
--------------------------
Leiner Health Products Inc., a Delaware corporation ("LHP," and collectively
with its subsidiaries, the "Company"), hereby offers (the "Exchange Offer"),
upon the terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (the "Letter of
Transmittal") to exchange up to $85,000,000 aggregate principal amount of its
9 5/8% Senior Subordinated Notes due 2007 (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act")
pursuant to a Registration Statement of which this Prospectus is a part, for a
like principal amount of its issued and outstanding 9 5/8% Senior Subordinated
Notes due 2007 (the "Existing Notes"). The New Notes will be issued in
denominations of $1,000 or integral multiples thereof. The New Notes and the
Existing Notes are referred to collectively herein as the "Notes." The Existing
Notes were originally issued and sold by Leiner Health Products Group Inc.,
LHP's indirect corporate parent ("Leiner Group"), in a transaction that was
exempt from registration under the Securities Act (the "Offering") and resold to
certain qualified institutional buyers and institutional accredited investors in
reliance on, and subject to the restrictions imposed pursuant to, Rule 144A
under the Securities Act ("Rule 144A") and other applicable exemptions from the
registration requirements of such Act. Immediately following the consummation of
the Offering, Leiner Group assigned to its wholly-owned indirect subsidiary LHP,
and LHP assumed, all of Leiner Group's obligations in respect of the Existing
Notes (the "Assumption") and LHP became the obligor on the Existing Notes. The
terms of the New Notes are identical in all material respects to the terms of
the Existing Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the New Notes will have been registered under the Securities
Act, and thus will not bear restrictive legends restricting their transfer
pursuant to the Securities Act.
Interest on the Notes is payable semiannually in cash on January 1 and July
1 of each year, commencing January 1, 1998. Interest on each of the New Notes
issued pursuant to the Exchange Offer will accrue from the last interest payment
date to which interest was paid or duly provided for on the Existing Notes
surrendered in exchange therefor or, if no interest has been paid or duly
provided for, from the original date of issuance of the Existing Notes.
The New Notes will be redeemable at the option of LHP, in whole or in part,
at any time on or after July 1, 2002 at the redemption prices set forth herein,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to July 1, 2000, LHP, at its option, may redeem in the
aggregate up to 30% of the original principal amount of the Notes at a
redemption price equal to 109 5/8% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption, with the net cash
proceeds of one or more Public Equity Offerings (as defined herein); PROVIDED,
HOWEVER, that at least $60.0 million aggregate principal amount of Notes remains
outstanding immediately after giving effect to such redemption. See "Description
of the New Notes-- Redemption." Upon a Change of Control (as defined herein),
(i) LHP will have the option prior to July 1, 2002, to redeem the New Notes, in
whole, at a redemption price equal to 100% of the principal amount thereof plus
the Applicable Premium (as defined herein) as of, and accrued and unpaid
interest (if any) to, the date of redemption, and (ii) if LHP does not redeem
the New Notes, subject to certain conditions, each holder of Notes will have the
right to require LHP to purchase such holder's New Notes at a price equal to
101% of the principal amount thereof, together with accrued and unpaid interest
to the date of purchase. See "Description of the New Notes--Change of Control."
The New Notes will be unsecured senior subordinated obligations of LHP and
will be subordinated in right of payment to all existing and future Senior Debt
(as defined herein) of LHP, and will rank PARI PASSU in right of payment with
all other existing and future senior subordinated indebtedness of LHP. As of
June 30, 1997, on a pro forma basis after giving effect to the Recapitalization
(as defined herein) and the financing therefor, the Company had approximately
$164.7 million principal amount of Senior Debt outstanding and approximately
$249.7 million of aggregate indebtedness outstanding (including the Existing
Notes).
The Exchange Offer is not conditioned upon any minimum number of Existing
Notes tendered. The Exchange Offer will expire at 5:00 p.m., New York City time,
on , 1997, unless extended by LHP (such date as it may be so extended,
the "Expiration Date"). As soon as practicable after the Expiration Date, LHP
will accept all Existing Notes properly tendered and not validly withdrawn for
Exchange (the "Exchange Date") and deliver or cause the delivery of New Notes in
exchange therefor. Existing Notes tendered pursuant to the Exchange Offer may be
withdrawn at any time prior to 5:00 p.m. New York City time or the Expiration
Date; otherwise such tenders are irrevocable. New Notes to be issued in exchange
for validly tendered Existing Notes will be delivered through the facilities of
The Depository Trust Company by the Exchange Agent (as defined herein).
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE NEW NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
The Existing Notes were originally issued and sold in a transaction that was
exempt from registration under the Securities Act and resold to certain
qualified institutional buyers and institutional accredited investors in
reliance on, and subject to the restrictions imposed pursuant to, Rule 144A
under the Securities Act ("Rule 144A") and other applicable exemptions from the
registration requirements of such Act. Based on interpretations by the Staff of
the Securities and Exchange Commission (the "Commission") as set forth in no-
action letters issued to third parties (including EXXON CAPITAL HOLDINGS
CORPORATION (available May 13, 1988), MORGAN STANLEY & CO. INCORPORATED
(available June 5, 1991), K-III COMMUNICATIONS CORPORATION (available July 2,
1993) and SHEARMAN & STERLING (available July 2, 1993)), LHP believes that New
Notes issued pursuant to the Exchange Offer in exchange for the Existing Notes
may be offered for resale, resold and otherwise transferred by holders thereof
(other than any such holder which is (i) an "affiliate" of LHP within the
meaning of Rule 405 under the Securities Act, (ii) a broker-dealer who acquired
Existing Notes directly from LHP or (iii) a broker-dealer who acquired Existing
Notes as a result of market-making or other trading activities) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that (a) such New Notes are acquired in the ordinary
course of such holder's business, (b) at the time of the commencement of the
Exchange Offer such holder has no arrangement with any person to participate in
a distribution of the New Notes and (c) such holder is not engaged in, and does
not intend to engage in, a distribution of the New Notes. Holders of the
Existing Notes that, at the time of the commencement of the Exchange Offer, are
engaged in, intend to engage in, or have an arrangement to engage in, a
distribution of the New Notes may not rely on the applicable interpretations of
the Staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction. In addition, since the Commission has not considered the
Exchange Offer in the context of a no-action letter, there can be no assurance
that the Staff of the Commission would make a similar determination with respect
to the Exchange Offer as in such other circumstances. Each holder of Existing
Notes that desires to participate in the Exchange Offer will be required to make
certain representations described in "The Exchange Offer -- Terms of the
Exchange Offer."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer in exchange for Existing Notes, where such Existing Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities, must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act and that it has not entered into
any arrangement or understanding with LHP or any affiliate of LHP to distribute
New Notes in connection with any resale of such New Notes. A broker-dealer that
acquired Existing Notes in a transaction other than as part of its market-making
activities or other trading activities will not be able to participate in the
Exchange Offer. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Existing Notes where such Existing Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. LHP has agreed
that, for a period of 180 days after the Expiration Date (as defined herein), it
will make this Prospectus available to any such participating broker-dealer for
use in connection with any such resale. Any holder that cannot rely upon such
interpretations must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "The Exchange Offer" and "Plan of Distribution."
The New Notes will be represented by one or more Global Certificate (as
defined herein) registered in the name of a nominee of The Depository Trust
Company, as Depository. Beneficial interest in the Global Certificates will be
shown on, and transfers will be effected only through, records maintained by the
Depository and its participants. See "Description of New Notes -- Book-Entry,
Delivery and Form."
There has not previously been any public market for the New Notes. LHP does
not intend to list the New Notes on any securities exchange or to seek approval
for quotation through any automated quotation system. There can be no assurance
that an active market for the New Notes will develop. Moreover, to the extent
that Existing Notes are tendered and accepted in the Exchange Offer, a holder's
ability to sell untendered, and tendered but unaccepted, Existing Notes could be
adversely affected. See "Risk Factors -- Absence of Public Market."
LHP will not receive any proceeds from the Exchange Offer. LHP has agreed to
pay the expenses it incurs for the Exchange Offer. No dealer manager is being
utilized in connection with the Exchange Offer.
ii
<PAGE>
THE EXCHANGE OFFER IS NOT BEING MADE, NOR WILL LHP ACCEPT SURRENDERS FOR
EXCHANGE FROM HOLDERS OF EXISTING NOTES, IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR "BLUE SKY" LAWS OF SUCH JURISDICTION.
------------------------
AVAILABLE INFORMATION
LHP has filed with the Commission a Registration Statement (together with
any amendments thereto, the "Registration Statement") on Form S-4 under the
Securities Act, with respect to the New Notes offered hereby. As permitted by
the rules and regulations of the Commission, this Prospectus does not contain
all of the information included in the Registration Statement and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other document referred to herein or therein and
filed as an exhibit to the Registration Statement are not necessarily complete
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. For further information with
respect to LHP and the New Notes, reference is hereby made to the Registration
Statement and the exhibits and schedules thereto.
LHP is not currently subject to the periodic reporting and other
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Pursuant to the Indenture (as defined herein), LHP has
agreed to file with the Commission (so long as it is permitted to do so) and
provide to the holders of the Notes annual reports and the information,
documents and other reports that are specified in Sections 13 and 15(d) of the
Exchange Act. Reports, proxy statements and other information may be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and Suite 1400, Northwestern Atrium Center, 14th
Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material
can also be obtained at prescribed rates by writing to the Commission, Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549 and such
material is contained on the worldwide web site maintained by the Commission at
http://www.sec.gov.
------------------------
YOUR LIFE-REGISTERED TRADEMARK-, PHARMACIST FORMULA-REGISTERED TRADEMARK-,
PROVEN RELEASE-REGISTERED TRADEMARK-, DAILY PAK-REGISTERED TRADEMARK-,
NATURALIZED-REGISTERED TRADEMARK-, MY-A-MULTI-REGISTERED TRADEMARK-,
CENTRAL-VITE-REGISTERED TRADEMARK-, THERA PLUS-REGISTERED TRADEMARK-, MAXIMUM
PAK-REGISTERED TRADEMARK-, DAILY SELECT PAK-REGISTERED TRADEMARK-, MEN'S DAILY
PAK-REGISTERED TRADEMARK-, WOMEN'S DAILY PAK-REGISTERED TRADEMARK-,
PHYTOGRAPH-REGISTERED TRADEMARK- AND BODYCOLOGY-REGISTERED TRADEMARK-, are
registered trademarks of the Company and FE-TABS-TM-, ANTIOXIDANT PAK-TM-,
PHARMACEUTICAL GRADE CALCIUM-TM-, CENTRAL-VITE SELECT-TM-, BODY SYSTEMS-TM-,
STANDARDIZED HERBAL EXTRACTS-TM-, SPACE KIDS-TM-, GER-TAB-TM-, PAPAYAZYME-TM-,
STRESS PAK-TM- and LUBRICARE-TM- are trademarks of the Company. Other brand or
product names used herein are trademarks or registered trademarks of their
respective companies.
iii
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES TO THE "COMPANY" OR "LEINER" SHALL MEAN
LHP AND ITS SUBSIDIARIES. REFERENCES HEREIN TO A "FISCAL" YEAR REFER TO THE
COMPANY'S FISCAL YEAR ENDED MARCH 31 IN THE CALENDAR YEAR INDICATED (E.G.,
REFERENCES TO FISCAL 1997 ARE REFERENCES TO THE COMPANY'S FISCAL YEAR ENDED
MARCH 31, 1997). REFERENCES HEREIN TO "PRO FORMA 1997" ARE REFERENCES TO FISCAL
1997, PRESENTED ON A PRO FORMA BASIS GIVING EFFECT TO THE COMPANY'S JANUARY 1997
ACQUISITION OF VITA HEALTH COMPANY (1985) LTD. ("VITA HEALTH"), THE COMPANY'S
CANADIAN SUBSIDIARY, AS WELL AS THE RECAPITALIZATION (AS DEFINED HEREIN) AND
RELATED TRANSACTIONS. REFERENCES HEREIN TO "PRO FORMA FIRST QUARTER FISCAL 1998"
ARE REFERENCES TO THE FIRST QUARTER OF FISCAL 1998, PRESENTED ON A PRO FORMA
BASIS AFTER GIVING EFFECT TO THE RECAPITALIZATION, AND WITH RESPECT TO BALANCE
SHEET DATA, ASSUMING THAT CERTAIN RECAPITALIZATION RELATED TRANSACTIONS THAT
WERE COMPLETED AFTER THE RECAPITALIZATION HAD OCCURRED ON JUNE 30, 1997. SEE
"SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA" AND "UNAUDITED PRO FORMA
FINANCIAL INFORMATION." THE DATA CONTAINED IN THIS PROSPECTUS WITH RESPECT TO
THE COMPANY'S RELATIVE MARKET SHARE AND COMPETITIVE POSITION ARE BASED ON RETAIL
SALES, AND ARE APPROXIMATIONS BASED ON COMPANY ESTIMATES AND INDUSTRY SOURCES,
INCLUDING FIND/SVP ("PACKAGED FACTS"), INFORMATION RESOURCES, INC. ("IRI
INFOSCAN"), MULTI-SPONSOR SURVEY, INC. ("GALLUP"), COUNCIL FOR RESPONSIBLE
NUTRITION ("CRN DATA") AND MARKETING AND MANAGEMENT INFORMATION, INC. ("MMI
DATA"). THE COMPANY BELIEVES THAT SUCH DATA ARE INHERENTLY IMPRECISE, BUT ARE
GENERALLY INDICATIVE OF ITS RELATIVE MARKET SHARE AND COMPETITIVE POSITION.
MARKET SHARE DATA ARE FOR THE U.S. MASS MARKET ONLY (WHICH INCLUDES
SUPERMARKETS, DRUG STORES, MASS MERCHANDISERS AND WAREHOUSE CLUBS) AND DO NOT
INCLUDE CANADIAN MARKET SHARE INFORMATION FOR VITA HEALTH.
THE COMPANY
Leiner is the nation's largest manufacturer of vitamins, minerals, and
nutritional supplements (collectively "vitamins," "vitamin products" or "VMS")
and distributes its products primarily through mass market retailers. The
Company has a 23% share of all mass market vitamin sales in the United States,
50% larger than its next closest competitor's share. Additionally, Leiner's 50%
share of the mass market private label segment is more than two times the size
of its next closest competitor's share. Leiner has increased its market share
over the last five years, with its U.S. vitamin sales growing at a compound
annual rate of 18.9% per year through fiscal 1997, over one and one half times
the U.S. industry growth rate. Leiner is also one of the nation's largest
private label over-the-counter ("OTC") pharmaceuticals manufacturers, with 18%
of its sales in OTC pharmaceutical and other products. In January 1997, the
Company acquired Vita Health, the second largest private label vitamin and OTC
pharmaceuticals manufacturer in the Canadian market.
The Company's products are sold in more than 50,000 of the nation's leading
retail outlets, including the 20 largest drug store chains, 18 of the 20 largest
supermarket chains, 10 of the largest mass merchandising chains, and the two
largest warehouse club chains, as well as in convenience stores and through
United States military outlets worldwide. Leiner is the vitamin category manager
for many leading retailers.
COMPETITIVE STRENGTHS
During the last five fiscal years, Leiner acquired two companies, built its
Your Life-Registered Trademark- product line into a $100 million broadline
vitamin brand, and invested significantly in plant and equipment. These
initiatives transformed Leiner from a marketing and sales oriented organization
into a fully integrated, low cost manufacturer and marketer of vitamins. The
Company attributes its leadership position to the following competitive
strengths:
- LOW COST MANUFACTURING: During the last five years, in addition to
maintenance capital expenditures, the Company has invested $29.5 million
primarily to increase capacity, as well as to consolidate
1
<PAGE>
plants and modernize equipment. The Company's overall tableting capacity
has been increased by 45% and packaging capacity by 66%. The Company's
overall tableting costs have been reduced by 8%, and packaging and
distribution costs in its western U.S. facilities have been reduced by
approximately 10% and 20%, respectively.
- HIGH QUALITY PRODUCTS: Quality is a critical factor in the customer
purchase decision, particularly for private label products, which are
marketed under the brand names of the Company's mass market retail
customers. The Company was the first major vitamin product supplier to be
certified as being in compliance with the United States Pharmacopoeial
Conventions' ("USP") vitamin manufacturing standards. The Company believes
this certification has enhanced its reputation as a premier quality
manufacturer of vitamins.
- ADVANCED CATEGORY MANAGEMENT: Through its sophisticated information
systems, the Company seeks to optimize the application of emerging
science, new product introductions, merchandising opportunities, shelf
space profitability and inventory management for its customers. The
Company produces over 6,000 stock keeping units ("SKUs"), ships
approximately 1,500 orders per week to over 200 customers and has
established a reputation for consistent on-time delivery.
- HIGH MARGIN NEW PRODUCTS: The Company identifies new products in non-mass
market distribution channels and introduces proven items at the cost,
quality and delivery standards required by mass market retailers. These
new products, typically introduced under Leiner's YOUR
LIFE-Registered Trademark- brand, produce the highest margins of all the
Company's products and represent an increasing percentage of sales. To
evaluate nutritional research and advise the Company on emerging science,
Leiner created a Scientific Advisory Board comprised of nationally
recognized authorities on nutrition and science. In the last two fiscal
years, the Company introduced 52 new products (including 18 herbal
products) which generated $32 million of fiscal 1997 net sales. As a
result, in the mass market, Leiner's share of the high growth herbal
products segment has grown from 9% in 1994 to 16% in 1996.
THE VITAMIN INDUSTRY
Vitamins are one of the nation's fastest growing consumer product
categories. According to industry sources, between 1992 and 1996, sales for the
vitamin industry grew at a compound annual rate of approximately 11.2% to $4.1
billion, as the percentage of American adults regularly using vitamins grew from
35% to 40%. This growth is expected to continue as more of the baby boom
generation reaches age fifty and vitamin usage continues to increase for all age
groups.
Between 1996 and 2005, the 50 to 64 age group is projected to be the fastest
growing segment of the United States population. Gallup polling data shows that
vitamin usage increases significantly with age, with 47% of individuals over age
50 regularly using vitamins, compared with 36% of younger adults.
Increasing vitamin usage among the general population is linked to three
major factors. First, research expenditures devoted to the positive effects of
vitamin products have increased dramatically. Such research has been described
in major medical journals and reported in the popular media. Second, the
national trend towards improved fitness, greater self-care and preventive
medicine has increased the general population's focus on nutritional products
consumption. Finally, the more favorable regulatory environment resulting from
the Dietary Supplement Health and Education Act of 1994 has generated increased
new product introductions and more effective point of sale communication of the
health benefits of vitamins to consumers. See "Industry."
BUSINESS STRATEGY
The Company's business strategy includes the following principal elements:
- INTRODUCING NEW PRODUCTS: Leiner has successfully introduced herb and
nutritional supplements into the mass market that were originally
available only in non-mass market channels. Mass market sales
2
<PAGE>
of high-margin herbal products increased 29% between 1995 and 1996 and
represent a significant growth opportunity for the Company. The Company
believes that the 30 new products it introduced in fiscal 1997 and its
planned new product introductions for fiscal 1998 will further strengthen
its position in the mass market channel.
- EXPANDING DISTRIBUTION IN NON-MASS MARKET DOMESTIC CHANNELS: In addition
to its growth in the mass market channel, Leiner has a proven record of
growing sales in non-mass market channels. For example, Leiner's sales
through United States military outlets worldwide have grown from $9.1
million in fiscal 1994 to $18.9 million in fiscal 1997. The Company has
contractual agreements to (i) sell vitamins directly through television
retailing, (ii) distribute products through direct mail to customers of a
managed care provider, (iii) sell vitamins to companies that market
directly to consumers and (iv) contract manufacture products for major
pharmaceutical companies. The Company is also negotiating arrangements to
market vitamin products through the health food store channel.
- GROWING INTERNATIONAL SALES: Leiner plans to (i) expand its leading
position in Canada established through its recent acquisition of Vita
Health, a major manufacturer of private label and branded vitamins and OTC
pharmaceuticals in Canada, (ii) distribute YOUR LIFE-Registered Trademark-
brand products in Japan through a joint venture established with Takeda
Chemical Industries, Ltd., (iii) supply vitamins to Teva Pharmaceutical
Industries Ltd. for distribution in Israel and (iv) follow its existing
retail customers into international markets including Mexico, Brazil and
Indonesia.
- BUILDING THE YOUR LIFE-REGISTERED TRADEMARK- BRAND: Between fiscal 1993
and fiscal 1997, the Company expanded sales of the YOUR
LIFE-Registered Trademark- brand from $40 million to $104 million. Between
fiscal 1996 and fiscal 1997, YOUR LIFE-Registered Trademark- sales grew
approximately 50%, driven primarily by increasing sales to mass
merchandisers and warehouse clubs. In fiscal 1997, the Company spent
approximately $12 million in advertising and promotional sales support to
further enhance the YOUR LIFE-Registered Trademark- brand.
- SELECTIVELY PURSUING ADD-ON ACQUISITIONS: The Company has successfully
purchased and integrated five companies since 1988, including the
acquisition of Vita Health in January 1997. With this acquisition, Leiner
gained (i) a leading competitive position in the Canadian market, (ii)
distribution through nearly all of the significant mass market retailers
in Canada, (iii) an extensive herb and nutritional supplement product line
and (iv) an established brand in the Canadian health food store segment.
Leiner intends to continue to pursue selective acquisition opportunities
to complement its business strategy.
- INCREASING OPERATING MARGINS AND REDUCING WORKING CAPITAL REQUIREMENTS:
The Company plans to pursue initiatives to (i) consolidate its eastern
U.S. packaging and distribution facilities, (ii) continue to reduce
selling, marketing, distribution, general and administrative ("SG&A")
expense as a percentage of sales, (iii) continue to reduce its raw
material costs, (iv) achieve savings from the integration of Vita Health
and (v) increase the proportion of its overall sales represented by sales
of YOUR LIFE-Registered Trademark- branded products and other higher
margin products, including new products and products sold through new
channels.
3
<PAGE>
SUMMARY OF THE RECAPITALIZATION
On June 30, 1997 (the "Recapitalization Closing Date") Leiner Group, LHP's
indirect corporate parent, completed a leveraged recapitalization (the
"Recapitalization") sponsored by North Castle Partners I, L.L.C. ("North
Castle"). The Recapitalization was effected pursuant to a Stock Purchase
Agreement and Plan of Merger, dated as of May 31, 1997 (the "Recapitalization
Agreement"), among Leiner Group, North Castle and LHP Acquisition Corp., a
wholly-owned subsidiary of North Castle (the "Merger Entity"). North Castle, a
Delaware limited liability company, is an investment fund formed by Charles F.
Baird, Jr. for the purpose of participating in the Recapitalization. Mr. Baird
was formerly a Managing Director of AEA Investors Inc. ("AEA"), which, together
with management, arranged the 1992 acquisition of LHP. Prior to the
Recapitalization, the common stock of Leiner Group (the "Existing Common Stock")
had been held by Mr. Baird, certain current and former managers and employees of
the Company, and AEA and certain of its co-investors (collectively, the
"Existing Shareholders").
Upon consummation of the Recapitalization, (i) certain current managers and
employees of the Company who had been Existing Shareholders had some of their
Existing Common Stock exchanged for cash, but together with Mr. Baird, retained
common stock of the recapitalized Leiner Group ("Group Common Stock") and
received rights under certain circumstances to receive Group Common Stock
("Equity Rights") equal to approximately 16% of the Group Common Stock
outstanding or issuable under Equity Rights (the "Group Equity"), as well as
certain warrants to acquire Group Common Stock ("Warrants"); (ii) AEA and
certain of its co-investors (the "AEA Group") and certain former managers of the
Company, all of whom had been Existing Shareholders, had most of their Existing
Common Stock purchased for cash, but retained Group Common Stock equal to
approximately 10% of the Group Equity, as well as Warrants; and (iii) North
Castle purchased Group Common Stock from Leiner Group representing the balance
or approximately 74% of the Group Equity for a cash investment of $80.4 million.
The Warrants provide the Existing Shareholders with the right to purchase
approximately 20% of the Group Common Stock on a fully-diluted basis giving
effect to the exercise of such Warrants, the Equity Rights and the Management
Options (as defined herein). The initial exercise price of the Warrants is 125%
of the purchase price per share paid by North Castle for its investment in the
Recapitalization. Commencing on the first anniversary of the Recapitalization
Closing Date, the exercise price will compound at a rate of 25% per year in
years two and three and then at a rate of 10% per year for the subsequent two
years.
The cash sources of financing for the Recapitalization consisted of North
Castle's investment in Group Common Stock, the proceeds of the sale of the
Existing Notes, and term and revolving credit borrowings under a senior secured
credit facility (the "New Credit Facility") provided by a syndicate of financial
institutions and The Bank of Nova Scotia as administrative agent, Merrill Lynch
Capital Corporation as documentation agent and Salomon Brothers Holding Company
Inc as syndication agent. See "Description of New Credit Facility." These funds
were applied to acquire Existing Common Stock for cash, to cash out options for
Existing Common Stock, to redeem preferred stock of Leiner Group and Vita
Health, to refinance substantially all existing indebtedness of the Company
other than certain capitalized leases, and to pay transaction-related fees and
expenses.
For further information concerning the Recapitalization, see "The
Recapitalization."
4
<PAGE>
The following table sets forth the sources and uses of funds for the
Recapitalization of Leiner Group, which closed on June 30, 1997.
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS AMOUNT
- ---------------------------------- ------------------- ---------------------------------- -------------------
<S> <C> <C> <C>
(DOLLARS IN
MILLIONS)
Revolving Credit Facility......... $ 74.8(a) Repurchased and Retained Equity of
Leiner Group.................... $ 211.1(d)
Term Loans........................ 85.0(b) Repayment of Debt and Preferred
Stock........................... 119.8(e)
Existing Notes.................... 85.0 Management Transaction Bonuses.... 5.2(f)
------
Total Debt...................... 244.8 Estimated Fees and Expenses....... 17.7(g)
------ ------
Total Common Equity of Leiner
Group........................... 109.0(c)
------
TOTAL SOURCES OF FUNDS.......... $ 353.8 TOTAL USES OF FUNDS............... $ 353.8
------ ------
------ ------
</TABLE>
- ------------------------
(a) Consists of borrowings under the new $125.0 million U.S. and Canadian
revolving credit facilities (collectively, the "Revolving Credit Facility")
provided under the New Credit Facility. See "Description of New Credit
Facility."
(b) Consists of borrowings under a $45.0 million term B loan facility and a
$40.0 million term C loan facility under the New Credit Facility, which were
fully drawn on the Recapitalization Closing Date. See "Description of New
Credit Facility."
(c) Consists of the Group Equity, comprised of (1) a new equity investment by
North Castle in Group Common Stock for cash of $80.4 million, (2) a retained
equity investment in Group Common Stock and Equity Rights with a value of
$17.6 million (based on the per share value of the North Castle equity
investment), held by certain current managers and employees of the Company
and Mr. Baird (the "Management Retained Equity"), and (3) a retained equity
investment in Group Common Stock with a value of $11.0 million (based on the
per share value of the North Castle equity investment), held by the AEA
Group and certain former managers of the Company (together with the
Management Retained Equity, the "Retained Equity"). See "The
Recapitalization."
(d) Includes transaction-related fees and expenses of $6.1 million, incurred by
Leiner Group, that were an adjustment to the amount received by the Existing
Shareholders. See "The Recapitalization."
(e) Consists of $102.2 million in outstanding borrowings and accrued interest
under the Company's previous senior credit agreement, an aggregate $13.9
million redemption price for outstanding pay-in-kind redeemable preferred
stock of Leiner Group held by AEA and an aggregate $3.7 million redemption
price for a minority preferred stock interest in Vita Health.
(f) Members of the Company's management received $5.1 million in transaction
bonuses ($3.1 million on an after-tax basis), which were paid by the Company
following the Recapitalization Closing Date. In addition, the Company paid
$0.1 million in employer payroll taxes related to the bonus payments.
(g) Does not include any fees and expenses that were an adjustment to the amount
received by the Existing Shareholders, which are included in (d) above.
5
<PAGE>
THE EXCHANGE OFFERING
<TABLE>
<S> <C>
Registration Rights The Existing Notes were issued on June 30, 1997 to Merrill
Agreement................ Lynch, Pierce, Fenner & Smith Incorporated, Salomon Brothers
Inc and Scotia Capital Markets (USA) Inc. (the "Initial
Purchasers"). The Initial Purchasers resold the Existing
Notes to certain qualified institutional buyers and
institutional accredited investors in reliance on, and
subject to the restrictions imposed pursuant to, Rule 144A
of the Securities Act and other applicable exemptions from
the registration requirements of the Act. In connection
therewith, Leiner Group, LHP and the Initial Purchasers
entered into the Registration Rights Agreement, dated as of
June 30, 1997 (the "Registration Rights Agreement"),
providing, among other things, for the Exchange Offer. See
"The Exchange Offer."
The Exchange Offer......... New Notes are being offered in exchange for an equal
principal amount of Existing Notes. As of the date hereof,
$85,000,000 aggregate principal amount of Existing Notes is
outstanding.
Resale of New Notes........ Based on interpretations by the Staff of the Commission as
set forth in no-action letters issued to third parties
(including EXXON CAPITAL HOLDINGS CORPORATION (available May
13, 1988), MORGAN STANLEY & CO. INCORPORATED (available June
5, 1991), K-III COMMUNICATIONS CORPORATION (available July
2, 1993) and SHEARMAN & STERLING (available July 2, 1993)),
LHP believes that the New Notes issued pursuant to the
Exchange Offer may be offered for resale, resold or
otherwise transferred by any holder thereof (other than any
such holder that is a broker-dealer or an "affiliate" of LHP
within the meaning of Rule 405 under the Securities Act)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that (i)
such New Notes are acquired in the ordinary course of
business, (ii) at the time of the commencement of the
Exchange Offer such holder has no arrangement or
understanding with any person to participate in a
distribution of the New Notes and (iii) such holder is not
engaged in, and does not intend to engage in, a distribution
of the New Notes. By tendering Existing Notes in exchange
for New Notes, each holder will represent to LHP that: (i)
it is not such an affiliate of LHP, (ii) any New Notes to be
received by it will be acquired in the ordinary course of
business and (iii) at the time of the commencement of the
Exchange Offer it had no arrangement with any person to
participate in a distribution of the New Notes and, if such
holder is not a broker-dealer, it is not engaged in, and
does not intend to engage in, a distribution of New Notes.
If a holder of Existing Notes is unable to make the
foregoing representations, such holder may not rely on the
applicable interpretations of the Staff of the Commission as
set forth in such no-action letters, and must comply with
the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale
transaction.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
Each broker-dealer that receives New Notes for its own
account pursuant to the Exchange Offer in exchange for
Existing Notes, where such Existing Notes were acquired by
such broker-dealer as a result of market-making activities
or other activities, must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act
and that it has not entered into any arrangement or
understanding with LHP or an affiliate of LHP to distribute
the New Notes in connection with any resale of such New
Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with
resales of New Notes where such Existing Notes were acquired
by such broker-dealer as a result of market-making
activities or other trading activities. LHP has agreed that,
starting on the Expiration Date, and ending on the close of
business 180 days after the Expiration Date, it will make
this Prospectus available to any such participating
broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
To comply with the securities laws of certain jurisdictions,
it may be necessary to qualify for sale or register the New
Notes prior to offering or selling such New Notes in such
jurisdictions. LHP has agreed, pursuant to the Registration
Rights Agreement and subject to certain specified
limitations therein, to register or qualify the New Notes
for offer or sale under the securities or "blue sky" laws of
such jurisdictions as may be necessary to permit the holders
of New Notes to trade the New Notes without any material
restrictions or limitations under the securities laws of the
several states of the United States.
Consequences of Failure to Upon consummation of the Exchange Offer, subject to certain
Exchange Existing limited exceptions, holders of Existing Notes who do not
Notes.................... exchange their Existing Notes for New Notes in the Exchange
Offer will no longer be entitled to registration rights and
will not be able to offer or sell their Existing Notes,
unless such Existing Notes are subsequently registered under
the Securities Act (which, subject to certain limited
exceptions, the Company will have no obligation to do),
except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state
securities laws. See "The Exchange Offer--Terms of the
Exchange Offer" and "--Consequences of Failure to Exchange."
Expiration Date............ 5:00 p.m., New York City time, on , 1997 (30 days
following the commencement of the Exchange Offer), unless
the Exchange Offer is extended by LHP in its sole
discretion, in which case the term "Expiration Date" means
the latest date and time to which the Exchange Offer is
extended.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Interest on the New The New Notes will accrue interest at a rate of 9 5/8% per
Notes.................... annum from June 30, 1997, the issue date of the Existing
Notes, or from the most recent date to which interest has
been paid or duly provided for on the Existing Notes.
Interest on the New Notes is payable on January 1 and July 1
of each year, commencing on January 1, 1998. In addition, it
is expected that additional interest will accrue on the
Notes at a rate of 0.5% per annum for the periods (i) from
and including the 121st day following the Recapitalization
Closing Date (October 29, 1997) until but excluding the date
the Registration Statement was declared effective, and (ii)
from and including the 151st day following the
Recapitalization Closing Date (November 28, 1997) until but
excluding the date of consummation of the Exchange Offer.
See "--Registration Rights."
Conditions to the The Exchange Offer is not conditioned upon any minimum
Exchange Offer........... principal amount of Existing Notes being tendered for
exchange. However, the Exchange Offer is subject to certain
customary conditions, which may be waived by LHP. See "The
Exchange Offer--Conditions." Except for the requirements of
applicable federal and state securities laws, there are no
federal or state regulatory requirements to be complied with
by the Company in connection with the Exchange Offer.
Procedures for Tendering Each holder of Existing Notes wishing to accept the Exchange
Existing Notes........... Offer must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, in accordance with the
instructions contained herein and therein, and mail or
otherwise deliver such Letter of Transmittal, or such
facsimile, together with any other required documentation to
the Exchange Agent (as defined herein) at the address set
forth herein and effect a tender of Existing Notes pursuant
to the procedures for book-entry transfer as provided for
herein. See "The Exchange Offer--Procedures for Tendering,"
"--Book Entry Transfer," and
"--Guaranteed Delivery Procedures." Certain other procedures
may apply with respect to certain book-entry transfers. See
"The Exchange Offer--Exchanging Book-Entry Notes."
Guaranteed Delivery Holders of Existing Notes who wish to tender their Existing
Procedures............... Notes and who cannot deliver their Existing Notes and a
properly completed Letter of Transmittal or any other
documents required by the Letter of Transmittal to the
Exchange Agent prior to the Expiration Date may tender their
Existing Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer--Guaranteed
Delivery Procedures."
Withdrawal Rights.......... Tenders of Existing Notes may be withdrawn to any time prior
to 5:00 p.m., New York City time, on the Expiration Date. To
withdraw a tender of Existing Notes, a written or facsimile
transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein under "The
Exchange Offer--Exchange Agent" prior to 5:00 p.m., New York
City time, on the Expiration Date.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Acceptance of Existing Subject to certain conditions, any and all Existing Notes
Notes and Delivery of that are validly tendered in the Exchange Offer prior to
New Notes................ 5:00 p.m., New York City time, on the Expiration Date will
be accepted for exchange. The New Notes issued pursuant to
the Exchange Offer will be delivered as soon as practicable
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
Certain U.S. Tax The exchange of Existing Notes for New Notes will not
Consequences............. constitute a taxable exchange for U.S. federal income tax
purposes. See "Certain Federal Income Tax Considerations."
Exchange Agent/Trustee..... United States Trust Company of New York, the trustee under
the indenture governing the Notes (the "Trustee") is serving
as exchange agent, (in such capacity the "Exchange Agent"),
in connection with the Exchange Offer.
Fees and Expenses.......... Expenses incident to LHP's consummation of the Exchange
Offer and compliance with the Registration Rights Agreement
will be borne by LHP. See "The Exchange Offer--Fees and
Expenses."
Use of Proceeds............ LHP will not receive any proceeds from the Exchange Offer.
The net proceeds from the sale of the Existing Notes
comprised a portion of the financing for the
Recapitalization and related transactions.
</TABLE>
SUMMARY OF TERMS OF THE NEW NOTES
The Exchange Offer relates to the exchange of up to $85,000,000 aggregate
principal amount of Existing Notes for an equal aggregate principal amount of
New Notes. New Notes will be entitled to the benefits of the same Indenture that
governs the Existing Notes and that will govern the New Notes. The form and
terms of the New Notes are identical in all material respects to the form and
terms of the Existing Notes, except that the New Notes will have been registered
under the Securities Act, and thus will not bear restrictive legends restricting
their transfer pursuant to the Securities Act. See "Description of the New
Notes."
<TABLE>
<S> <C>
Maturity Date.............. July 1, 2007.
Interest Payment Dates..... January 1 and July 1 of each year, commencing January 1,
1998.
Optional Redemption........ The New Notes will be redeemable at the option of LHP, in
whole or in part, at any time on or after July 1, 2002 at
the redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of
redemption. In addition, on or prior to July 1, 2000, LHP,
at its option, may redeem in the aggregate up to 30% of the
original principal amount of the Notes at a redemption price
equal to 109 5/8% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, with the net cash proceeds of one or more Public
Equity Offerings; PROVIDED, HOWEVER, that at least $60.0
million aggregate principal amount of Notes remains
outstanding immediately after giving effect to such
redemption. See "Description of the New
Notes--Redemption--Optional Redemption."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Ranking.................... The New Notes will be unsecured senior subordinated
obligations of LHP and will be subordinated in right of
payment to all existing and future Senior Debt of LHP,
including borrowings under the New Credit Facility, and will
rank PARI PASSU in right of payment with all other existing
and future senior subordinated indebtedness of LHP.
As of June 30, 1997, after giving effect on a pro forma
basis to the Recapitalization and the financing therefor,
the Company had approximately $164.7 million principal
amount of Senior Debt outstanding and approximately $249.7
million of aggregate indebtedness outstanding (including the
Existing Notes). See "Description of the New
Notes--Subordination."
Change of Control.......... Upon the occurrence of a Change of Control (as defined
herein), (i) LHP will have the option, prior to July 1,
2002, to redeem all of the Notes, at a redemption price
equal to 100% of the principal amount thereof plus the
Applicable Premium, as of, and accrued and unpaid interest
(if any) to, the date of redemption and (ii) if LHP does not
redeem the Notes, subject to certain conditions, each holder
of Notes will have the right to require LHP to purchase such
holder's Notes at a purchase price equal to 101% of the
principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "Description
of the New Notes--Change of Control."
Covenants.................. The Indenture pursuant to which the New Notes will be
issued, contains certain covenants that, among other things,
will limit the ability of LHP and any Restricted Subsidiary
(as defined herein) to (i) incur additional indebtedness,
(ii) issue preferred stock in Restricted Subsidiaries, (iii)
pay dividends or make other distributions, (iv) repurchase
equity interests or subordinated indebtedness, (v) create
certain liens, (vi) enter into certain transactions with
affiliates, (vii) consummate certain asset sales and (viii)
merge or consolidate with any person. See "Description of
the New Notes--Certain Covenants."
Absence of a Public Market The New Notes will be new securities for which there
for the Notes............ currently is no market. Although the Initial Purchasers have
informed LHP that they currently intend to make a market in
the New Notes, they are not obligated to do so, and any such
market making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Notes.
The Existing Notes are eligible for trading in the Private
Offerings, Resale and Trading through Automated Linkages
(PORTAL) market. LHP does not intend to apply for listing of
the New Notes on any securities exchange or for quotation
through the National Association of Securities Dealers
Automated Quotation System. See "Plan of Distribution."
</TABLE>
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary historical financial data derived from
the consolidated financial statements of the Company. The statement of
operations data for the fiscal years ended March 31, 1993, 1994, 1995, 1996, and
1997, except for the unaudited pro forma statement of operations data for the
fiscal year ended March 31, 1997, were derived from the consolidated financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
and included elsewhere herein. The statement of operations data for the three
months ended June 30, 1996 and 1997, and the balance sheet data as of June 30,
1997, except for the unaudited pro forma financial data as of and for the three
months ended June 30, 1997, were derived from the unaudited condensed
consolidated financial statements of the Company included elsewhere herein.
The unaudited pro forma consolidated statement of operations data of the
Company for the year ended March 31, 1997 gives effect to (i) the
Recapitalization with respect to the Company as if it had occurred on April 1,
1996, and (ii) the acquisition of Vita Health on January 30, 1997 as if that
acquisition had occurred on April 1, 1996, based on historical financial
information for Vita Health for the ten months ended January 30, 1997 that was
derived from Vita Health's unaudited financial statements. The unaudited pro
forma consolidated statement of operations data of the Company for the three
months ended June 30, 1997 give effect to the Recapitalization with respect to
the Company as if it had occurred on April 1, 1997. The unaudited pro forma
consolidated balance sheet data of the Company as of June 30, 1997 give effect
to the Recapitalization with respect to the Company assuming that certain
Recapitalization-related transactions that were completed after June 30, 1997
had occurred on June 30, 1997.
The summary unaudited pro forma financial data do not reflect those
Recapitalization-related transactions that only affected Leiner Group. Expenses
of $11.8 million were incurred by Leiner Group in connection with the
Recapitalization, of which $6.1 million represented an adjustment to the amount
received by the Existing Shareholders. See "The Recapitalization." Historically,
the Company has not paid any material recurring expenses on behalf of Leiner
Group, although no assurance can be given that such payments will not be made in
the future. Furthermore, although federal and other consolidated income taxes
are legally payable by Leiner Group, such taxes historically have related to
LHP's operations and accordingly have been paid for by LHP and accounted for in
its consolidated financial statements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--General-- Recapitalization
Accounting; Financial Statement Presentation; Parent Company."
The summary historical and unaudited pro forma financial data should be read
in conjunction with the historical consolidated financial statements of the
Company and notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Financial
Information" contained elsewhere in this Prospectus, as well as the information
concerning the Recapitalization (including the sources and uses therefor)
contained in "The Recapitalization." The summary unaudited pro forma financial
data and related notes are provided for informational purposes and do not
necessarily reflect the results of operations or financial position of the
Company that would have actually resulted had the events referred to above or in
the notes to the unaudited pro forma financial information been consummated as
of the date and for the period indicated and are not intended to project the
Company's financial position or results of operations for any future period.
11
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------------------------
UNAUDITED
PRO FORMA
1993(1) 1994 1995 1996 1997 1997(2)(6)
----------- --------- --------- --------- --------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales
Vitamins...................................... $ 159.5 $ 217.3 $ 239.6 $ 267.7 $ 321.7 $ 333.7
OTC pharmaceuticals........................... 53.0 67.4 63.1 58.8 61.3 68.6
Other......................................... 18.3 18.9 12.0 11.9 9.8 14.6
----------- --------- --------- --------- --------- -------------
Total net sales................................... 230.8 303.6 314.7 338.4 392.8 416.9
Gross profit...................................... 59.2 77.6 78.1 85.1 104.2 110.5
SG&A.............................................. 48.0 59.5 59.7 62.6 72.7 79.3
Impairment and closure of OTC facility(3)......... -- -- -- 4.7 1.4 1.4
Management reorganization(4)...................... -- -- -- -- 1.0 1.0
Compensation related to stock options(5).......... -- -- -- -- -- --
Management transaction bonuses(5)................. -- -- -- -- -- --
Amortization of goodwill.......................... 1.4 1.6 1.6 1.6 1.5 1.7
Other charges(6).................................. 4.0 2.4 0.5 0.5 0.9 2.0
----------- --------- --------- --------- --------- -------------
Operating income (loss)........................... 5.8 14.1 16.3 15.8 26.7 25.2
Interest expense, net(7).......................... 5.9 7.1 9.0 9.9 8.3 23.4
----------- --------- --------- --------- --------- -------------
Income (loss) before income taxes and
extraordinary item.............................. $ (0.1) $ 7.0 $ 7.3 $ 5.9 $ 18.4 $ 1.8
----------- --------- --------- --------- --------- -------------
----------- --------- --------- --------- --------- -------------
Income (loss) before extraordinary item........... $ (1.1) $ 3.4 $ 3.8 $ 1.2 $ 10.4 $ 0.1
----------- --------- --------- --------- --------- -------------
----------- --------- --------- --------- --------- -------------
<CAPTION>
FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------------------------
(UNAUDITED)
PRO FORMA
1996 1997 1997(6)
--------- --------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales
Vitamins...................................... $ 56.9 $ 75.6 $ 75.6
OTC pharmaceuticals........................... 11.3 15.1 15.1
Other......................................... 2.4 3.4 3.4
--------- --------- ------
Total net sales................................... 70.6 94.1 94.1
Gross profit...................................... 18.6 22.2 22.2
SG&A.............................................. 15.5 17.5 17.5
Impairment and closure of OTC facility(3)......... -- -- --
Management reorganization(4)...................... 0.2 -- --
Compensation related to stock options(5).......... -- 15.4 15.4
Management transaction bonuses(5)................. -- 5.1 5.1
Amortization of goodwill.......................... 0.4 0.4 0.4
Other charges(6).................................. 0.1 0.1 0.4
--------- --------- ------
Operating income (loss)........................... 2.4 (16.4) (16.7)
Interest expense, net(7).......................... 2.2 1.8 5.8
--------- --------- ------
Income (loss) before income taxes and
extraordinary item.............................. $ 0.2 $ (18.2) $ (22.5)
--------- --------- ------
--------- --------- ------
Income (loss) before extraordinary item........... $ 0.1 $ (11.1) $ (13.7)
--------- --------- ------
--------- --------- ------
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
------------------------
<S> <C> <C>
UNAUDITED
<CAPTION>
ACTUAL PRO FORMA
----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................................................... $ 74.5 $ 87.8
Total assets............................................................................. 293.4 293.4
Total debt............................................................................... 239.6 249.7
Minority interest in subsidiary.......................................................... 4.7 1.0
Total common shareholder's deficit....................................................... (45.0) (38.2)
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FISCAL YEARS ENDED MARCH 31, ENDED JUNE 30,
-------------------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED (UNAUDITED)
PRO FORMA
1993(1) 1994 1995 1996 1997 1997(2)(6) 1996 1997
----------- --------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Gross margin.................... 25.6% 25.6% 24.8% 25.2% 26.5% 26.5% 26.3% 23.6%
EBITDA(8)....................... $ 11.4 $ 23.4 $ 27.0 $ 32.9 $ 38.1 N/A $ 5.3 $ (5.0)
EBITDA margin(8)................ 4.9% 7.7% 8.6% 9.7% 9.7% N/A 7.5% (5.3)%
Depreciation and
amortization(9)............... $ 4.6 $ 7.2 $ 10.5 $ 12.3 $ 12.3 $ 12.9 $ 2.9 $ 3.1
Capital expenditures............ 3.3 15.0 16.7 3.5 3.5 3.8 0.6 1.3
Cash flows from operating
activities.................... 1.9 (17.1) 13.1 12.7 23.2 N/A 0.5 4.6
Cash flows from investing
activities.................... (21.9) (18.3) (21.9) (8.8) (10.2) N/A (0.9) (4.4)
Cash flows from financing
activities.................... 19.6 36.9 7.3 (2.5) (12.1) N/A 0.5 0.4
Ratio of total debt to
EBITDA(8)(10)................. 6.6x 4.2x 4.0x 3.2x 2.8x N/A -- --
Ratio of EBITDA to interest
expense(8).................... 1.9 3.3 3.1 3.4 4.7 N/A 2.5 (2.9)
Ratio of earnings to fixed
charges(11)................... 1.0 1.8 1.7 1.5 2.9 1.1 1.1 (7.2)
<CAPTION>
<S> <C>
PRO FORMA
1997(6)
---------------
<S> <C>
OTHER DATA:
Gross margin.................... 23.6%
EBITDA(8)....................... N/A
EBITDA margin(8)................ N/A
Depreciation and
amortization(9)............... $ 3.1
Capital expenditures............ 1.3
Cash flows from operating
activities.................... N/A
Cash flows from investing
activities.................... N/A
Cash flows from financing
activities.................... N/A
Ratio of total debt to
EBITDA(8)(10)................. N/A
Ratio of EBITDA to interest
expense(8).................... N/A
Ratio of earnings to fixed
charges(11)................... 0.7
</TABLE>
12
<PAGE>
- ------------------------
(1) The May 1992 acquisitions by Leiner Group of LHP and XCEL Laboratories, Inc.
("XCEL"), an OTC pharmaceuticals manufacturer, were accounted for under the
purchase method of accounting and new bases of accounting were established
at the time of each such acquisition. See "The Company--History."
Accordingly, the statement of operations data for the fiscal year ended
March 31, 1993 represent the results of operations of the Company, the
results of operations for XCEL from the date of its acquisition, and
purchase accounting for the acquisitions of LHP and XCEL during that fiscal
year.
(2) On January 30, 1997, the Company purchased Vita Health. This column gives
effect to the acquisition of Vita Health, as well as the Recapitalization
and related transactions with respect to the Company. See "Unaudited Pro
Forma Financial Information." The Vita Health acquisition was accounted for
under the purchase method of accounting. Consequently, the results of
operations of Vita Health were included in the consolidated financial
results of the Company for the two months ended March 31, 1997. The pro
forma data shown for fiscal 1997 includes the operating results of Vita
Health for the additional ten months ended January 30, 1997.
(3) During fiscal 1996, the Company decided to significantly reduce the size of
its OTC liquid pharmaceuticals manufacturing business. Accordingly, the
Company determined that certain long-lived assets with a carrying amount of
$8.3 million were impaired and wrote them down by $4.7 million to their
estimated fair value. During fiscal 1997, the Company closed the
manufacturing facility and out-sourced the production to a third party. The
costs incurred of $1.4 million include (i) the write-off of fixed assets of
$0.8 million and (ii) closure costs including salaries in conjunction with
the facility closing of $0.6 million. The expense does not include an
additional charge to cost of sales of $0.5 million for the write-off of
certain liquid OTC inventory which was no longer being manufactured by the
Company.
(4) During fiscal 1997, the Company reorganized the management team. Expenses of
$1.0 million include severance expense for the previous Chief Financial
Officer, Vice President of Product Development and Vice President of
Corporate Development and include the hiring and relocation expenses for the
new Chief Financial Officer and other corporate officers.
(5) Represents non-recurring charges relating to the Recapitalization,
consisting of (x) a compensation charge incurred by the Company for the
in-the-money value of existing stock options of $15.4 million which were (i)
converted into an equivalent value of Equity Rights at the date of the
Recapitalization, (ii) paid out in cash, or (iii) exercised for common stock
(or a combination thereof), and (y) $5.1 million in transaction bonuses
which were paid to members of the Company's management subsequent to the
Recapitalization. These non-recurring charges contributed significantly to
the Company's operating loss of $16.4 million for the three months ended
June 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operation--First Quarter
Fiscal 1998 Compared to First Quarter Fiscal 1997."
(6) Other charges for the fiscal years ended March 31, 1993 through March 31,
1997 and the three months ended June 30, 1996 and June 30, 1997 include
management fees paid to AEA that were discontinued upon consummation of the
Recapitalization. Other charges also include costs related to the original
acquisition of Leiner by the AEA Group and compensation expense arising from
the sale of shares of Common Stock to management in connection with the
acquisition of Leiner by the AEA Group in the fiscal year ended March 31,
1993, the write-off of deferred charges associated with the refinancing of
the Company's revolving credit facility in the fiscal year ended March 31,
1994 and expenses incurred in connection with the withdrawn initial public
offering in the fiscal year ended March 31, 1997. Other charges also
include, in the fiscal years ended March 31, 1994 through March 31, 1997,
non-cash compensation expense arising from the granting of stock options.
Other charges in the fiscal year ended March 31, 1995 do not include $0.5
million in other charges incurred by Leiner Group in connection with its
withdrawn initial public offering in that fiscal year, which are reflected
in the consolidated financial statements of Leiner Group. Unaudited pro
forma statement of operations data for fiscal 1997 and the three months
ended June 30, 1997 include the pro rata portion of an annual management fee
of $1.5 million payable to North Castle Partners, L.L.C., an affiliate of
North Castle, following the Recapitalization and excludes the annual
management fee of AEA. See "Certain Transactions."
(7) Net interest expense in the fiscal years ended March 31, 1993 and 1994 do
not reflect $0.1 million and $0.2 million, respectively, in interest income
received by Leiner Group, which is reflected in the consolidated financial
statements of Leiner Group.
(8) For purposes of calculating the ratio of EBITDA to interest expense,
interest expense excludes the amortization of deferred financing fees, which
is included in interest expense in the income statement in the consolidated
financial statements.
"EBITDA," as presented, represents earnings before interest expense, income
taxes, depreciation and amortization and other non-cash charges, consisting
of (i) the write off of deferred financing charges, net of income taxes,
included as an extraordinary item in the statements of operations for fiscal
1997 and the first quarter of fiscal 1998, (ii) non-cash stock compensation
charges, including those recorded in connection with the Recapitalization
(see Note 5), (iii) expenses related to the impairment and
13
<PAGE>
closure of the OTC liquid pharmaceuticals manufacturing facility in fiscal
1996 and 1997 (see Note 3), and (iv) other non-cash charges in fiscal 1994
and fiscal 1997. EBITDA is calculated as follows (in thousands):
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED
JUNE 30,
---------
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------- (UNAUDITED)
1993 1994 1995 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....................................... $ (1,033) $ 3,417 $ 3,813 $ 1,166 $ 7,638 $ 119
Add back:
Interest expense, net................................. 5,791 7,144 9,010 9,924 8,281 2,152
Income taxes.......................................... 999 3,573 3,524 4,686 8,028 92
Depreciation and amortization......................... 4,586 7,247 10,514 12,288 12,309 2,867
Extraordinary item.................................... -- -- -- -- 2,756 --
Compensation related to stock options................. 1,093 264 132 132 99 33
Impairment and closure of facility.................... -- -- -- 4,730 1,416 --
Other non-cash charges................................ -- 1,753 -- -- 18 --
--------- --------- --------- --------- --------- ---------
Subtotal.............................................. 12,555 19,981 23,180 31,760 30,446 5,144
--------- --------- --------- --------- --------- ---------
EBITDA.................................................. $ 11,436 $ 23,398 $ 26,993 $ 32,926 $ 38,084 $ 5,263
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1997
-----------
<S> <C>
Net income (loss)....................................... $ (12,183)
Add back:
Interest expense, net................................. 1,800
Income taxes.......................................... (7,105)
Depreciation and amortization......................... 3,066
Extraordinary item.................................... 1,109
Compensation related to stock options................. 8,300
Impairment and closure of facility.................... --
Other non-cash charges................................ --
-----------
Subtotal.............................................. 7,170
-----------
EBITDA.................................................. $ (5,013)
-----------
-----------
</TABLE>
Although EBITDA (as well as related EBITDA ratios) is a non-GAAP measurement,
EBITDA, EBITDA margin, the ratio of
total debt to EBITDA and the ratio of EBITDA to interest expense are
included because management understands that such information is considered
by certain investors to be an additional basis for evaluating the Company's
ability to pay interest, repay debt and make capital expenditures. EBITDA
should not be considered an alternative to measures of operating performance
as determined in accordance with generally accepted accounting principles,
including net income as a measure of the Company's operating results and
cash flows as a measure of the Company's liquidity. Because EBITDA is not
calculated identically by all companies, the presentation herein may not be
comparable to other similarly titled measures of other companies.
(9) Depreciation and amortization as presented does not include the amortization
of deferred financing fees. In the cash flow statement in the consolidated
financial statements, the amortization of deferred financing fees is
included in depreciation and amortization.
(10) The ratio of total debt to EBITDA is not presented for interim periods
because it is not meaningful.
(11) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, whether capitalized or
expensed, plus one-third of rental expense under operating leases (the
portion that has been deemed by the Company to be representative of an
interest factor).
RISK FACTORS
Prospective investors should carefully consider the matters set forth under
"Risk Factors," beginning on page 15, in evaluating an investment in the Notes.
14
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, BEFORE TENDERING
THEIR EXISTING NOTES FOR NEW NOTES, HOLDERS OF EXISTING NOTES SHOULD CONSIDER
CAREFULLY THE FOLLOWING FACTORS, WHICH ARE GENERALLY APPLICABLE TO THE EXISTING
NOTES AND THE NEW NOTES.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
As a result of the Recapitalization, the Company is highly leveraged, with
indebtedness that is very substantial in relation to its shareholder's equity.
After giving pro forma effect to the Recapitalization, as of June 30, 1997, the
Company's aggregate outstanding indebtedness was $249.7 million and the
Company's shareholder's equity reflected a deficit of $38.2 million. The New
Credit Facility and the Indenture will permit the Company to incur or guarantee
certain additional indebtedness, subject to certain limitations. The Company
will be required to repay the $85.0 million in term loans under the New Credit
Facility over the eight and one-half year period following June 30, 1997, with
scheduled principal payments of $850,000 annually for the first six years, $27.4
million in the seventh year, $39.3 million in the eighth year, and $13.2 million
in the final six months. All outstanding revolving credit borrowings under the
New Credit Facility will become due on June 30, 2003. The Company expects that
its working capital needs will require it to obtain replacement revolving credit
facilities at that time. See "Selected Historical and Pro Forma Financial
Information," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," "Description of New
Credit Facility" and "Description of the New Notes."
The Company's high degree of leverage could have important consequences to
holders of Notes, including but not limited to the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired in the
future; (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds available to the Company for its operations and other
purposes, including investments in research and development and capital
spending; (iii) the Company may be substantially more leveraged than certain of
its competitors, which may place the Company at a competitive disadvantage; (iv)
the Company may be hindered in its ability to adjust rapidly to changing market
conditions; and (v) the Company's substantial degree of leverage could make it
more vulnerable in the event of a downturn in general economic conditions or its
business or changing market conditions and regulations.
The Company's ability to repay or to refinance its obligations with respect
to its indebtedness will depend on its future financial and operating
performance, which, in turn, will be subject to prevailing economic and
competitive conditions and to certain financial, business, legislative,
regulatory and other factors, many of which are beyond the Company's control.
These factors could include operating difficulties, increased operating costs,
product pricing pressures, the response of competitors, regulatory developments,
and delays in implementing strategic projects. The Company's ability to meet its
debt service and other obligations may depend in significant part on the extent
to which the Company can implement successfully its business strategy. There can
be no assurance that the Company will be able to implement its strategy fully or
that the anticipated results of its strategy will be realized. See
"Business--Business Strategy."
If the Company's cash flow and capital resources are insufficient to fund
its debt service obligations, the Company may be forced to reduce or delay
capital expenditures, sell assets, or seek to obtain additional equity capital,
or to refinance or restructure its debt. There can be no assurance that the
Company's cash flow and capital resources will be sufficient for the payment of
principal of, and premium, if any, and interest on, its indebtedness in the
future, or that any such alternative measures would be successful or would
permit the Company to meet its scheduled debt service obligations. In addition,
because the Company's obligations under the New Credit Facility will bear
interest at floating rates, an
15
<PAGE>
increase in interest rates could adversely affect, among other things, the
Company's ability to meet its debt service obligations. The Company entered into
an interest protection arrangement effective July 30, 1997 for a period of three
years with respect to $29.4 million of its indebtedness under the New Credit
Facility that provides a cap of 6.17% on the interest rates payable thereon. See
"Description of New Credit Facility."
SUBORDINATION OF NEW NOTES
The New Notes will be unsecured, senior subordinated obligations of LHP, and
as such, will be subordinated in right of payment to all existing and future
Senior Debt of LHP, including indebtedness of LHP under the New Credit Facility
and LHP's guarantee of indebtedness of Vita Health under the New Credit
Facility. The New Notes will rank PARI PASSU with all senior subordinated
indebtedness of LHP, if any, and will rank senior to all subordinated
indebtedness of LHP, if any. The New Notes will also be effectively subordinated
to all secured indebtedness of LHP to the extent of the value of the assets
securing such indebtedness, and to all existing and future obligations and
liabilities of LHP's subsidiaries. The obligations of LHP under the New Credit
Facility are secured by substantially all of the assets of LHP and any future
U.S. subsidiary of LHP and a pledge of the capital stock of LHP and any such
subsidiary and 65% of the capital stock of any direct foreign subsidiary of LHP.
The obligations of Vita Health under the New Credit Facility are additionally
secured by substantially all of the assets of Vita Health and its Canadian
parents and subsidiaries. As of June 30, 1997, after giving pro forma effect to
the Recapitalization, the aggregate principal amount of Senior Debt that
effectively ranked senior to the Notes was approximately $164.7 million.
In the event of bankruptcy, liquidation, dissolution, reorganization or any
similar proceeding regarding LHP, or any default in payment or acceleration of
any debt thereof, the assets of LHP will be available to pay obligations on the
New Notes (and any Existing Notes that are not exchanged) only after the Senior
Debt of LHP has been paid in full, and there may not be sufficient assets
remaining to pay amounts due on all or any of such Notes. See "Description of
the New Notes-- Subordination."
RESTRICTIVE FINANCING COVENANTS
The New Credit Facility contains a number of covenants that significantly
restrict the operations of the Company. In addition, the Company is required to
comply with specified financial ratios and tests, including minimum net worth
requirements, maximum leverage ratios, minimum fixed charge coverage ratios and
minimum EBITDA to cash interest expense ratios, and certain of these ratios and
tests may be more restrictive in future years. There can be no assurance that
the Company will be able to comply with such covenants or restrictions in the
future. The Company's ability to comply with such covenants and other
restrictions may be affected by events beyond its control, including prevailing
economic, financial and industry conditions. The breach of any such covenants or
restrictions could result in a default under the New Credit Facility that would
permit the lenders thereunder to declare all amounts outstanding thereunder to
be immediately due and payable, together with accrued and unpaid interest, and
terminate their commitments to make further extensions of credit thereunder, and
the Company could be prohibited from making any payments on the New Notes. See
"Description of New Credit Facility." In addition, the Indenture contains a
number of restrictive covenants relating to the Company. These covenants,
however, are subject to a number of exceptions and limitations, and may not
afford holders of the New Notes with protection in the event of a
highly-leveraged transaction, reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect holders of the
Notes.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control (as defined in the Indenture),
the Company will be required to make an offer to purchase all of the outstanding
Notes at a price equal to 101% of the principal amount thereof at the date of
purchase plus accrued and unpaid interest, if any, to the date of
16
<PAGE>
purchase. The occurrence of certain of the events that would constitute a Change
of Control under the Indenture would constitute a default under the New Credit
Facility and might constitute a default under other indebtedness of the Company.
In addition, the New Credit Facility prohibits the purchase of the Notes in the
event of a Change of Control, unless and until such time as the indebtedness
under the New Credit Facility is repaid in full. The Company's failure to
purchase the Notes in such instance would result in a default under each of the
Indenture and the New Credit Facility. The inability to repay the indebtedness
under the New Credit Facility, if accelerated, could have material adverse
consequences to the Company and to the holders of the Notes. Future indebtedness
of the Company may also contain prohibitions of certain events or transactions
that could constitute a Change of Control or require such indebtedness to be
repurchased upon a Change of Control. In the event of a Change of Control, there
can be no assurance that the Company would have sufficient assets to satisfy all
of its obligations under the New Credit Facility and the Notes. See "Description
of New Credit Facility" and "Description of the New Notes--Change of Control."
FRAUDULENT TRANSFER CONSIDERATIONS
The incurrence of indebtedness by the Company, such as the Notes, may be
subject to review under federal bankruptcy law or relevant state fraudulent
conveyance laws if a bankruptcy case or lawsuit is commenced by or on behalf of
unpaid creditors of the Company. Under these laws, if, in a bankruptcy or
reorganization case or a lawsuit by or on behalf of unpaid creditors of the
Company, a court were to find that, at the time the Company incurred
indebtedness, including indebtedness under the Notes, (i) the Company incurred
such indebtedness with the intent of hindering, delaying or defrauding current
or future creditors or (ii) (a) the Company received less than reasonably
equivalent value or fair consideration for incurring such indebtedness and (b)
the Company (1) was insolvent or was rendered insolvent by reason of any of the
transactions, (2) was engaged, or about to engage, in a business or transaction
for which its assets constituted unreasonably small capital, (3) intended to
incur, or believed that it would incur, debts beyond its ability to pay as such
debts matured (as all of the foregoing terms are defined in or interpreted under
the relevant fraudulent transfer or conveyance statutes) or (4) was a defendant
in an action for money damages, or had a judgment for money damages docketed
against it (if, in either case, after final judgment the judgment is
unsatisfied), then such court could avoid or subordinate the amounts owing under
the Notes to presently existing and future indebtedness of the Company and take
other actions detrimental to the holders of the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the law of the jurisdiction that is being applied in any
such proceeding. Generally, however, the Company would be considered insolvent
if, at the time it incurred the indebtedness, either (i) the sum of its debts
(including contingent liabilities) is greater than its assets, at a fair
valuation, or (ii) the present fair saleable value of its assets is less than
the amount required to pay the probable liability on its total existing debts
and liabilities (including contingent liabilities) as they become absolute and
matured. There can be no assurance as to what standards a court would use to
determine whether the Company was solvent at the relevant time, or whether,
whatever standard was used, the Notes would not be avoided or further
subordinated on another of the grounds set forth above. In rendering their
opinions in connection with the initial financing of the Recapitalization,
counsel for the Company and counsel for the lenders did not express any opinion
as to the applicability of federal or state fraudulent transfer and conveyance
laws.
The Company believes that at the time the indebtedness constituting the
Existing Notes was incurred initially by the Company, the Company (i) was (a)
neither insolvent nor rendered insolvent thereby, (b) in possession of
sufficient capital to run its businesses effectively and (c) incurring debts
within its ability to pay as the same matured or became due, and (ii) had
sufficient assets to satisfy any probable money judgment against it in any
pending action. The Company also believes that at the time it initially will
incur indebtedness constituting the New Notes that the Company (i) will be (a)
neither insolvent nor rendered insolvent thereby, (b) in possession of
sufficient capital to run its businesses effectively and (c) incurring
17
<PAGE>
debts within its ability to pay as the same mature or become due and (ii) will
have sufficient assets to satisfy any probable money judgment against it in any
pending action. In reaching the foregoing conclusions, the Company has relied
upon its analyses of internal cash flow projections and estimated values of
assets and liabilities of the Company. There can be no assurance, however, that
a court passing on such questions would reach the same conclusions.
CONTROL OF THE COMPANY
North Castle holds approximately 74% of the issued and outstanding Group
Common Stock on a fully diluted basis. Pursuant to the terms of the Leiner Group
Stockholders Agreement, dated as of June 30, 1997 (the "Stockholders
Agreement"), and entered among Leiner Group, North Castle, AEA Group, and
certain other shareholders represented by AEA Group in connection with the
Recapitalization, the AEA Group has the power to elect one member of Leiner
Group's Board of Directors and North Castle has the power to elect the remaining
directors of Leiner Group, and through Leiner Group, all the directors of LHP.
Accordingly, North Castle controls the Company and has the power to appoint new
management and approve any action requiring the approval of the holders of Group
Common Stock, including adopting amendments to Leiner Group's certificate of
incorporation and approving mergers or sales of substantially all of the
Company's assets. There can be no assurance that the interests of North Castle
will not conflict with the interests of the holders of the Notes. Under North
Castle's operating agreement, Mr. Baird has authority and discretion over the
business, affairs and operations of North Castle. See "Management" and "Certain
Transactions."
EFFECT OF RESEARCH AND PUBLICITY ON VITAMIN PRODUCT BUSINESS
The Company believes the growth experienced in the last several years by the
vitamin product business is based largely on national media attention regarding
recent scientific research suggesting potential health benefits from regular
consumption of certain vitamin products. Various studies published since 1992 by
researchers at major universities have suggested an association between regular
consumption of antioxidant supplements such as vitamins E and C and selenium and
a reduced risk of certain diseases and including heart disease, cancer and
Alzheimer's disease. In addition, certain other studies have reported that
consumption of folic acid (a B vitamin) can aid prevention of heart disease and
neural tube birth defects. Such research has been described in major medical
journals, magazines, newspapers and television programs. However, certain recent
studies relating to certain antioxidants have produced results contrary to the
favorable indications of other prior and subsequent studies. The scientific
research to date with respect to antioxidants and certain other of the Company's
products, including Dehydroepiandrosterone ("DHEA") is not conclusive, and there
can be no assurance of future favorable scientific results and media attention,
or the absence of unfavorable or inconsistent findings. In the event of future
unfavorable scientific results or media attention, the Company's sales of
vitamin products could be materially adversely affected.
POTENTIAL FOR INCREASED GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling, advertising
and sale of the Company's products are subject to regulation by one or more
United States and Canadian federal agencies, including the United States Food
and Drug Administration (the "FDA"), the United States Federal Trade Commission
(the "FTC"), the United States Consumer Product Safety Commission (the "CPSC")
and Health Canada. The Company's activities are also regulated by various
agencies of the states, provinces, localities and countries in which the
Company's products are sold. In addition, the Company manufactures and markets
certain of its products in compliance with the guidelines promulgated by
voluntary standard organizations, such as the USP.
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994. DSHEA amended the Federal Food, Drug, and Cosmetic
Act to (i) define dietary supplements,
18
<PAGE>
(ii) expand with certain limitations the number of products that can be marketed
as dietary supplements, (iii) permit "structure/function" statements for all
vitamin products, including herbal products and other nutritional supplements,
and (iv) permit the use of published literature in the sale of vitamin products.
The FDA has proposed, but not yet promulgated, regulations to implement the
labeling requirements of DSHEA. Since its adoption, certain aspects of DSHEA
have been subject to criticism as a result of the increased distribution of
certain products that have been linked to harmful effects, including death. A
possible effect of such criticism may be that regulations, when promulgated by
the FDA, may significantly limit certain provisions of DSHEA beneficial to the
Company. The Company cannot determine what effect regulations promulgated to
implement DSHEA will have on its business in the future. Such regulations are
likely, among other things, to require expanded or different labeling and could
require expanded documentation of the properties of certain products and
scientific substantiation regarding ingredients, product claims or safety. The
Company believes that it is in material compliance with all applicable laws.
In Canada, the Company's products are subject to government regulation under
the Food and Drug Act and the regulations thereunder (the "Canadian Act") which
require regulatory approvals of such products through a drug identification
number ("DIN") or general proprietary number ("GP") by Health Canada. The loss
of a particular DIN or GP would adversely affect the ability to continue to sell
the particular product to which it was assigned. Material noncompliance with the
provisions of the Canadian Act may result in the loss of a DIN or GP or the
seizure and forfeiture of products which are sold in noncompliance with the
Canadian Act. The Company is currently seeking regulatory approvals for certain
of its products. There can be no assurance that such regulatory approvals will
be received and receipt of such approvals may be subject to significant delays.
Certain of the Company's products are subject to government regulation under
the Canadian Controlled Drugs and Substances Act and the regulations thereunder
(the "CDSA") which includes requirements for licenses of the factory, approved
security, a qualified person in charge of the factory and detailed record
keeping in connection with the manufacturing of controlled substances. The loss
of a license or the failure to meet any of these requirements would adversely
affect the ability to continue to manufacture and to sell products containing
controlled substances.
In response to the Canadian government's concern that a growing number of
unlabeled and incorrectly labeled herbal products are for sale to the Canadian
public which should have, but have not, received regulatory approval, a panel
has been established to review the regulatory framework for herbal products. The
Canadian government may implement new or amended requirements. There is, in
addition, the risk of stricter government enforcement of existing requirements
for herbal products. This may result in additional costs to the Company, delay
the entry of some products into the market or adversely affect sales of herbal
products.
In addition, the Company cannot predict whether new legislation or
regulation governing the Company's activities will be enacted by legislative
bodies or promulgated by agencies regulating the Company's activities, or what
the effect of any such legislation or regulation on the Company's business would
be. There can be no assurance that new legislation or regulation, including
changes to existing laws and regulations, will not materially adversely affect
the Company's results of operations or business.
RELIANCE ON CERTAIN CUSTOMERS AND CERTAIN PRODUCTS
The Company has approximately 200 active U.S. customers. In fiscal 1997,
Wal-Mart Stores, Inc. and Walgreen Co. accounted for approximately 27% and 12%,
respectively, of the Company's sales. Each of the Company's other major
customers accounted for less than 10% of the Company's sales for fiscal 1997.
The Company's top ten customers in the aggregate accounted for approximately 71%
of the Company's sales for fiscal 1997. Sales of vitamins C and E, in the
aggregate, accounted for approximately 34% of the Company's sales in fiscal 1997
(excluding sales by Vita Health). If one or more of the Company's major
19
<PAGE>
customers substantially reduced their volume of purchases from the Company, or
if sales of vitamin C or E were substantially reduced, the Company's results of
operations could be materially adversely affected.
DISRUPTION OF OPERATIONS
Beginning in fiscal 1994, the Company implemented a major facilities
consolidation, capacity expansion and equipment modernization program with
respect to its western U.S. facilities, whereby the Company consolidated its
western U.S. facilities into a smaller number of larger units with modern
equipment and expanded capacity for the purpose of realizing certain cost
savings and manufacturing efficiencies. The Company believes further cost
reduction opportunities exist with respect to its eastern U.S. facilities and
plans to consolidate its three existing eastern U.S. packaging and distribution
facilities into a new facility in York County, South Carolina, an area just
south of Charlotte, North Carolina. While the Company believes that this program
will reduce the Company's manufacturing and distribution costs, there can be no
assurance that the expected cost reductions will be realized or that this
program will result in improved profit margins. A significant, unexpected
disruption during the expansion of this program to the Company's eastern U.S.
facilities could have a material adverse effect on the Company's results of
operations.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other vitamin product and OTC pharmaceuticals manufacturers. Among
other factors, competition among these manufacturers is based upon price. If one
or more manufacturers significantly reduce their prices in an effort to gain
market share, the Company's results of operations or market position could be
adversely affected. Certain of the Company's competitors, particularly
manufacturers of nationally advertised brand name products, are larger and have
resources substantially greater than those of the Company, and are less
leveraged than the Company will be following the Recapitalization. In the
future, one or more of these companies could seek to compete more directly with
the Company by manufacturing private label products or by significantly lowering
the prices of their national brand products.
The Company sells substantially all of its vitamin products to mass market
retailers. Although the Company does not currently participate significantly in
other channels such as health food stores, direct mail and direct sales, the
Company's products may face competition from such alternative channels as more
customers utilize these channels of distribution to obtain vitamin products.
RELIANCE ON CERTAIN SUPPLIERS; AVAILABILITY AND COST OF PURCHASED MATERIALS
The Company purchases from third party suppliers certain important
ingredients and products that the Company cannot manufacture. Although the
Company currently has supply arrangements with several suppliers of these
ingredients and products, and the Company's purchased materials are generally
available from numerous sources, an unexpected interruption of supply could
materially adversely affect the Company's results of operations. Two suppliers
provided approximately 31% of the materials purchased during fiscal 1997 by the
Company (excluding purchases by Vita Health), and a loss of either of these
suppliers could materially adversely affect the Company. No other single
supplier accounts for more than 10% of the Company's material purchases.
Increased demand for certain products can occasionally exceed the existing
supply of certain important ingredients and components that the Company does not
manufacture. The Company generally receives adequate notice of any potential
disruption in the supply of such ingredients and components to ensure sufficient
time to procure alternative sources. As a result, the Company has been able to
manage the supply of such ingredients and components. However, an interruption
in supply of such ingredients and components that the Company is unable to
remedy, could result in the Company's inability to deliver its products on a
timely basis, which, in turn, could adversely affect its operations.
20
<PAGE>
The Company has not always in the past been, and may not in the future
always be, able to raise prices quickly enough to fully offset the effects of
increased purchased material costs.
POSSIBILITY OF TRADE DRESS CLAIMS
The Company's packaging of certain of its branded products identifies
nationally branded products to which the Company's products are comparable.
Although the Company designs its packaging to avoid infringing upon any
proprietary rights of national brand marketers and is not currently the subject
of any legal actions regarding infringement, there can be no assurance that the
Company will not be subject to such legal actions in the future.
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has an aggregate of $57.0 million of insurance coverage, including
primary product liability and umbrella liability coverage with deductibles of
(i) in the case of OTC pharmaceuticals, $0.25 million per claim, subject to an
annual aggregate deductible limit of $0.75 million and (ii) in the case of
vitamins and all other products, $0.25 million per claim, subject to an annual,
aggregate deductible limit of $0.75 million. There can be no assurance that
product liability insurance will continue to be available at an economically
reasonable cost or that the Company's insurance will be adequate to cover
liability the Company incurs in respect of product liability claims. See also
"--Litigation Involving Products Containing L-Tryptophan."
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise.
LHP does not have employment contracts with any of its executive officers. LHP
has entered severance benefit agreements with certain members of LHP's senior
management. See "Management--Severance Arrangements." If, for any reason, key
personnel do not continue to be active in LHP's management, operations could be
adversely affected.
ACQUISITION RELATED RISKS
Part of the Company's business strategy has been and will continue to be to
acquire other businesses that will complement its existing business. Management
is unable to predict whether or when any prospective acquisition candidates will
become available or the likelihood of a material transaction being completed
should any negotiations commence. The Company's ability to finance acquisitions
may be constrained by, among other things, its high degree of leverage. The New
Credit Facility and the Indenture may significantly limit the Company's ability
to make acquisitions and to incur indebtedness in connection with acquisitions.
In addition, acquisitions that the Company may make or in which the Company may
enter will involve risks, including the successful integration and management of
acquired technology, operations and personnel. The integration of acquired
businesses may also lead to the loss of key employees of the acquired companies
and diversion of management attention from ongoing business concerns. There can
be no assurance that any acquisition will be made, that the Company will be able
to obtain additional financing needed to finance such transactions and, if any
acquisitions are so made or formed, that they will be successful.
RISKS ASSOCIATED WITH INTERNATIONAL MARKETS
The Company's continued growth is dependent in part upon its ability to
expand its operations into new markets, including international markets. The
Company may experience difficulty entering new international markets due to
greater regulatory barriers, the necessity of adapting to new regulatory
21
<PAGE>
systems and problems related to entering new markets with different cultural
bases and political systems. Operating in international markets exposes the
Company to certain risks, including, among other things, (i) changes in or
interpretations of foreign import, currency transfer and other restrictions and
regulations that among other things may limit the Company's ability to sell
certain products or repatriate profits to the United States, (ii) exposure to
currency fluctuations, particularly in light of the Company's substantial
interest payment obligations, which must be paid in United States and Canadian
dollars, (iii) the potential imposition of trade or foreign exchange
restrictions or increased tariffs and (iv) economic and political instability.
As the Company continues to expand its international operations, these and other
risks associated with international operations are likely to increase.
LITIGATION INVOLVING PRODUCTS CONTAINING L-TRYPTOPHAN
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of August 14, 1997, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 668 lawsuits of which 658 have been settled. The Company's supplier of
bulk L-Tryptophan has agreed to assume the defense of all claims (including any
future claims that may be made) and pay all settlements and judgments, other
than for certain punitive damages, against the Company arising out of the
ingestion of these L-Tryptophan products. To date, such supplier has funded all
settlements and paid all legal fees and expenses incurred by the Company related
to these matters. No punitive damages have been awarded in the 658 cases that
have been settled. In light of such agreement and such supplier's performance to
date thereunder, and the Company's product liability insurance (which is subject
to deductibles not to exceed $1.6 million in the aggregate with respect to the
10 pending cases), the Company does not expect to be required to make any
material payments in connection with the resolution of the remaining 10 cases.
ABSENCE OF PUBLIC MARKET
The Existing Notes are eligible for trading through the PORTAL market. The
New Notes are new securities for which there presently is no established market
and none may develop. Although the Initial Purchasers have informed the Company
that they currently intend to make a market in the New Notes, the Initial
Purchasers are not obligated to do so and any such market making may be
discontinued at any time without notice, at the sole discretion of the Initial
Purchasers. In addition, such market making activity may be limited during the
pendency of the Exchange Offer or the effectiveness of a shelf registration
statement in lieu thereof. Accordingly, there can be no assurance as to the
development or liquidity of any market for the New Notes.
Even if a market for the New Notes develops, the price at which the holders
of New Notes will be able to sell cannot be assured and the New Notes could
trade at a price above or below either their purchase price or face value.
To the extent that Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for the remaining untendered or tendered but not
accepted Existing Notes could be adversely affected. Because the Company
anticipates that most holders of the Existing Notes will elect to exchange such
Existing Notes for New Notes due to the absence of restrictions on the resale of
New Notes under the Securities Act, the Company anticipates that the liquidity
of the market for any Existing Notes remaining after the consummation of the
Exchange Offer may be substantially limited.
22
<PAGE>
THE COMPANY
GENERAL
Leiner is the nation's largest manufacturer of vitamins, minerals, and
nutritional supplements and distributes its products primarily through mass
market retailers. The Company has a 23% share of all mass market vitamin sales
in the United States, 50% larger than its next closest competitor's share.
Additionally, Leiner's 50% share of the mass market private label segment is
more than two times the size of its next closest competitor's share. Leiner has
increased its market share over the last five years, with its U.S. vitamin sales
growing at a compound annual rate of 18.9% per year through fiscal 1997, over
one and one half times the U.S. industry growth rate. Leiner is also one of the
nation's largest private label OTC pharmaceuticals manufacturers, with 20% of
its sales in OTC pharmaceutical and other products. In January 1997, the Company
acquired Vita Health, the second largest private label vitamin and OTC
pharmaceuticals manufacturer in the Canadian market.
The Company's products are sold in more than 50,000 of the nation's leading
retail outlets, including the 20 largest drug store chains, 18 of the 20 largest
supermarket chains, 10 of the largest mass merchandising chains, and the two
largest warehouse club chains, as well as in convenience stores and through
United States military outlets worldwide. Leiner is the vitamin category manager
for many leading retailers.
HISTORY
The Company is the ultimate successor to the vitamin product division of P.
Leiner & Sons, America, Inc. The division, founded in 1973, was purchased in
1979 by management and Booker plc ("Booker") through LHP, then named P. Leiner
Nutritional Products Corp. (the "Predecessor Company"). On May 4, 1992, Leiner
Group acquired LHP (the "LHP Acquisition") for a total purchase price of
approximately $90.9 million. LHP subsequently changed its name to Leiner Health
Products Inc. Leiner Group was incorporated under the laws of the State of
Delaware in 1987 by AEA, and did not have any significant assets, liabilities or
activities prior to the LHP Acquisition. Leiner Group is a holding company with
no significant operations or assets other than the stock of LHP, which it holds
through its sole direct subsidiary, PLI Holdings Inc., itself a holding company
("PLI").
On May 22, 1992 Leiner Group acquired privately held XCEL, a major U.S.
private label OTC pharmaceuticals manufacturer (the "XCEL Acquisition"), for a
total purchase price of approximately $24.7 million. On March 8, 1993, XCEL was
merged into LHP. On May 4, 1994, Leiner Group's name was changed from PLI
Investors Inc. to Leiner Health Products Group Inc.
In January 1997, the Company acquired Vita Health (the "Vita Health
Acquisition"), one of the leading manufacturers of private label and branded
vitamins, minerals and OTC pharmaceuticals in Canada, for a total purchase price
of approximately $16.0 million, including $1.1 million of direct acquisition
costs. Vita Health is currently a wholly-owned indirect subsidiary of LHP. Vita
Health is headquartered in Winnipeg, Manitoba, Canada. This location serves as
Vita Health's headquarters, manufacturing, tableting, packaging and distribution
location.
The principal executive offices of LHP are located at 901 East 233rd Street,
Carson, California 90745-6204, and the telephone number is (310) 835-8400.
23
<PAGE>
USE OF PROCEEDS
There will be no cash proceeds payable to LHP from the issuance of the New
Notes pursuant to the Exchange Offer. The proceeds of the Offering of the
Existing Notes were used to fund a portion of the financing for the
Recapitalization and related transactions. Such funding requirements included
payments in respect of Common Stock and options for Common Stock, repayment of
substantially all existing indebtedness of the Company other than certain
capitalized leases, redemption of preferred stock of Leiner Group and Vita
Health, payment of management transaction bonuses, and payment of transaction-
related fees and expenses. For further discussion of the sources and uses of
funds related to the Recapitalization, see "The Recapitalization."
The existing indebtedness of the Company repaid in connection with the
Recapitalization consisted of outstanding term loan and revolving credit
borrowings under the Company's previous senior credit agreement, which had an
expiration of April 1, 2003. Such indebtedness either consisted of short-term
borrowings used for working capital, or was incurred in January 1997 in
connection with financing the acquisition of Vita Health and refinancing of
certain indebtedness of the Company. Such indebtedness amounted to approximately
$102.2 million (including then accrued interest), with interest rates thereon of
6.4% per annum for U.S. borrowings and 4.1% per annum for Canadian borrowings.
The preferred stock redeemed in connection with the Recapitalization consisted
of pay-in-kind redeemable preferred stock of Leiner Group held by AEA, for which
the aggregate redemption price was $13.9 million, and a minority preferred stock
interest in Vita Health, issued in connection with the Vita Health Acquisition,
for which the aggregate redemption price was $3.7 million.
24
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 on a historical basis including the effect of the Recapitalization, and
on a pro forma basis after giving effect to certain Recapitalization-related
transactions that were completed after June 30, 1997. This table should be read
in conjunction with "Unaudited Pro Forma Financial Information," "Selected
Historical and Pro Forma Financial Information," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
-----------------------
<S> <C> <C>
HISTORICAL PRO FORMA
---------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current portion):
Revolving credit facilities (1)...................................................... $ 64,736 $ 74,836
Term loans (2)....................................................................... 85,000 85,000
Capitalized lease obligations........................................................ 4,815 4,815
New Notes............................................................................ 85,000 85,000
---------- -----------
Total long-term debt............................................................... 239,551 249,651
Minority interest in subsidiary (3).................................................... 4,718 1,000
Total common shareholder's deficit..................................................... (45,022) (38,188)
---------- -----------
Total capitalization................................................................... $ 199,247 $ 212,463
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Borrowings of up to $125.0 million under the Revolving Credit Facility are
available for working capital and general corporate purposes, including
(subject to certain sublimits) letters of credit, the face value of which
totalled $4.7 million as of June 30, 1997. As of September 30, 1997, the
Company's unused availability under the Revolving Credit Facility was
approximately $59.2 million. The Revolving Credit Facility will mature on
June 30, 2003. See "Description of New Credit Facility."
(2) Term loan borrowings under the New Credit Facility consist of $45.0 million
in Term B loans, maturing seven and one-half years following June 30, 1997,
and $40.0 million in Term C loans, maturing eight and one-half years
following June 30, 1997, in each case with required quarterly principal
payments until maturity. See "Description of New Credit Facility."
(3) Consists of preferred stock of Vita Health held by certain of its former
owners, valued at an aggregate redemption price of $4.7 million of which
$3.7 million was redeemed in July 1997 in connection with the
Recapitalization.
25
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial data of the Company
has been prepared to give effect to the Recapitalization and certain
Recapitalization-related transactions that were completed after the
Recapitalization with respect to the Company. For a discussion of the
Recapitalization, see "The Recapitalization".
The pro forma adjustments presented are based upon available information and
certain assumptions that the Company believes are reasonable under the
circumstances. The historical consolidated statement of operations data for the
three months ended June 30, 1997 and the historical consolidated balance sheet
data as of June 30, 1997 were derived from the unaudited condensed consolidated
financial statements of the Company included elsewhere herein. The historical
consolidated statement of operations data for the year ended March 31, 1997 was
derived from the audited consolidated financial statements of the Company
included elsewhere herein.
The unaudited pro forma consolidated statement of operations data of the
Company for the year ended March 31, 1997 give effect to (i) the
Recapitalization with respect to the Company as if it had occurred on April 1,
1996, and (ii) the acquisition of Vita Health on January 30, 1997 as if that
acquisition had occurred on April 1, 1996, based on the historical financial
information for Vita Health for the ten months ended January 30, 1997 that was
derived from Vita Health's unaudited financial statements. The unaudited pro
forma consolidated statement of operations data of the Company for the three
months ended June 30, 1997 give effect to the Recapitalization with respect to
the Company as if it had occurred on April 1, 1997. The unaudited pro forma
consolidated balance sheet data of the Company as of June 30, 1997 give effect
to the Recapitalization with respect to the Company assuming that certain
Recapitalization-related transactions that were completed after June 30, 1997
had occurred on June 30, 1997.
The unaudited pro forma financial data should be read in conjunction with
the historical consolidated financial statements of the Company and notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and other financial data included elsewhere in this
Prospectus, as well as the information concerning the Recapitalization
(including the sources and uses therefor) contained in "The Recapitalization."
The pro forma financial data and related notes are provided for informational
purposes only and do not necessarily reflect the results of operations or
financial position of the Company that would have actually resulted had the
events referred to above or in the notes to the unaudited proforma financial
information been consummated as of the date and for the period indicated and are
not intended to project the Company's financial position or results of
operations for any future period.
26
<PAGE>
LEINER HEALTH PRODUCTS INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 3,117 $ 3,117
Accounts receivable, net................................................. 56,012 56,012
Income taxes receivable.................................................. 4,678 4,678
Inventories.............................................................. 96,177 96,177
Deferred income taxes.................................................... 3,838 3,838
Prepaid expenses and other current assets................................ 3,117 3,117
---------- ----------- ---------
Total current assets................................................... 166,939 166,939
Property, plant and equipment, net......................................... 42,034 42,034
Goodwill, net.............................................................. 57,675 57,675
Deferred income taxes...................................................... 3,321 3,321
Deferred financing charges................................................. 11,853 11,853
Other non-current assets................................................... 11,544 11,544
---------- ----------- ---------
Total assets........................................................... $ 293,366 $293,366
---------- ----------- ---------
---------- ----------- ---------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Bank checks outstanding, less cash on deposit............................ $ 10,222 $ 10,222
Current portion of long-term debt........................................ 2,062 2,062
Accounts payable......................................................... 53,525 53,525
Other accrued expenses................................................... 26,594 $ (7,131)(1)
(5,125)(2)
(960)(3) 13,378
---------- ----------- ---------
Total current liabilities.............................................. 92,403 (13,216) 79,187
Capitalized lease obligations.............................................. 3,603 3,603
Revolving credit facility.................................................. 63,886 5,125(2)
960(3)
3,718(4)
297(5) 73,986
Term loans................................................................. 85,000 85,000
Senior subordinated notes.................................................. 85,000 85,000
Deferred income taxes...................................................... 2,582 2,582
Other non-current liabilities.............................................. 1,196 1,196
Minority interest in subsidiary............................................ 4,718 (3,718)(4) 1,000
Common shareholder's deficit............................................... (45,022) 7,131(1)
(297)(5) (38,188)
---------- ----------- ---------
Total liabilities and shareholder's equity (deficit)................... $ 293,366 $ -- $293,366
---------- ----------- ---------
---------- ----------- ---------
</TABLE>
See accompanying notes.
27
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(IN THOUSANDS)
The Pro Forma First Quarter Fiscal 1998 balance sheet data of the Company
give effect to the following pro forma adjustments:
(1) Represents the cash transferred from Leiner Group and paid out by the
Company in July 1997 related to the stock option compensation for options
cancelled in connection with the Recapitalization.
(2) Represents the management transaction bonuses paid in July 1997 related
to the Recapitalization.
(3) Represents certain Recapitalization fees and expenses which had been
accrued as of June 30, 1997, but which were paid subsequent to June 30, 1997.
(4) Consists of preferred stock of Vita Health held by certain of its former
owners, valued at an aggregate redemption price of $4.7 million of which $3.7
million was redeemed in July 1997 in connection with Recapitalization.
(5) Represents employer payroll taxes paid in July 1997 related to the stock
option compensation and the management bonuses.
28
<PAGE>
LEINER HEALTH PRODUCTS INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL(1) ADJUSTMENTS PRO FORMA(1)
------------ ------------ -------------
<S> <C> <C> <C>
Net sales....................................................................... $ 94,076 $ 94,076
Cost of sales................................................................... 71,860 71,860
------------ -------------
Gross profit.................................................................... 22,216 22,216
SG&A............................................................................ 17,549 17,549
Compensation related to stock options(2)........................................ 15,431 15,431
Management transaction bonuses(2)............................................... 5,125 5,125
Amortization of goodwill........................................................ 402 402
Other charges................................................................... 88 287(3) 375
------------ ------------ -------------
Operating loss.................................................................. (16,379) (287) (16,666)
Interest expense, net........................................................... 1,800 393(4)
3,623(5) 5,816
------------ ------------ -------------
Loss before income taxes and extraordinary item................................. (18,179) (4,303) (22,482)
Benefit for income taxes........................................................ (7,105) (1,721)(6) (8,826)
------------ ------------ -------------
Loss before extraordinary item.................................................. $ (11,074) $(2,582) $ (13,656)
------------ ------------ -------------
------------ ------------ -------------
Depreciation and amortization expenses(7)....................................... $ 3,066 $ -- $ 3,066
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes.
29
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
Notes to the Pro Forma First Quarter Fiscal 1998 statement of operations data
are as follows:
(1) The historical financial data reflects data from the Company's
consolidated statement of operations and therefore does not include any
statement of operations data for the Company's parent, Leiner Group. The pro
forma financial information does not reflect those Recapitalization-related
transactions that only affected Leiner Group. Expenses of $11.8 million were
incurred by Leiner Group in connection with the Recapitalization, of which
$6.1 million represented an adjustment of the amount received by the
Existing Shareholders. See "The Recapitalization." Historically, the Company
has not paid any material recurring expenses on behalf of Leiner Group,
although no assurances can be given that such payments will not be made in
the future. Furthermore, although federal and other consolidated income
taxes are legally payable by Leiner Group, such taxes historically have
related to LHP's operations and accordingly have been paid for by LHP and
accounted for in its consolidated financial statements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General--Recapitalization Accounting; Financial Statement
Presentation; Parent Company."
(2) Represents non-recurring charges relating to the Recapitalization
consisting of (x) a compensation charge incurred by the Company for the
in-the-money value of existing stock options of $15.4 million which were (i)
converted into an equivalent value of Equity Rights at the date of the
Recapitalization, (ii) paid out in cash, or (iii) exercised for common stock
(or a combination thereof), and (y) $5.1 million in transaction bonuses
which were paid to members of the Company's management subsequent to the
Recapitalization. These non-recurring charges contributed significantly to
the Company's operating loss of $16.4 million for the three months ended
June 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations--First Quarter
Fiscal 1998 Compared to First Quarter Fiscal 1997."
(3) Represents the elimination of the quarterly management fee of $88
charged by AEA and the application of the quarterly management fee of $375
that will be charged by North Castle after the Recapitalization.
(4) Represents the amortization of debt issuance fees of $393 for the
three months ended June 30, 1997 related to the New Credit Facility.
(5) Reflects the change in interest expense based on the
Recapitalization financing:
<TABLE>
<S> <C>
Elimination of historical interest expense......................... $ (1,800)
Add back historical interest expense related to capitalized leases,
net of historical interest income................................ 71
Interest expense on New Credit Facility (at a weighted average rate
of 8.1%, using pro forma principal balances outstanding as of
June 30, 1997 and the actual interest rates on those balances as
of June 30, 1997)................................................ 3,307
Interest expense on the Notes...................................... 2,045
---------
Total incremental interest expense............................. $ 3,623
---------
---------
</TABLE>
30
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS)
For each 0.125% increase or decrease in the assumed weighted average
interest rate in respect of the New Credit Facility, total pro forma
interest expense would increase or decrease, respectively, by approximately
$50 for the three months ended June 30, 1997.
(6) Reflects the income tax effects of pre-tax pro forma adjustments and
related financing structure.
(7) Depreciation and amortization as presented does not include the
amortization of deferred financing fees. In the cash flow statement in the
unaudited condensed consolidated financial statements, the amortization of
deferred financing fees is included in depreciation and amortization.
31
<PAGE>
LEINER HEALTH PRODUCTS INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
10 MONTHS ADJUSTED PRO
HISTORICAL(1) VITA HEALTH ADJUSTMENTS COMPANY ADJUSTMENTS FORMA(1)
---------- ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................... $392,786 $24,131 $416,917 $416,917
Cost of sales................................ 288,579 17,790 306,369 306,369
---------- ----------- -------- ---------
Gross profit................................. 104,207 6,341 110,548 110,548
SG&A......................................... 72,696 6,561 79,257 79,257
Impairment and closure of OTC facility....... 1,416 1,416 1,416
Management reorganization.................... 1,000 1,000 1,000
Amortization of goodwill..................... 1,514 $ 166(2) 1,680 1,680
Other charges(3)............................. 878 878 $ 1,150(4) 2,028
---------- ----------- ----------- -------- ----------- ---------
Operating income (loss)...................... 26,703 (220) (166) 26,317 (1,150) 25,167
Interest expense, net........................ 8,281 60 8,341 1,573(5)
13,454(6) 23,368
---------- ----------- ----------- -------- ----------- ---------
Income (loss) before income taxes and
extraordinary item......................... 18,422 (280) (166) 17,976 (16,177) 1,799
(Provision) benefit for income taxes......... (8,028) (112) -- (8,140) 6,471(7) (1,669)
---------- ----------- ----------- -------- ----------- ---------
Income (loss) before extraordinary item...... $ 10,394 $ (392) $ (166) $ 9,836 $ (9,706) $ 130
---------- ----------- ----------- -------- ----------- ---------
---------- ----------- ----------- -------- ----------- ---------
Depreciation and amortization expenses(8).... $ 12,345 $ 351 $ 166 $ 12,862 $ -- $ 12,862
---------- ----------- ----------- -------- ----------- ---------
---------- ----------- ----------- -------- ----------- ---------
</TABLE>
See accompanying notes.
32
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
Notes to the Pro Forma Fiscal 1997 statement of operations data are as
follows:
(1) The historical financial data reflects data from the Company's
consolidated statement of operations and therefore does not include any
statement of operations data for the Company's parent, Leiner Group. The pro
forma financial information does not reflect those Recapitalization-related
transactions that only affected Leiner Group. Expenses of $11.8 million were
incurred by Leiner Group in connection with the Recapitalization, of which
$6.1 million represented an adjustment to the amount received by the
Existing Shareholders. See "The Recapitalization." Historically, the Company
has not paid any material recurring expenses on behalf of Leiner Group,
although no assurances can be given that such payments will not be made in
the future. Furthermore, although federal and other consolidated income
taxes are legally payable by Leiner Group, such taxes historically have
related to LHP's operations and accordingly have been paid for by LHP and
accounted for in its consolidated financial statements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General--Recapitalization Accounting; Financial Statement
Presentation; Parent Company."
(2) Represents the incremental amortization of goodwill related to the
acquisition of Vita Health for the period from April 1, 1996 to January 31,
1997. The amount of goodwill recorded in connection with the acquisition was
$7.1 million, and it is being amortized over its expected benefit period of
35 years.
(3) Other charges do not include (i) non-recurring charges incurred in
connection with the Recapitalization for transaction fees and expenses of
$11.9 million which have been deferred and will be amortized over subsequent
periods, not to exceed 10 years, (ii) stock option compensation expense of
$15.7 million (including related employer payroll taxes) and (iii)
management bonuses of $5.2 million (including related employer payroll
taxes).
(4) Represents the elimination of the management fee of $350 charged by
AEA and the application of the management fee of $1,500 that will be charged
by North Castle after the Recapitalization.
(5) Represents the amortization of debt issuance fees of $1,573 for the
year ended March 31, 1997. The amortization periods for fees related to the
New Credit Facility and the Notes are 6.8 years and 10 years, respectively.
(6) Reflects the change in interest expense based on the
Recapitalization financing:
<TABLE>
<S> <C>
Elimination of historical interest expense......................... $ (8,341)
Add back historical interest expense related to capitalized leases,
net of historical interest income................................ 370
Interest expense on New Credit Facility (at a weighted average rate
of 8.1%, using pro forma principal balances outstanding as of
June 30, 1997 and the actual interest rates on those balances as
of June 30, 1997)................................................ 13,244
Interest expense on the Notes...................................... 8,181
---------
Total incremental interest expense............................... $ 13,454
---------
---------
</TABLE>
33
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED MARCH 31, 1997
(IN THOUSANDS)
For each 0.125% increase or decrease in the assumed weighted average
interest rate in respect of the New Credit Facility, total pro forma
interest expense would increase or decrease, respectively, by approximately
$200 for the year ended March 31, 1997.
(7) Reflects the income tax effects of pre-tax pro forma adjustments and
related financing structure.
(8) Depreciation and amortization as presented does not include the
amortization of deferred financing fees. In the cash flow statement in the
consolidated financial statements, the amortization of deferred financing
fees is included in depreciation and amortization.
34
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents selected historical financial data derived from
the consolidated financial statements of the Company. The statement of
operations data for the fiscal years ended March 31, 1993, 1994, 1995, 1996, and
1997, except for the unaudited pro forma statement of operations data for the
fiscal year ended March 31, 1997, were derived from the consolidated financial
statements of the Company audited by Ernst & Young LLP, Independent Auditors and
included elsewhere herein. The statement of operations data for the three months
ended June 30, 1996 and 1997, and the balance sheet data as of June 30, 1997,
except for the unaudited pro forma financial information as of and for the three
months ended June 30, 1997, were derived from the unaudited condensed
consolidated financial statements of the Company included elsewhere herein.
The unaudited pro forma consolidated statement of operations data of the
Company for the year ended March 31, 1997 give effect to (i) the
Recapitalization with respect to the Company as if it had occurred on April 1,
1996, and (ii) the acquisition of Vita Health on January 30, 1997 as if that
acquisition had occurred on April 1, 1996. The historical financial information
for Vita Health for the ten months ended January 30, 1997 was derived from Vita
Health's unaudited financial statements. The unaudited pro forma consolidated
statement of operations data of the Company for the three months ended June 30,
1997 give effect to the Recapitalization with respect to the Company as if it
had occurred on April 1, 1997. The unaudited pro forma consolidated balance
sheet data of the Company as of June 30, 1997 give effect to the
Recapitalization with respect to the Company assuming that certain
Recapitalization-related transactions that were completed after June 30, 1997
had occurred on June 30, 1997.
The selected unaudited pro forma financial data should be read in
conjunction with the historical consolidated financial statements of the Company
and notes thereto, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Unaudited Pro Forma Financial Information"
contained elsewhere in this Prospectus, as well as the information concerning
the Recapitalization (including the sources and uses therefor) contained in "The
Recapitalization." The selected pro forma financial data and related notes are
provided for informational purposes and do not necessarily reflect the results
of operations or financial position of the Company that would have actually
resulted had the events referred to above or in the notes to the unaudited pro
forma financial information been consummated as of the date and for the period
indicated and are not intended to project the Company's financial position or
results of operations for any future period.
35
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE
30,
FISCAL YEARS ENDED MARCH 31, ---------------------------------
--------------------------------------------------------------------
UNAUDITED (UNAUDITED)
PRO FORMA PRO FORMA
1993(1) 1994 1995 1996 1997 1997(2)(6) 1996 1997 1997(6)
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales.................. $ 230.8 $ 303.6 $ 314.7 $ 338.4 $ 392.8 $ 416.9 $ 70.6 $ 94.1 $ 94.1
Cost of sales.............. 171.7 226.0 236.6 253.3 288.6 306.4 52.0 71.9 71.9
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
Gross profit............... 59.2 77.6 78.1 85.1 104.2 110.5 18.6 22.2 22.2
SG&A....................... 48.0 59.5 59.7 62.6 72.7 79.3 15.5 17.5 17.5
Impairment and closure of
OTC facility(3).......... -- -- -- 4.7 1.4 1.4 -- -- --
Management
reorganization(4)........ -- -- -- -- 1.0 1.0 0.2 -- --
Compensation related to
stock options(5)......... -- -- -- -- -- -- -- 15.4 15.4
Management transaction
bonuses(5)............... -- -- -- -- -- -- -- 5.1 5.1
Amortization of goodwill... 1.4 1.6 1.6 1.6 1.5 1.7 0.4 0.4 0.4
Other charges(6)........... 4.0 2.4 0.5 0.5 0.9 2.0 0.1 0.1 0.4
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
Operating income (loss).... 5.8 14.1 16.3 15.8 26.7 25.2 2.4 (16.4) (16.7)
Interest expense, net(7)... 5.9 7.1 9.0 9.9 8.3 23.4 2.2 1.8 5.8
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
Income (loss) before income
taxes and extraordinary
item..................... (0.1) 7.0 7.3 5.9 18.4 1.8 0.2 (18.2) (22.5)
Provision (benefit) for
income taxes............. 1.0 3.6 3.5 4.7 8.0 1.7 0.1 (7.1) (8.8)
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
Income (loss) before
extraordinary item....... (1.1) 3.4 3.8 1.2 10.4 0.1 0.1 (11.1) (13.7)
Extraordinary item......... -- -- -- -- 2.8 2.8 -- 1.1 1.1
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
Net income (loss).......... $ (1.1) $ 3.4 $ 3.8 $ 1.2 $ 7.6 $ (2.7) $ 0.1 $ (12.2) $ (14.8)
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
----------- --------- --------- --------- --------- ----------- --------- --------- -----------
BALANCE SHEET DATA:
Working capital............ $ 49.5 $ 63.8 $ 61.7 $ 72.3 $ 79.4 NA $ 74.8 $ 74.5 $ 87.8
Total assets............... 200.3 244.6 257.4 251.3 284.6 NA 242.1 293.4 293.4
Total debt................. 75.0 98.5 106.7 104.2 105.4 NA 104.7 239.6 249.7
Minority interest in
subsidiary............... -- -- -- -- 4.7 NA -- 4.7 1.0
Total common shareholder's
equity (deficit)......... 50.1 67.7 71.5 72.7 80.2 NA 72.8 (45.0) (38.2)
OTHER DATA:
Gross margin............... 25.6% 25.6% 24.8% 25.2% 26.5% 26.5% 26.3% 23.6% 23.6%
EBITDA(8).................. $ 11.4 $ 23.4 $ 27.0 $ 32.9 $ 38.1 NA $ 5.3 $ (5.0) NA
EBITDA margin(8)........... 4.9% 7.7% 8.6% 9.7% 9.7% NA 7.5% (5.3% NA
Depreciation and
amortization(9).......... $ 4.6 $ 7.2 $ 10.5 $ 12.3 $ 12.3 $ 12.9 $ 2.9 $ 3.1 $ 3.1
Capital expenditures....... 3.3 15.0 16.7 3.5 3.5 3.8 0.6 1.3 1.3
Cash flows from operating
activities............... 1.9 (17.1) 13.1 12.7 23.2 NA 0.5 4.6 NA
Cash flows from investing
activities............... (21.9) (18.3) (21.9) (8.8) (10.2) NA (0.9) (4.4) NA
Cash flows from financing
activities............... 19.6 36.9 7.3 (2.5) (12.1) NA 0.5 0.4 NA
Ratio of total debt to
EBITDA(8)(10)............ 6.6x 4.2x 4.0x 3.2x 2.8x NA -- -- NA
Ratio of EBITDA to interest
expense(8)............... 1.9 3.3 3.1 3.4 4.7 NA 2.5 (2.9) NA
Ratio of earnings to fixed
charges(11).............. 1.0 1.8 1.7 1.5 2.9 1.1 1.1 (7.2) 0.7
</TABLE>
36
<PAGE>
- ------------------------------
(1) The May 1992 acquisitions by Leiner Group of LHP and XCEL were accounted for
under the purchase method of accounting and new bases of accounting were
established at the time of each such acquisition. See "The
Company--History." Accordingly, the statement of operations data for the
fiscal year ended March 31, 1993 represent the results of operations of LHP,
the results of operations for XCEL from the date of its acquisition, and
purchase accounting for the acquisitions of LHP and XCEL during that fiscal
year.
(2) On January 30, 1997, the Company purchased Vita Health. This column gives
effect to the Vita Health acquisition, as well as the Recapitalization and
related transactions with respect to the Company. See "Unaudited Pro Forma
Financial Information." The Vita Health acquisition was accounted for under
the purchase method of accounting. Consequently, the results of operations
of Vita Health were included in the consolidated financial results of the
Company for two months ended March 31, 1997. The pro forma data shown for
fiscal 1997 includes the operating results of Vita Health for the additional
ten months ended January 30, 1997.
(3) During fiscal 1996, the Company decided to significantly reduce the size of
its OTC liquid pharmaceuticals manufacturing business. Accordingly, the
Company determined that certain long-lived assets with a carrying amount of
$8.3 million were impaired and wrote them down by $4.7 million to their
estimated fair value. During fiscal 1997, the Company closed the
manufacturing facility and out- sourced the production to a third party. The
costs incurred of $1.4 million include (i) the write-off of fixed assets of
$0.8 million and (ii) closure costs including salaries in conjunction with
the facility closing of $0.6 million. The expense does not include an
additional charge to cost of sales of $0.5 million for the write-off of
certain liquid OTC inventory which was no longer being manufactured by the
Company.
(4) During fiscal 1997, the Company reorganized the management team. Expenses of
$1.0 million include severance expense for the previous Chief Financial
Officer, Vice President of Product Development and Vice President of
Corporate Development and include the hiring and relocation expenses for the
new Chief Financial Officer and other corporate officers.
(5) Represents non-recurring charges relating to the Recapitalization,
consisting of (x) a compensation charge incurred by the Company for the
in-the-money value of existing stock options of $15.4 million which were (i)
converted into an equivalent value of Equity Rights at the date of the
Recapitalization, (ii) paid out in cash, or (iii) exercised for common stock
(or a combination thereof), and (y) $5.1 million in transaction bonuses
which were paid to members of the Company's management subsequent to the
Recapitalization. These non-recurring charges contributed significantly to
the Company's net loss of $12.2 million for the three months ended June 30,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operation--First Quarter Fiscal 1998
Compared to First Quarter Fiscal 1997."
(6) Other charges for the fiscal years ended March 31, 1993 through March 31,
1997 and the three months ended June 30, 1996 and June 30, 1997 include
management fees paid to AEA that were discontinued upon consummation of the
Recapitalization. Other charges also include costs related to the original
acquisition of Leiner by the AEA Group and compensation expense arising from
the sale of shares of Common Stock to management in connection with the
acquisition of Leiner by the AEA Group in the fiscal year ended March 31,
1993, the write-off of deferred charges associated with the refinancing of
the Company's revolving credit facility in the fiscal year ended March 31,
1994 and expenses incurred in connection with the withdrawn initial public
offering in the fiscal year ended March 31, 1997. Other charges also
include, in the fiscal years ended March 31, 1994 through March 31, 1997,
non-cash compensation expense arising from the granting of stock options.
Other charges in the fiscal year ended March 31, 1995 do not include $0.5
million in other charges incurred by Leiner Group in connection with its
withdrawn initial public offering in that fiscal year, which are reflected
in the consolidated financial statements of Leiner Group. Unaudited pro
forma statement of operations data for fiscal 1997 and the three months
ended June 30, 1997 includes the pro rata portion of an annual management
fee of $1.5 million payable to North Castle Partners, L.L.C., an affiliate
of North Castle, following the Recapitalization and excludes the annual
management fee of AEA. See "Certain Transactions."
(7) Net interest expense in the fiscal years ended March 31, 1993 and 1994 do
not reflect $0.1 million and $0.2 million, respectively, in interest income
received by Leiner Group, which is reflected in the consolidated financial
statements of Leiner Group.
(8) For purposes of calculating the ratio of EBITDA to interest expense,
interest expense excludes the amortization of deferred financing fees, which
is included in interest expense in the income statement in the consolidated
financial statements.
"EBITDA," as presented, represents earnings before interest expense, income
taxes, depreciation and amortization and other non-cash charges, consisting
of (i) the write off of deferred financing charges, net of income taxes,
included as an extraordinary item in the statements of operations for fiscal
1997 and the first quarter of fiscal 1998, (ii) non-cash stock compensation
charges, including those recorded in connection with the Recapitalization
(see Note 5), (iii) expenses related to the impairment and
37
<PAGE>
closure of the OTC liquid pharmaceuticals manufacturing facility in fiscal
1996 and 1997 (see Note 3), and (iv) other non-cash charges in fiscal 1994
and fiscal 1997. EBITDA is calculated as follows (in thousands):
<TABLE>
<CAPTION>
FOR THREE
MONTHS
ENDED
JUNE 30,
---------
FISCAL YEARS ENDED MARCH 31,
----------------------------------------------------- (UNAUDITED)
1993 1994 1995 1996 1997 1996
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)........................................ $ (1,033) $ 3,417 $ 3,813 $ 1,166 $ 7,638 $ 119
Add back:
Interest expense, net.................................. 5,791 7,144 9,010 9,924 8,281 2,152
Income taxes........................................... 999 3,573 3,524 4,686 8,028 92
Depreciation and amortization.......................... 4,586 7,247 10,514 12,288 12,309 2,867
Extraordinary item..................................... -- -- -- -- 2,756 --
Compensation related to stock options.................. 1,093 264 132 132 99 33
Impairment and closure of facility..................... -- -- -- 4,730 1,416 --
Other non-cash charges................................. -- 1,753 -- -- 18 --
--------- --------- --------- --------- --------- ---------
Subtotal............................................. 12,555 19,981 23,180 31,760 30,446 5,144
--------- --------- --------- --------- --------- ---------
EBITDA................................................. $ 11,436 $ 23,398 $ 26,993 $ 32,926 $ 38,084 $ 5,263
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
<CAPTION>
1997
---------
<S> <C>
Net income (loss)........................................ $ (12,183)
Add back:
Interest expense, net.................................. 1,800
Income taxes........................................... (7,105)
Depreciation and amortization.......................... 3,066
Extraordinary item..................................... 1,109
Compensation related to stock options.................. 8,300
Impairment and closure of facility..................... --
Other non-cash charges................................. --
---------
Subtotal............................................. 7,170
---------
EBITDA................................................. $ (5,013)
---------
---------
</TABLE>
Although EBITDA (as well as related EBITDA ratios) is a non-GAAP measurement,
EBITDA, EBITDA margin, the ratio of total debt to EBITDA and the ratio of
EBITDA to interest expense are included because management understands that
such information is considered by certain investors to be an additional
basis for evaluating the Company's ability to pay interest, repay debt and
make capital expenditures. EBITDA should not be considered an alternative to
measures of operating performance as determined in accordance with generally
accepted accounting principles, including net income as a measure of the
Company's operating results and cash flows as a measure of the Company's
liquidity. Because EBITDA is not calculated identically by all companies,
the presentation herein may not be comparable to other similarly titled
measures of other companies.
(9) Depreciation and amortization as presented does not include the amortization
of deferred financing fees. In the cash flow statement in the consolidated
financial statements, the amortization of deferred financing fees is
included in depreciation and amortization.
(10) The ratio of total debt to EBITDA is not presented for interim periods
because it is not meaningful.
(11) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, whether capitalized or
expensed, plus one-third of rental expense under operating leases (the
portion that has been deemed by the Company to be representative of an
interest factor).
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the consolidated financial
statements of the Company contained elsewhere in this Prospectus (the
"Consolidated Financial Statements"). The Company's fiscal year ends on March 31
of each year. References herein to a "fiscal" year refer to the Company's fiscal
year ended March 31 in the calendar year indicated (e.g., references to fiscal
1997 are references to the Company's fiscal year ended March 31, 1997).
GENERAL
CURRENT TRENDS. The Company believes that overall trends in the vitamin
industry are the most significant trends affecting the Company's financial
performance. According to industry sources, between 1992 and 1996, sales for the
vitamin industry grew at a compound annual rate of approximately 11.2% to $4.1
billion, as the percentage of American adults regularly using vitamins grew from
35% to 40%. Between 1996 and 2005, the 50 to 64 age group is projected to be the
fastest growing segment of the United States population. Gallup polling data
shows that vitamin usage increases significantly with age, with 47% of
individuals over age 50 regularly using vitamins, compared with 36% of younger
adults.
Increasing vitamin usage among the general population is linked to three
major factors. First, research expenditures devoted to the positive effects of
vitamin products have increased dramatically. Such research has been described
in major medical journals and reported in the popular media. Second, the
national trend towards improved fitness, greater self-care and preventive
medicine has increased the general population's focus on nutritional products
consumption. Finally, the more favorable regulatory environment resulting from
the DSHEA has generated increased new product introductions and more effective
point of sale communication of the health benefits of vitamins to consumers.
However, as has been the case in the past, adverse scientific research or
publicity concerning the health benefits of vitamin consumption can materially
impact the growth of the vitamin market.
Beginning in fiscal 1996 and continuing in fiscal 1997, the retail drugstore
industry experienced several major consolidations. The Company provides private
label vitamin products to the 20 largest drugstore chains in the United States
and believes it has strong relationships with the leading drugstore chains.
Consequently, management believes the Company is well positioned to benefit from
this consolidation trend due to (i) its strong relationships with the acquiring
companies in the largest consolidations and (ii) the anticipated reduction in
the number of vendors as the consolidated companies streamline their purchasing.
A number of the Company's customers made significant acquisitions or were
acquired during this period, with CVS Corporation acquiring Revco D.S., Inc.,
Rite Aid Corporation acquiring Thrifty-Payless Inc. and JCPenney acquiring
Eckerd Corporation. The recent retail drugstore consolidations have created
certain temporary disruptions in these customers' operations and purchasing
decisions. These disruptions had some minor adverse effects on the Company's
sales in fiscal 1997. Although the Company believes that the consolidation of
major drugstore chains will have a positive effect on its long-term sales, the
increased purchasing scale of the consolidated retailers increases the relative
importance of each of these customers to the Company's financial performance.
HISTORICAL TRENDS. Throughout fiscal 1993 and fiscal 1994, the Company's
growth was fueled by favorable publicity of scientific research evidencing the
health benefits of vitamin product consumption. During fiscal 1994 and fiscal
1995, the Company took its initial step to build capacity and lower its
manufacturing costs by making significant investments in its western U.S.
tableting operation and consolidating two western U.S. packaging plants and one
distribution facility into a single facility. See "Business -- Manufacturing and
Distribution."
39
<PAGE>
In the first quarter of fiscal 1995, however, a study, referred to as the
"Finnish Smokers Study," was released that reached a negative conclusion as to
the health benefits of consumption of certain antioxidants. The release of this
study received significant media attention and negatively impacted short-term
consumer demand for certain vitamin products, and resulted in a downturn in
sales. In response, the Company halted its manufacturing restructuring plan and
focused on the development of a program to downsize, including the closure of a
tableting plant and the elimination of approximately 200 tableting and packaging
positions. The Company's manufacturing efficiency was negatively affected, as
its western U.S. tableting and packaging facilities, designed to operate most
efficiently on higher volumes, were operated at significantly sub-optimal
production levels. Vitamin product sales stabilized during the second half of
fiscal 1995, and by the first quarter of fiscal 1996 had largely recovered to
pre-Finnish Smokers Study levels. Because the market stabilized and recovered
more quickly and strongly than had been expected by the Company and its
customers, the efficiency of the Company's manufacturing operations was again
negatively impacted, this time by costs associated with expedited manufacturing
and packaging scheduling required through December 1995 in order for the Company
to timely meet its customers' increased orders.
During fiscal 1996 and 1997, the retail mass market for vitamins returned to
pre-Finnish Smokers Study levels. Overall market growth was positively affected
by the release of a number of research reports regarding the benefits of such
products as vitamin C, vitamin E and selenium, as well as by new product
introductions, particularly in the herbal and nutritional supplement segments.
During this period, the Company introduced 52 new products, the majority of
which were targeted at these two segments.
RECAPITALIZATION ACCOUNTING; FINANCIAL STATEMENT PRESENTATION; PARENT
COMPANY. The Recapitalization has been accounted for as a recapitalization of
Leiner Group, which will have no impact on the historical basis of assets and
liabilities as reflected in the consolidated financial statements of Leiner
Group or the Company. Other than with respect to redeemable preferred stock of
Leiner Group, which was redeemed in connection with the Recapitalization, the
consolidated financial statements of Leiner Group and LHP for the periods
discussed below are not materially different. See Notes 6 and 7 to "Selected
Historical and Pro Forma Financial Information."
Leiner Group is a holding company with no significant independent operations
or assets other than in respect of its investment in LHP. Leiner Group is not
expected to have any significant sources of funds in the future other than the
proceeds of sales of its equity or other securities (which it may be required to
apply to repay borrowings under the New Credit Facility) and dividends and
distributions for LHP. Historically, the Company has not paid any material
recurring expenses on behalf of Leiner Group. However, no assurance can be given
that such payments will not be made in the future to the extent permitted by the
Company's financing agreements, including the New Credit Facility and the
Indenture. Furthermore, although federal and other consolidated income taxes are
legally payable by Leiner Group, such taxes historically have related to LHP's
operations and accordingly have been paid for by LHP and accounted for in its
consolidated financial statements.
40
<PAGE>
SEASONALITY
Leiner's business is seasonal, as increased vitamin usage corresponds with
the cough, cold and flu season. A significant portion of the Company's sales and
a more significant portion of the Company's operating income, therefore, occurs
in the second half of the fiscal year as reflected in the table below:
<TABLE>
<CAPTION>
NET SALES OPERATING INCOME (LOSS)
------------------------ ------------------------
<S> <C> <C> <C> <C>
AMOUNT % OF YEAR AMOUNT % OF YEAR
--------- ------------- --------- -------------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fiscal 1998
First quarter.................................................. $ 94.1 -- $ (16.4)(1) --
Fiscal 1997
First quarter.................................................. $ 70.6 18% $ 2.4 9%
Second quarter................................................. 85.6 22 1.1 4
Third quarter.................................................. 104.3 26 9.3 35
Fourth quarter................................................. 132.3 34 13.9 52
--------- --- --------- ---
$ 392.8 100% $ 26.7(2) 100%
--------- --- --------- ---
--------- --- --------- ---
Fiscal 1996
First quarter.................................................. $ 62.7 19% $ 1.5 10%
Second quarter................................................. 78.7 23 2.6 16
Third quarter.................................................. 94.8 28 5.9 37
Fourth quarter................................................. 102.2 30 5.8 37
--------- --- --------- ---
$ 338.4 100% $ 15.8(3) 100%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
- ------------------------
(1) Includes expenses of $15.4 million related to stock option compensation and
$5.1 million of management bonuses, both of which were incurred in
connection with the Recapitalization. Without these expenses, operating
income would have been $4.1 million.
(2) Includes expenses incurred in connection with the closure of the OTC liquid
pharmaceuticals manufacturing facility, a management reorganization,
non-cash stock compensation expense and the preparation of a registration
statement in connection with a withdrawn initial public offering. See Note 4
of Notes to Consolidated Financial Statements.
(3) Includes charges for long-lived asset impairment of $4.7 million recorded in
the fourth quarter of fiscal 1996 and non-cash stock compensation expense.
41
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the fiscal years ended March 31,
1995, 1996 and 1997 and for the three months ended June 30, 1996 and 1997.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------
FOR THE THREE MONTHS
FOR THE FISCAL YEARS ENDED
MARCH 31, ENDED JUNE 30,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................... 75.2 74.8 73.5 73.7 76.4
--------- --------- --------- --------- ---------
Gross profit................................................ 24.8 25.2 26.5 26.3 23.6
Marketing, selling and distribution expenses................ 13.5 13.1 13.1 15.5 12.7
General and administrative expenses......................... 5.5 5.4 5.4 6.5 5.9
Impairment and closure of OTC Facility...................... -- 1.4 0.3 -- --
Management reorganization................................... -- -- 0.3 0.3 --
Compensation related to stock options....................... -- -- -- -- 16.4
Management transaction bonuses.............................. -- -- -- -- 5.5
Amortization of goodwill.................................... 0.5 0.5 0.4 0.5 0.4
Other charges............................................... 0.2 0.1 0.2 0.2 0.1
--------- --------- --------- --------- ---------
Operating income (loss)..................................... 5.2 4.7 6.8 3.3 (17.4)
Interest expense, net....................................... 2.9 2.9 2.1 3.0 1.9
--------- --------- --------- --------- ---------
Income (loss) before income taxes and extraordinary item.... 2.3 1.7 4.7 0.3 (19.3)
Provision (benefit) for income taxes before extraordinary
item...................................................... 1.1 1.4 2.0 0.1 (7.5)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item..................... 1.2 0.3 2.6 0.2 (11.8)
Extraordinary item.......................................... -- -- 0.7 -- 1.2
--------- --------- --------- --------- ---------
Net income (loss)........................................... 1.2% 0.3% 1.9% 0.2% (13.0)%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
FIRST QUARTER FISCAL 1998 COMPARED TO FIRST QUARTER FISCAL 1997
Net sales for the first quarter of fiscal 1998 increased by $23.5 million,
or 33.2%, over the first quarter in fiscal 1997, from $70.6 million to $94.1
million. Sales from Vita Health Company (1985) Ltd. of Canada ("Vita Health"), a
wholly-owned subsidiary acquired January 30, 1997, accounted for $7.1 million of
this increase.
Excluding Vita Health sales, the Company's net sales increased $16.4
million, or 23.2%, over the comparable period in fiscal 1997 due to market
growth. Excluding Vita Health sales, vitamin product sales increased by $15.0
million, or 26.4%, compared to the first quarter of the prior year. Strong
demand for supplements has pushed the vitamin sales volume higher in the current
year. Additionally, an increase in the volume of multi-vitamin sales also
contributed to the vitamin product sales increase. Sales of OTC pharmaceuticals,
excluding Vita Health, increased by $1.7 million, or 15.0%, compared to the same
period in the prior year.
Gross profit increased $3.6 million, or 19.4%, from $18.6 million in the
first quarter of fiscal 1997 to $22.2 million in the first quarter of fiscal
1998. Excluding Vita Health, the increase in gross profit was $1.5 million, or
8.1%. Gross profit margin for the first quarter of fiscal 1998 was 23.6% versus
26.3% in the year ago period. The decrease in margin is primarily attributed to
a change in customer and product sales mix.
42
<PAGE>
Higher margin branded product sales were lower than expected in the first
quarter of fiscal 1998 because of large fourth quarter promotions in fiscal 1997
which slowed first quarter volume, while lower margin private label customers
involved in retail consolidations accelerated their purchases.
Selling, marketing, distribution, general and administrative expense
("SG&A") increased $2.0 million, or 12.9%, in the first quarter of fiscal 1998
when compared to the same period in fiscal 1997. Of this increase, Vita Health
accounted for $1.2 million. SG&A for the first quarter of fiscal 1998 totaled
$17.5 million, representing 18.6% of net sales, showing an improvement over the
same prior year period in which SG&A totaled $15.5 million or 22.0% of net
sales. Overall, this improvement can be attributed primarily to the Company's
focus on holding expenses steady while increasing sales. In addition, for the
first quarter of fiscal 1998, marketing expenses were lower because of the
change in the timing and the reduction of advertising and promotional
expenditures.
In the first quarter of fiscal 1997, the Company reorganized its management
team. Expenses of $0.2 million were incurred relating to severance for the
previous Chief Financial Officer, Vice President of Product Development and Vice
President of Corporate Development, and include hiring and relocation expenses
for the new Chief Financial Officer and other corporate officers.
In the first quarter of fiscal 1998, the Company recorded compensation
expenses related to the in-the-money value of stock options issued to certain
management personnel of $15.4 million and management bonuses of $5.1 million,
both of which related to the Recapitalization.
Primarily due to the impact of such Recapitalization-related expenses, the
Company had an operating loss of $16.4 million for the first quarter of fiscal
1998. Without these Recapitalization-related expenses, the operating income
would have been $4.1 million representing an increase of $1.7 million, or 70.8%,
over the same period in the prior fiscal year.
Net interest expense declined by $0.4 million during the first quarter of
fiscal 1998, compared to the first quarter of fiscal 1997. Net interest expense
during the first quarter of fiscal 1998 was $1.8 million, compared to $2.2
million for the comparable period in fiscal 1997. This improvement was due to
both lower average borrowings and lower interest rates paid by the Company on
its outstanding debt. Interest expense incurred in the first quarter of fiscal
1998 is not representative of the interest expense expected to be incurred
during the balance of fiscal 1998 due to changes in the debt structure and
interest rates effective with the Recapitalization.
The income tax benefit for the first quarter of fiscal 1998 was $7.1
million, which compares to the income tax provision of $0.1 million for the
first quarter of 1997. Based on current estimates, the Company expects its
effective tax rate to be approximately 53% for the remainder of fiscal 1998, and
to be higher than the combined federal and state rate of 40% primarily because
of the nondeductability of goodwill amortization and certain accruals.
The extraordinary loss recorded in the first quarter of fiscal 1998
represented the write off of $1.9 million of deferred financing charges which
had been incurred by the Company when it entered into a credit facility on
January 30, 1997. The income tax effect of that charge was a benefit of $0.8
million.
Primarily as a result of the previously discussed factors, a net loss of
$12.2 million was recorded in the first quarter of fiscal 1998 compared to net
income of $0.1 million recorded in the first quarter of fiscal 1997.
FISCAL 1997 COMPARED TO FISCAL 1996
Net sales increased by $54.4 million, or 16.1%, to $392.8 million for fiscal
1997 from $338.4 million for fiscal 1996. Net sales for fiscal 1997 include $4.6
million of Vita Health sales.
Vitamin product sales, including Vita Health, increased by $54.0 million, or
20.2%, to $321.7 million for fiscal 1997 from $267.7 million for fiscal 1996.
The increase was principally attributable to unit sales
43
<PAGE>
increases and selective price increases in most major types of vitamin products
including vitamin E, the growth of the Company's herbal product line introduced
in fiscal 1996 and fiscal 1997, including products such as echinacea and ginkgo
biloba, and the Company's introduction of new nutritional supplements, including
products such as DHEA and shark cartilage, as well as the added sales from Vita
Health.
OTC pharmaceutical sales increased by $2.5 million, or 4.3%, to $61.3
million for fiscal 1997 from $58.8 million for fiscal 1996. The increase was
principally due to market growth and the acquisition of Vita Health.
Gross profit increased $19.1 million, or 22.4%, to $104.2 million for fiscal
1997 from $85.1 million for fiscal 1996. The gross margin also improved to 26.5%
in fiscal 1997 from 25.2% in fiscal 1996. The increase in the gross profit
margin was principally due to a decrease in the Company's manufacturing costs
from the investment in manufacturing equipment and facility consolidations
during the last four fiscal years and increased sales of higher margin new
products and the Company's YOUR LIFE-REGISTERED TRADEMARK- brand.
SG&A increased $10.1 million, or 16.1%, to $72.7 million for fiscal 1997
from $62.6 million in fiscal 1996. Expressed as a percentage of sales, SG&A
remained essentially flat at 18.5% in fiscal 1996 and fiscal 1997. The dollar
increase in SG&A was partially driven by the Company's investment of
approximately $2.7 million in a national radio advertising campaign (versus $1.1
million in 1996), and an increase in other promotional expenses.
During fiscal 1997, the Company closed its OTC liquid pharmaceuticals
manufacturing facility and out-sourced the production to a third party. As a
result, the Company incurred costs in fiscal 1997 of $1.4 million comprised of
(i) the write-off of fixed assets of $0.8 million and (ii) closure costs
including salaries in conjunction with the closing of $0.6 million. An
additional expense of $0.5 million for the write-off of certain liquid OTC
inventory which was no longer being manufactured by the Company was also
incurred and is included in cost of goods sold. The closure decision was made in
fiscal 1997 based on an evaluation of the OTC liquids pharmaceutical business,
as a result of which it was determined that it was more cost effective to
out-source this production to a third party. As a result of an earlier decision
in fiscal 1996 to reduce production, the Company recognized a long-lived asset
impairment charge of $4.7 million in fiscal 1996. See "--Fiscal 1996 Compared to
Fiscal 1995."
In fiscal 1997, the Company reorganized its management team. Expenses of
$1.0 million were incurred relating to severance for the previous Chief
Financial Officer, Vice President of Product Development and Vice President of
Corporate Development, and include hiring and relocation expenses for the new
Chief Financial Officer and other corporate officers.
Goodwill amortization of $1.5 million in fiscal 1997 and $1.6 million in
fiscal 1996 related to the goodwill arising from the acquisitions of LHP, XCEL
and Vita Health. Other charges of $0.9 million for fiscal 1997 included
management fees paid to AEA, the write-off of expenses incurred in connection
with Leiner Group's withdrawn initial public offering and compensation expense
arising from the grant of stock options to certain members of management in
fiscal 1994. Other charges of $0.5 million for fiscal 1996 included management
fees paid to AEA and stock compensation expense.
Primarily as a result of the factors discussed above, operating income
increased by $10.9 million to $26.7 million for fiscal 1997 from $15.8 million
for fiscal 1996.
Net interest expense decreased by $1.6 million to $8.3 million in fiscal
1997 from $9.9 million in fiscal 1996. The decrease was principally due to a
reduction in the Company's outstanding indebtedness prior to the Vita Health
Acquisition. Additionally, the Company refinanced all of its outstanding
indebtedness in January 1997, which reduced the Company's average interest cost.
The interest rates on the majority of the Company's then existing debt were
based upon variable rates that are a spread above either LIBOR or prime rates.
44
<PAGE>
The Company's effective income tax rate of approximately 44% for fiscal 1997
was higher than the combined state and federal rate of 40% primarily because of
the nondeductibility of goodwill amortization.
Primarily as a result of the factors discussed above, income before
extraordinary item for fiscal 1997 increased by $9.2 million to $10.4 million
for fiscal 1997 from $1.2 million for fiscal 1996.
The extraordinary item for fiscal 1997 of $2.8 million, net of taxes, was a
result of the Company's refinancing on January 30, 1997. See Note 7 to the
Consolidated Financial Statements.
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $23.7 million, or 7.5%, to $338.4 million for fiscal
1996 from $314.7 million for fiscal 1995.
Vitamin product sales increased by $28.1 million, or 11.7%, to $267.7
million for fiscal 1996 from $239.6 million for fiscal 1995. The increase was
principally attributable to unit sales increases in most major types of vitamin
products, initial sales of the Company's herbal product line and the Company's
introduction of other new nutritional supplements, including products such as
PYCNOGENOL-REGISTERED TRADEMARK-, evening primrose oil and coenzyme Q10. Selling
price increases implemented late in fiscal 1995 and during fiscal 1996
contributed approximately $8.5 million of the vitamin product sales increase.
OTC pharmaceutical sales decreased by $4.3 million, or 6.8%, to $58.8
million for fiscal 1996 from $63.1 million for fiscal 1995. The decrease was
principally due to declines in the net average selling price of certain
analgesics and in the number of units sold as a result of price competition and
the introduction by nationally branded companies of several new analgesic
products. Additionally, the Company's decision to resign as the OTC liquid
pharmaceuticals supplier to a major drug store chain (due to unprofitable
margins) in the first half of fiscal 1996 contributed approximately $4.0 million
to this sales decline. These decreases were partially offset by revenues from
new private label OTC pharmaceuticals business developed by the Company in
fiscal 1996.
Gross profit increased $7.0 million, or 9.0%, to $85.1 million in fiscal
1996 from $78.1 million in fiscal 1995. The gross profit margin also improved to
25.2% in fiscal 1996 from 24.8% in fiscal 1995. The increase in the gross profit
margin was principally due to a decrease in the Company's manufacturing costs
resulting from the investment in manufacturing equipment and facility
consolidations during the last three fiscal years, which allowed the Company,
among other things, to achieve lower per unit manufacturing and packaging costs
through larger batch sizes and longer packaging runs.
SG&A increased $2.9 million to $62.6 million in fiscal 1996 from $59.7
million in fiscal 1995. Expressed as a percentage of sales, SG&A declined 0.5%
from 19.0% in fiscal 1995 to 18.5% in fiscal 1996, as the Company continued to
leverage its SG&A as it increased sales.
In fiscal 1996, following the Company's resignation as the OTC liquid
pharmaceuticals supplier to a major drugstore chain, the Company decided to
scale back its liquid manufacturing capability. As a result of this decision,
the Company recognized a long-lived asset impairment and recorded a write-down
of a portion of the goodwill arising from the XCEL Acquisition. This write-down
has been reflected in the fiscal 1996 results of operations as a long-lived
asset impairment charge of $4.7 million.
Goodwill amortization of $1.6 million in each of the years ended March 31,
1995 and 1996 relates to the goodwill arising from the LHP and XCEL
Acquisitions. The other charges of $0.5 million in each of the years ended March
31, 1995 and 1996 are comprised of management fees paid to AEA and compensation
expense resulting from the grant of stock options to certain members of
management in fiscal 1994.
Primarily as a result of the factors discussed above, operating income of
$15.8 million for fiscal 1996 was $0.5 million less than operating income in
fiscal 1995.
45
<PAGE>
Net interest expense increased by $0.9 million to $9.9 million in fiscal
1996 from $9.0 million in fiscal 1995. The increase was principally due to
higher weighted average interest rates. The interest rates on the majority of
the Company's debt were at rates that were a function of either the LIBOR or
prime rates.
The Company's effective income tax rate of approximately 80% for fiscal 1996
was higher than the combined state and federal rate of 40% primarily because of
the nondeductibility of goodwill amortization, as well as the nondeductibility
of the long-lived asset impairment charge. The effective income tax rate for
fiscal 1996 was higher than the effective income tax rate of 48% for fiscal
1995, principally due to the nondeductibility of the long-lived asset impairment
charge.
Primarily as a result of the above factors, net income for fiscal 1996
declined by 68.4% to $1.2 million from $3.8 million in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash has historically been used to fund capital expenditures,
working capital requirements and debt service. As a result of the
Recapitalization, the Company's liquidity requirements have significantly
increased, primarily due to significantly increased interest expense
obligations. Interest expense, excluding amortization of deferred financing
fees, is estimated to be $21.8 million per year, associated with borrowings of
$159.8 million under the New Credit Facility, $85.0 million under the Notes, and
existing capitalized lease obligations of $4.8 million. See "Unaudited Pro Forma
Financial Information." In addition, the Company will be required to repay the
$85.0 million in term loans under the New Credit Facility over the eight and
one-half year period following June 30, 1997, with scheduled principal payments
of $850,000 annually for the first six years, $27.4 million in the seventh year,
$39.3 million in the eighth year, and $13.2 million in the final six months. The
Company will also be required to apply certain asset sale proceeds, as well as
50% of its excess cash flow (as defined in the New Credit Facility) unless a
leverage ratio test is met, to prepay the borrowings under the New Credit
Facility. All outstanding revolving credit borrowings under the New Credit
Facility will become due on June 30, 2003. The Company incurred a non-cash,
one-time charge of approximately $1.9 million related to the write-off of
existing deferred financing fees during the first quarter of fiscal 1998, as a
result of the Recapitalization. See "-- Results of Operations--First Quarter
Fiscal 1998 Compared to First Quarter Fiscal 1997."
CASH FLOWS, WORKING CAPITAL AND CAPITAL EXPENDITURES. During the first
quarter of fiscal 1998, net cash provided by operating activities totaled $4.6
million. This resulted from the first quarter net loss of $12.2 million, offset
by non-cash charges to income of $9.7 million, including $8.3 million related to
stock option compensation expense incurred in connection with the
Recapitalization, and a net change in operating assets and liabilities of $7.0
million. The changes from March 31, 1997 to June 30, 1997 in the net accounts
receivable and inventory balances resulted primarily of the seasonality of the
Company's business, whereby sales are normally higher in the fourth quarter of
the fiscal year when compared to the first quarter of the fiscal year. See
"--Seasonality." The change in accrued compensation and benefits was primarily
due to the accrual of the management bonuses and the value of the stock options,
both of which were paid in connection with the Recapitalization.
Net cash used in investing activities was $4.4 million in the first quarter
of fiscal 1998. This was primarily due to the net capital expenditures of $1.3
million and a deposit of $1.4 million which was made in connection with the
lease of the South Carolina facility during the quarter. The capital
expenditures included the investment that the Company is making in its
information systems and new manufacturing and distribution facility in South
Carolina.
Net cash provided by financing activities was $0.4 million in the first
quarter of fiscal 1998. This was due primarily to the financing transactions and
related indebtedness incurred in connection with the Recapitalization, offset by
repayments of existing indebtedness and, to a lesser extent, payment of certain
Recapitalization-related expenses on behalf of Leiner Group and an increase in
deferred financing charges
46
<PAGE>
resulting from $11.9 million of deferred financing charges related to the New
Credit Facility and Existing Notes.
Cash provided by operating activities prior to changes in assets and
liabilities was $25.4 million in fiscal 1997. The Company's working capital
increased $7.1 million, or 9.8%, to $79.4 million at March 31, 1997 from $72.3
million at March 31, 1996. This increase in working capital was principally due
to a sales increase of 16.1%. The Company's capital expenditures totaled $3.5
million in each of fiscal 1996 and fiscal 1997. During the latter part of fiscal
1993 and during fiscal years 1994 and 1995, the Company significantly increased
its manufacturing capacity and enhanced its manufacturing technology.
Accordingly, the Company invested in property, plant and equipment during fiscal
1996 and fiscal 1997 at lower levels because of sufficient capacity. The Company
anticipates investing approximately $10 million in capital equipment projects in
fiscal 1998, with approximately 75% for manufacturing capacity and productivity
improvements and 25% for routine maintenance.
Cash provided by operating activities totaled $23.2 million in fiscal year
1997 and $4.6 million in the first quarter of fiscal 1998. The Company's working
capital as of June 30, 1997 totaled $74.5 million. The Company's capital
expenditures totaled $3.5 million in fiscal 1997 and $1.3 million for the three
months ended June 30, 1997. The Company anticipates investing approximately $12
million in capital equipment projects in fiscal 1998, with approximately 75% for
manufacturing capacity and productivity improvements and 25% for routine
maintenance.
FINANCING ARRANGEMENTS. The New Credit Facility provides for term loan
borrowings in an aggregate principal amount of $85.0 million, consisting of
$45.0 million maturing seven and one-half years following June 30, 1997 and
$40.0 million maturing eight and one-half years following June 30, 1997, and
U.S. and Canadian revolving credit facilities with aggregate availability of
$125.0 million, of which $74.8 million was drawn down in connection with the
Recapitalization. As of September 30, 1997 the Company's unused availability
under the New Credit Facility was approximately $59.2 million. The Revolving
Credit Facility will mature six years after June 30, 1997, and includes letter
of credit and swingline facilities. Borrowings under the New Credit Facility
bear interest at floating rates that are based on LIBOR or on the applicable
alternate base rate (as defined), and accordingly the Company's financial
condition and performance is and will continue to be affected by changes in
interest rates. The Company has entered into an interest protection arrangement
effective July 30, 1997 with respect to $29.4 million of its indebtedness under
the New Credit Facility that provides a cap of 6.17% on LIBOR rates plus
applicable margin on the interest rates payable thereon. The New Credit Facility
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 or otherwise dispose of assets, make investments or capital
expenditures, repurchase or prepay the Notes or other subordinated debt, or
engage in certain other activities. The Company must also comply with certain
financial ratios and tests, including a minimum net worth requirement, a maximum
leverage ratio, a minimum interest coverage ratio and a minimum fixed charge
coverage ratio. For a more detailed summary of the terms of the New Credit
Facility, including amortization and interest rates, see "Description of New
Credit Facility."
The Notes may be required to be purchased by the Company upon a Change of
Control (as defined) and in certain circumstances with the proceeds of asset
sales. The Notes are subordinated to the indebtedness under the New Credit
Facility. The Indenture 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. See "Description of the New
Notes."
A portion of the outstanding borrowings under the New Credit Facility,
amounting to approximately U.S. $15.0 million as of June 30, 1997, is
denominated in Canadian dollars. All other outstanding borrowings under the New
Credit Facility, and all of the borrowings under the Notes, are denominated in
U.S. dollars.
47
<PAGE>
At June 30, 1997, borrowings under the New Credit Facility bore interest at
a weighted average rate of 8.1% per annum. The Notes bear interest at a rate of
9 5/8% per annum. Certain additional interest is expected to be payable in
respect of the Notes as a result of delayed effectiveness of the Registration
Statement and consummation of the Exchange Offer. See "Registration Rights."
The Company currently plans to pursue a receivables financing to be entered
into during fiscal 1998, with initial availability of the equivalent of
approximately $40 million principal amount, which would be fully drawn at the
closing of that financing. Usage under this receivables facility is expected to
result in a dollar-for-dollar reduction in both outstanding borrowings under the
Revolving Credit Facility and the availability under the Revolving Credit
Facility. No assurance can be given that this receivables financing will be
implemented.
The Company intends to establish a new packaging and distribution facility
in York County, South Carolina. As this new facility becomes operational, other
facilities located in the midwestern United States will be closed. The Company
expects to incur expenses estimated at approximately $1.9 million annually
through fiscal year 1999 in connection with the establishment of the new
facility and the closure of the midwestern U.S. facilities. The Company will
lease this new facility under a prearranged, assigned purchase and leaseback
facility that will provide the financing for its construction, at an estimated
annual lease expense, net of lease costs for the facilities currently expected
to be closed, of $1.4 million. See "Business--Manufacturing and Distribution."
The Company currently believes that cash flow from operating activities,
together with revolving credit borrowings available under the New Credit
Facility, will be sufficient to fund the Company's currently anticipated working
capital, capital spending and debt service requirements until the maturity of
the Revolving Credit Facility (six years after June 30, 1997), but there can be
no assurance in this regard. The Company expects that its working capital needs
will require it to obtain new revolving credit facilities at the time that the
Revolving Credit Facility matures, whether by extending, renewing, replacing or
otherwise refinancing the Revolving Credit Facility. No assurance can be given
that any such extension, renewal, replacement or refinancing can be successfully
accomplished.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains forward-looking statements, including statements
regarding, among other items, (i) the Company's growth strategies; (ii) trends
in the Company's business; and (iii) the Company's future liquidity requirements
and capital resources. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from those anticipated by these forward-looking statements, including
as a result of the factors described in the section entitled "Risk Factors." In
light of these risks and uncertainties, there can be no assurance that events
anticipated by the forward-looking statements contained in this Prospectus will
in fact transpire.
48
<PAGE>
INDUSTRY
According to industry sources and management estimates, total retail sales
of vitamin products in the United States were approximately $4.1 billion in
calendar year 1996. Several different types of vitamin products are marketed
through four major distribution channels and in three major product categories.
The different types of vitamin products include multivitamins, minerals (such as
calcium), single-entity vitamins (such as vitamins C and E), nutritional
supplements (such as PYCNOGENOL-Registered Trademark-, coenzyme Q10 and evening
primrose oil) and herbal products (such as ginseng, garlic, echinacea and ginkgo
biloba).
<TABLE>
<CAPTION>
PRODUCTS 1996 MASS MARKET VITAMIN SALES
- ---------------------------------------------------------------------------------- -------------------------------
<S> <C>
Multivitamins..................................................................... 28.5%
Minerals.......................................................................... 16.0
Herbal Products................................................................... 11.3
Vitamin E......................................................................... 11.3
Vitamin C......................................................................... 11.0
Nutritional Supplements........................................................... 10.9
B Vitamins........................................................................ 7.5
Other............................................................................. 3.5
-----
Total............................................................................. 100.0%
-----
-----
</TABLE>
- ------------------------
Sources: IRI Infoscan, MMI Data, CRN Industry Data, LHP shipments and management
estimates.
The primary channels of retail distribution in the vitamin product business
are mass market retailers (drug stores, mass merchandising chains, supermarkets
and warehouse club stores, such as Walgreens, Wal-Mart, Safeway and Sam's Club,
respectively), health food stores, direct sales and mail order. Leiner is the
leading participant in the U.S. mass market channel.
<TABLE>
<CAPTION>
1996 TOTAL 1996 MASS
VITAMIN MARKET VITAMIN
RETAIL DISTRIBUTION CHANNELS INDUSTRY SALES MASS MARKET RETAILERS SALES
- ----------------------------------------- --------------- ----------------------------------------- ---------------
<S> <C> <C> <C>
Mass Market Retailers.................... 52.6% Drug Stores.............................. 46.5%
Health Food.............................. 25.7 Mass Merchandisers....................... 24.3
Direct Sales............................. 12.6 Supermarkets............................. 22.9
Mail Order............................... 5.8 Club Stores.............................. 6.3
-----
Other.................................... 3.3 Total.................................... 100.0%
----- -----
-----
Total.................................... 100.0%
-----
-----
</TABLE>
- ------------------------
Sources: IRI Infoscan, MMI Data, CRN Industry Data, LHP shipments and management
estimates.
Within the mass market channel, there are three major product categories:
national brands, broadline brands and private label products.
<TABLE>
<CAPTION>
PRODUCT CATEGORY 1996 MASS MARKET VITAMIN SALES
- ---------------------------------------------------------------------------------- -------------------------------
<S> <C>
National Brands................................................................... 40.3%
Private Label..................................................................... 36.3
Broadline Brands.................................................................. 23.4
-----
Total............................................................................. 100.0%
-----
-----
</TABLE>
- ------------------------
Sources: IRI Infoscan (excludes warehouse club sales).
49
<PAGE>
The national brand category consists primarily of multi-vitamins such as
CENTRUM-REGISTERED TRADEMARK-, ONE-A-DAY-REGISTERED TRADEMARK-,
THERAGRAN-REGISTERED TRADEMARK- and OSCAL-REGISTERED TRADEMARK- mineral
supplements. Broadline brands, such as Leiner's YOUR LIFE-REGISTERED TRADEMARK-
brand, offer a complete range of products under one brand name, including
multi-vitamins, single-entity vitamins, minerals, and nutritional supplements.
Private label products are marketed under the retailer's name and offer a wide
product assortment similar to, but somewhat narrower in scope than, broadline
brands, including national brand equivalent formulas positioned as lower-priced
products.
In the mass market, private label products represented 36.3% of dollar
vitamin sales in 1996. Private label products use the same active ingredients as
national brands. The Company believes that consumers find private label products
attractive because they sell at substantially lower prices than national brands
yet are comparable in quality and efficacy. Private label products appeal to
retailers because such products generally provide for a higher gross profit
margin and higher dollar profit per unit than national brands. Broadline brands
are supported by retailer merchandising programs and less extensive advertising
than national brands. Broadline brands provide advantages to the consumer and
retailer similar to those of private labels, and currently represent 23.4% of
dollar vitamin sales, while national brands represent 40.3%.
VITAMIN INDUSTRY GROWTH. During the last four years, vitamin industry sales
have grown at a compound annual rate of approximately 11.2%, from $2.7 billion
in 1992 to $4.1 billion in 1996. Growth in the vitamin category is being driven
primarily by (i) favorable demographic trends and (ii) increased usage.
According to Gallup polling information, people in the age group 50 and
above exhibit the highest use of vitamin products of all age groups (measured by
percentage of the age group using vitamin products). In the United States, 47%
of persons over age 50 use vitamin products regularly (compared to 40% for
persons age 35 to 49 and 32% for persons age 18 to 34). According to the United
States Bureau of the Census, from 1996 through 2005, the age group of persons
age 50 to 64 is projected to grow 39.2%, compared to 1.3% for the age group of
persons age 18 to 49.
<TABLE>
<CAPTION>
REGULAR VITAMIN USAGE BY AGE GROUP
- -----------------------------------
<S> <C> <C>
AGE CATEGORY 1992 1996
- ------------- --------- ---------
18-34 29.0% 32.0%
35-49 35.5 40.0
50-64 36.9 47.0
65+ 41.7 47.0
</TABLE>
The Company believes that three primary factors have generated significant
increases in vitamin usage: (i) recent scientific research supporting vitamin
supplementation, (ii) the growth of self-care and preventative medicine and
(iii) the increased ability of vitamin manufacturers to communicate the benefits
of individual vitamins with the enactment of the DSHEA. These factors have
created increased usage among all age groups. For example, the percentage of the
United States population between the ages of 18 and 34 who regularly take
vitamins increased from 29% in 1992 to 32% in 1996, and, between the ages of 50
and 64, the percentage increased from 37% to 47%. In addition to a larger
percentage of the population regularly using vitamins, active vitamin users are
consuming more pills. The average number of pills consumed daily by regular
vitamin users increased 12.5%, from 2.4 in 1992 to 2.7 in 1996.
- SCIENTIFIC RESEARCH. Various studies published since 1992 by researchers
at major universities have suggested an association between regular
consumption of vitamin products such as vitamins C and E and other
"antioxidants" and a reduced risk of certain diseases, such as heart
disease, cancer and Alzheimer's disease. Such research has been described
in major medical journals, such as the NEW ENGLAND JOURNAL OF MEDICINE,
magazines, newspapers and television programs. An indicator of the impact
of this research is the reported increase in regular vitamin usage among
the nation's physicians from 43% to 56% between 1994 and 1996.
50
<PAGE>
- GROWTH OF SELF-CARE AND PREVENTIVE MEDICINE. Vitamin product consumption
has been favorably affected by the growing practice of self-care and
preventive medicine by lay people in the United States. This trend is
driven by (i) increased information available to the consumer on the
health benefits of certain foods, including vitamin products, (ii) a
desire to avoid rising health care costs, (iii) convenience and (iv)
affordability.
- DSHEA. The Dietary Supplement Health and Education Act of 1994, enacted in
October 1994, removed or scaled back many restrictions previously imposed
on vitamin product manufacturers. DSHEA expanded the ability of vitamin
product manufacturers to make, on labels and in literature,
"structure/function" statements that explain how a nutrient or dietary
substance affects the structure or function of the body. The
manufacturer's ability to better communicate the health benefits of
vitamins is especially important in light of the growing trend toward
self-care and the increased sales of vitamin products in the mass market
channel, where customers are less able to rely on sales personnel for
explanations of product benefits.
MASS MARKET CHANNEL GROWTH. Over the last five years, the mass market,
where Leiner has the leading position, has consistently grown faster than the
overall vitamin industry. Between 1992 and 1996 the mass market industry sales
have grown at a compound annual rate of approximately 11.9% compared to the
vitamin industry sales which have grown at an annual compound rate of 11.2%. The
Company believes that in addition to attractive economics to retailers, growth
in the mass market channel is being driven by several consumer-driven factors:
- PRICE POINT: The average price of a vitamin in the mass market channel is
approximately 30% less than the same product in the health food channel.
In the mass market, private label products are typically priced 40% below
comparable national brands.
- NUMBER OF OUTLETS: There are more than 50,000 mass market outlets versus
approximately 9,000 in the health food channel.
- CONVENIENCE: Consumers increasingly purchase vitamins at their customary
marketplace. This favors the mass market channel over health food stores,
which are visited less frequently by the general population.
- HERB AND NUTRITIONAL SUPPLEMENT PRODUCTS: Some of the fastest growing
products in the herbal category are just now transitioning from health
food stores to mass market outlets. Typically, newer products are
introduced in the health food channel and, after gaining credibility,
migrate to the mass market. These herbal and nutritional supplement
products currently represent 18.3% of the sales in the mass market channel
versus over 50% of the health food channel's sales.
51
<PAGE>
BUSINESS
GENERAL
Leiner is the nation's largest manufacturer of vitamins, minerals, and
nutritional supplements and distributes its products primarily through mass
market retailers. The Company has a 23% share of all mass market vitamin sales
in the United States, 50% larger than its next closest competitor's share.
Additionally, Leiner's 50% share of the mass market private label segment is
more than two times the size of its next closest competitor's share. Leiner has
increased its market share over the last five years, with its U.S. vitamin sales
growing at a compound annual rate of 18.9% per year through fiscal 1997, over
one and one half times the U.S. industry growth rate. Leiner is also one of the
nation's largest private label OTC pharmaceuticals manufacturers, with 18% of
its sales in OTC pharmaceutical and other products. In January 1997, the Company
acquired Vita Health, the second largest private label vitamin and OTC
pharmaceuticals manufacturer in the Canadian market.
The Company sells a full line of vitamin products, including approximately
370 products in more than 4,400 SKUs. The Company's products are sold in tablet
and capsule forms, and in varying sizes with different potencies, flavors and
coatings. The Company's vitamin products include national brand equivalents
which compare to CENTRUM-Registered Trademark-, ONE-A-DAY-Registered Trademark-
and GINSANA-Registered Trademark-, natural vitamin products such as vitamins C
and E and folic acid, minerals such as calcium and herbal products such as
echinacea and ginkgo biloba. The Company's vitamin products are sold under its
customers' store names ("private label products"), as well as under its own YOUR
LIFE-REGISTERED TRADEMARK- brand. The Company estimates that private label
vitamin products account for approximately 36% of total vitamin product sales by
mass market retailers and accounted for approximately 55% of Leiner's total
fiscal 1997 sales (excluding sales by Vita Health). The Company also markets
over 100 different OTC pharmaceutical products in over 1,575 SKUs, including
products comparable to most major national brands in the analgesic, cough and
cold remedy and digestive aid categories.
The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets, including drug store, supermarket, mass merchandising,
and warehouse club chains, as well as in convenience stores and through United
States military outlets worldwide. Leiner is the vitamin category manager for
many leading retailers. The Company's vitamin product customers include the
country's 20 largest drug store chains (including Walgreens, American Stores,
Eckerd, CVS, Rite Aid and Revco), 18 of the 20 largest supermarket chains
(including Safeway, Winn-Dixie, Albertson's, A&P and Lucky Stores), 10 of the
largest mass merchandising chains (including Wal-Mart, Target, Kmart and
Venture) and the two largest warehouse club chains (Sam's Club and Costco).
Vita Health is currently the second largest industry participant in Canada
in terms of private label sales and the third largest participant in terms of
total sales. Vita Health has built strong relationships with Canada's largest
mass market retailers, a mass market customer base that matches well with
Leiner's customer base. Vita Health also has a strong position in the health
food channel in Canada, a distribution channel Leiner is in the process of
entering in the United States. Vita Health sells to more than 500 retail
accounts across Canada.
COMPETITIVE STRENGTHS
The Company attributes its strong market position and historical financial
performance to competitive strengths, which it believes include (i) low cost
manufacturing, (ii) high quality products, (iii) advanced category management
and leading customer service, (iv) the consistent introduction of high margin
new products and (v) a complementary OTC pharmaceutical business.
LOW COST MANUFACTURING. During the last five years, the Company has
invested $29.5 million primarily to increase capacity, as well as to consolidate
plants and modernize equipment. Tableting capacity has been increased by 45% and
packaging capacity by 66%. Tableting costs have been reduced by
52
<PAGE>
8%, and packaging and distribution costs in its western U.S. facilities have
been reduced by approximately 10% and 20%, respectively.
The Company is the largest manufacturer in the vitamin industry with two
tableting facilities and four packaging facilities. The tableting facilities
operate to USP standards and are capable of producing over 14 billion tablets
per year. The packaging facilities also operate to USP standards and contain 32
packaging lines.
HIGH QUALITY PRODUCTS. Quality is a critical factor in the customer
purchase decision, particularly of private label products, which are marketed
under the brand names of Leiner's mass market retail customers. The Company was
the first major vitamin product supplier to be certified as being in compliance
with USP's vitamin manufacturing standards. Management believes that the Company
is one of only two companies that have been independently certified as being in
substantial compliance with USP standards for manufacturing vitamin products.
While adhering to USP standards is currently voluntary, customers may require
that products meet these standards. Moreover, if a company applies a USP
designation to its vitamin labels, then the Federal Food, Drug and Cosmetics Act
requires compliance with the USP monographs and USP Manufacturing Practices for
nutritional supplements. All current Leiner vitamins that have USP monographs
qualify under USP standards.
In addition to USP vitamins, Leiner was the first major vitamin product
supplier to introduce quality innovations to the mass market such as a full line
of STANDARDIZED HERBAL EXTRACTS-Registered Trademark- (formulations specially
prepared to ensure consistent potencies of active ingredients), PHARMACEUTICAL
GRADE CALCIUM-TM-(specially processed calcium with the lowest lead levels in the
industry), Preservative-Free Vitamins, and PROVEN RELEASE-Registered Trademark-
(standards for dissolution and disintegration in substantially the form later
adopted by the USP).
The Company's management believes that its reputation for introducing many
new products after review of their safety, utility and commercial acceptance is
a key element of Leiner's strong relationships with mass market retailers and,
in turn, enhances Leiner's ability to introduce new products into the channels
it serves.
ADVANCED CATEGORY MANAGEMENT. Through its information systems, the Company
seeks to optimize the application of emerging science, new product
introductions, merchandising opportunities, shelf space profitability, and
inventory management for its customers. The Company produces over 6,000 SKUs and
ships approximately 1,500 orders per week to over 200 customers. The Company
receives 83% of its sales volume electronically through electronic data
interchange ("EDI") systems and provides vendor-managed inventory ("VMI")
services to many of its customers.
The Company, through its account marketing managers, acts as the category
manager for the vitamin product sections for several of the nation's largest
mass market retailers. Approximately 50% of the Company's sales are from
accounts where the Company is the vitamin category manager. As a category
manager, the Company seeks to utilize industry sales data obtained from consumer
market research firms, together with customer retail sales data (often received
through the Company's on-line EDI system), to identify profit enhancement
opportunities and to develop and present to customers analyses and proposals
regarding merchandising, pricing and marketing strategies. Leiner's account
marketing managers also provide private label customers with creative services
(such as artwork for promotions, advertisement layouts and label and packaging
design). The Company's category management program and creative services
constitute sales and marketing tools that management believes strengthen
Leiner's relationships with its customers.
HIGH MARGIN NEW PRODUCTS. The Company identifies emerging products in
non-mass market distribution channels and introduces proven items at the cost,
quality and delivery standards required by mass market retailers. These new
products, typically introduced under the YOUR LIFE-Registered Trademark- brand,
produce the highest margins of all the Company's products and represent an
increasing percentage of sales. To evaluate nutritional research and advise the
Company on emerging science, Leiner created a Scientific Advisory
53
<PAGE>
Board comprised of nationally recognized authorities on nutrition and science.
In the last two fiscal years, the Company introduced 52 new products which
generated $32 million of fiscal 1997 sales. As a result, in the mass market
Leiner's share of the high growth herbal products segment has grown from 9% in
1994 to 16% in 1996.
NEW PRODUCTS INTRODUCED IN FISCAL 1997
Bilberry
Compare to Garlique-Registered Trademark-
DHA
Ester-C
Grape Seed Extract
Memory Support
Non-Aspirin Gelcaps
Super Multi-Vitamin
Cardio Complex
Compare to
Propalmex-Registered Trademark-
DHEA
Eye Care Complex
Kava Kava
Milk Thistle
Selenium 200 Mcg
Cat's Claw
Compare to Rejuvex-Registered Trademark-
Dong Quai
Ginger
Liquid Energy Tonic
New Phytonutrients
Shark Cartilage
Cayenne
Coenzyme Q10
Echinacea & Goldenseal
Glucosamine Sulfate
Lubricare-TM-
Non-Aspirin Geltabs
St. John's Wort
Leiner's Scientific Advisory Board is comprised of nationally recognized
authorities in nutrition, gerontology, biochemistry, disease prevention,
botanical research, cardiology, epidemiology and regulatory affairs related to
nutrition and related health fields. The Scientific Advisory Board meets three
times annually to review the most recent research published in the area of
nutrition, specified new product development programs and various reports of
interest from board members. The Company believes that its Scientific Advisory
Board is viewed by Leiner's customers as a valuable resource.
COMPLEMENTARY NATURE OF VITAMIN PRODUCT AND OTC PHARMACEUTICAL
BUSINESSES. The Company's OTC pharmaceutical products are sold through the same
distribution channels and, for most products, manufactured by the same processes
as the Company's vitamin products. In addition, vitamin product and OTC
pharmaceuticals purchase decisions are generally made by the same buyer as the
Company's customers. This overlap of channels and processes allows the Company
to enhance its position with mass market retailers and its manufacturing and
distribution expertise by allowing the Company to (i) offer "one-stop"
vitamin/OTC pharmaceuticals shopping, (ii) allocate its fixed costs across a
broader revenue base and (iii) offer a more diversified source of revenue to
fund future growth of the Company.
BUSINESS STRATEGY
The Company has developed an operating plan to take advantage of the
continuing significant growth opportunities available to the Company
specifically and within the industry as a whole. The operating plan includes the
following principal elements: (i) introducing new products, (ii) expanding
distribution in non-mass market domestic channels, (iii) growing international
sales, (iv) building the YOUR LIFE-Registered Trademark- brand, (v) selectively
pursuing add-on acquisitions and (vi) increasing operating margins and reducing
working capital.
INTRODUCING NEW PRODUCTS. Leiner has successfully introduced into the mass
market herb and nutritional supplement products originally available only in
non-mass market channels. Mass market sales of high margin herbal products
increased 29% between 1995 and 1996 and represents a significant growth
opportunity for the Company. The Company believes that the 30 new products it
introduced in fiscal 1997 and its planned new product introductions for fiscal
1998 will further strengthen its position in the mass market channel.
Leiner believes that herb and nutritional supplement products offer an
important avenue of growth because (i) industry sales of herb and nutritional
supplement products have increased in the mass market channel at a compound
annual rate of approximately 31% from 1994 through 1996, and (ii) the Company's
share of herb and nutritional supplement products sales in the mass market
channel is substantially lower than the Company's share for vitamin and mineral
sales and thus presents a growth opportunity. Since 1994, Leiner has introduced
more than 28 herbal products and Leiner's share of herbal product sales in the
54
<PAGE>
mass market channel has grown from 10.7% in 1994 (or estimated retail sales of
$13.3 million) to 16.7% in 1996 (or estimated retail sales of $39.4 million).
The Company believes it is a leader in the vitamin product industry in the
responsible development of new products. The Company intends to continue to
develop new products and programs based on scientific research and consumer
needs. Leiner has substantially bolstered its research/product development teams
with the addition of seven people including a senior executive from the Company
and two scientists with Ph.D's in food science and nutritional science. Leiner's
research team has focused on the broad array of herbal products expected to
migrate from the health food channel to the mass market channel.
EXPANDING DISTRIBUTION IN NON-MASS MARKET DOMESTIC CHANNELS. In addition to
its growth in the mass market channel, Leiner has a proven record of growing
sales in non-mass market channels. For example, Leiner's sales through United
States military outlets worldwide have grown from $9.1 million in fiscal 1994 to
$18.9 million in fiscal 1997. The Company has contractual agreements to (i) sell
products directly through television retailing, (ii) sell vitamins to companies
that market directly to consumers and (iii) contract manufacture products for
major pharmaceutical companies. The Company is also negotiating arrangements to
market vitamin products through the health food store channel.
GROWING INTERNATIONAL SALES. Leiner plans to (i) expand its leading
position in Canada established through its recent acquisition of Vita Health, a
major manufacturer of private label and branded vitamins and OTC pharmaceuticals
in Canada, which resulted in exclusive relationships for Canadian distribution
with Safeway, London Drug and Wal-Mart, (ii) distribute YOUR
LIFE-Registered Trademark- brand products in Japan through a strategic alliance
established with Takeda Chemical Industries, Ltd., which is the largest vitamin
producer in Japan, distributing vitamins to over 65,000 pharmacies, (iii) supply
a full line of vitamin products to Teva Pharmaceutical Industries Ltd. for
distribution in Israel under the Viva brand and (iv) follow its existing retail
customers into major international markets including Mexico, Brazil and
Indonesia.
BUILDING THE YOUR LIFE-REGISTERED TRADEMARK- BRAND. Between fiscal 1993 and
fiscal 1997, the Company expanded sales of the YOUR LIFE-Registered Trademark-
brand from $40 million to $104 million. Between fiscal 1996 and fiscal 1997,
YOUR LIFE-Registered Trademark- sales grew approximately 50%, driven primarily
by increasing sales to the mass merchandisers and to warehouse clubs. In fiscal
1997, the Company spent approximately $12 million in advertising and promotional
support to further enhance the YOUR LIFE-Registered Trademark- brand.
Nearly all of the Company's product innovations (including PROVEN
RELEASE-Registered Trademark-, DAILY PAKS-Registered Trademark-,
NATURALIZED-Registered Trademark- vitamin products, Family Size packages and
PHYTOGRAPH-TM- herbal testing) are initially introduced under the YOUR
LIFE-Registered Trademark- label. In fiscal 1998, the Company plans to implement
its innovative BODY SYSTEMS-TM- science-based merchandising system, and transfer
the successful YOUR LIFE-Registered Trademark- brand positioning recently
developed in the warehouse club chains to the Company's core drug store
customers.
SELECTIVELY PURSUING ADD-ON ACQUISITIONS. The Company has successfully
purchased and integrated five companies since 1988, including the acquisition of
Vita Health in January 1997. With this acquisition, Leiner gained (i) a leading
competitive position in the Canadian market, (ii) distribution in nearly all of
the significant mass market retailers in Canada, (iii) an extensive herb and
nutritional supplement product line and (iv) an established brand in the
Canadian health food store segment. Leiner intends to continue to pursue
selective acquisition opportunities.
INCREASING OPERATING MARGINS AND REDUCING WORKING CAPITAL REQUIREMENTS. The
Company plans to pursue initiatives to (i) consolidate its eastern U.S.
packaging and distribution facilities; (ii) continue to reduce SG&A expense as a
percentage of sales, (iii) continue to reduce its raw material costs, (iv)
achieve savings from the integration of Vita Health and (v) increase the
proportion of its overall sales represented by sales of Your
Life-Registered Trademark- branded products and other higher margin products,
including new products and products sold through new channels.
55
<PAGE>
- CONSOLIDATING EASTERN U.S. PACKAGING AND DISTRIBUTION: Leiner is committed
to continuous cost reduction and quality improvement. In fiscal 1995, the
Company completed the consolidation of three Los Angeles, California area
packaging and distribution sites into one location in Carson, California.
The centralized facility allowed the Company to more effectively schedule
its packaging lines, reducing set-ups and generating longer, uninterrupted
runs. As a result, productivity in the California packaging location
increased by 53% (measured in bottles produced per line shift). Aggregate
western U.S. packaging costs per bottle were reduced by approximately 10%.
In addition, distribution costs were reduced by approximately 20%, and,
because of the more efficient organization of the western U.S. facilities,
inventory now turns 40% faster in the western U.S. facilities than in the
unconsolidated eastern U.S. facilities.
In April 1997, Leiner announced its plan to consolidate its three eastern
U.S. packaging and distribution sites into one facility in York County,
South Carolina, an area just south of Charlotte, North Carolina. Based on
the demonstrated performance improvement in its western U.S. facilities,
the Company believes the eastern U.S. consolidation will result in future
cost savings.
- REDUCING RAW MATERIAL COSTS: The Company believes that it is the largest
purchaser of vitamin raw material in the United States and, as a result,
can use its purchasing leverage to receive volume discounts and other
benefits that give it a competitive advantage. Although the Company
believes that it has developed a low cost purchasing position in the
industry, it continues to strive to further lower purchasing costs.
- INTEGRATING THE VITA HEALTH ACQUISITION: Management has developed an
integration program with four primary components: (i) consolidate raw
materials purchasing and use low cost vendors; (ii) use Vita Health's
strong relationships with the leading retailers in Canada to expand sales
through the introduction of Leiner's low cost, high quality products in
the Canadian market; (iii) use Vita Health's facilities for combined
distribution in Canada; and (iv) focus manufacturing in low cost
locations.
- INCREASING THE PERCENTAGE OF HIGHER MARGIN PRODUCTS: Leiner intends to
shift its product mix to increase the relative share of higher margin
products by (i) introducing higher margin new products, including herb and
nutritional supplement products, (ii) increasing its sales in alternative
channels, including the health food store channel and direct television
channel, which sell a larger percentage of higher margin branded products
and (iii) continuing to expand the sales of YOUR
LIFE-Registered Trademark- branded products with significant marketing
support, extensive new product introductions and aggressive pricing in
selected channels.
PRODUCTS
The following table sets forth the sales of the Company's vitamin, OTC
pharmaceutical and other product lines from fiscal 1993 through fiscal 1997:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED MARCH 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Vitamin products............................. $ 159.5 $ 217.3 $ 239.6 $ 267.7 $ 321.7
OTC pharmaceuticals.......................... 53.0 67.4 63.1 58.8 61.3
Other products............................... 18.3 18.9 12.0 11.9 9.8
--------- --------- --------- --------- ---------
Total.................................. $ 230.8 $ 303.6 $ 314.7 $ 338.4 $ 392.8
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
VITAMIN PRODUCTS. The Company sells a full line of vitamin products,
including approximately 370 products in more than 4,400 SKUs. The Company's
products are sold in tablet and capsule forms, and in varying sizes with
different potencies, flavors and coatings. The Company's vitamin products
include
56
<PAGE>
national brand equivalents which compare to CENTRUM-Registered Trademark-,
ONE-A-DAY-Registered Trademark- and GINSANA-Registered Trademark-, natural
vitamin products such as vitamins C and E and folic acid, minerals such as
calcium and herbal products such as echinacea and ginkgo biloba. In addition,
Leiner's Your Life-Registered Trademark- brand is one of the nation's largest
broadline vitamin product brands. Sales of vitamins C and E, in the aggregate,
accounted for approximately 34% of the Company's sales in fiscal 1997 (excluding
sales by Vita Health).
The following table lists representative national brand equivalent vitamin
products marketed by the Company and the names of comparable nationally
advertised brands (which names are owned by others) with which the Company's
products compete. Virtually all of the Company's products listed below are
marketed under both the Company's Your Life-Registered Trademark- brand and
private label.
<TABLE>
<CAPTION>
NATIONAL BRAND EQUIVALENT VITAMIN PRODUCTS COMPARABLE NATIONALLY ADVERTISED BRANDS
<S> <C>
Animal Chewable Multi........................ Flintstones-Registered Trademark-
Antioxidant Vitamin & Mineral Formula........ Protegra-Registered Trademark-
Calcium 600.................................. Caltrate-Registered Trademark-
Central-Vite Select-TM-...................... Centrum Silver-Registered Trademark-
Central-Vite-Registered Trademark-........... Centrum-Registered Trademark-
Daily Garlic................................. Garlique-Registered Trademark-
Fe-Tabs-TM-.................................. Feosol-Registered Trademark-
Ger-Tab-TM-.................................. Geritol-Registered Trademark-
Ginkgo Biloba Tablets........................ Ginkoba-TM-
Ginseng...................................... Ginsana-Registered Trademark-
Hi-Cal 500................................... Oscal-Registered Trademark-
Mature Women's Formula....................... Rejuvex-Registered Trademark-
My-A-Multi-Registered Trademark-............. Myadec-Registered Trademark-
One Daily.................................... One-A-Day-Registered Trademark-
Prenatal Tablets............................. Stuart Prenatal-Registered Trademark-
Saw Palmetto Complex......................... Propalmex-TM-
Stress Formula............................... Stress Tabs-Registered Trademark-
Thera Plus-Registered Trademark-............. Theragran M-Registered Trademark-
Vision Formula............................... Ocuvite-Registered Trademark-
</TABLE>
DAILY PAKS-REGISTERED TRADEMARK-
Antioxidant Pak-TM-
Maximum Pak-Registered Trademark-
Men's Daily Pak-Registered Trademark-
Daily Pak Select-Registered Trademark-
Stress Pak-TM-
Women's Daily Pak-Registered Trademark-
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The following table lists other representative vitamin products marketed by
the Company. Virtually all of the Company's products listed below are marketed
under both the Company's Your Life-Registered Trademark- brand and private
label.
NATURAL VITAMIN PRODUCTS
B-1 with Rice Bran
B-6 with Yeast
B-12 with Liver
Balanced B Complex +C
Balanced B-50, B-100, B-150 Complex
Beta Carotene
Calcium, Magnesium & Zinc
Calcium & Magnesium
Cod Liver Oil Vitamin A&D
Dieter's Multivitamin/Mineral
Hi Potency Iron
Hi Potency Multivitamin Mineral
Iron-Free Multivitamin & Mineral
Natural Source Calcium
Oyster Shell Calcium with D (250 mg, 500 mg)
Pharmaceutical Grade Calcium
Time Release Maximum Choice
Time Release Vit. C w/Rose Hips (500 mg, 1000 mg, 1500 mg)
Time Release Complete Multivitamin
Time Release Balanced B-50, B-100
Time Release B-12 (1000 mcg, 2000 mcg)
Time Release B-6
Vitamin A
Vitamin C with Rose Hips (250 mg, 500 mg, 1000 mg)
Vitamin E Blended (200 I.U., 400 I.U., 1000 I.U.)
Vitamin E
Zinc Lozenges with Vitamins C and B-6
REGULAR VITAMIN PRODUCTS
Advance E with ALA
All Purpose Multivitamin/Multimineral
B-Complex Supplement
Chewable Calcium + D
Chewable Vitamin C (orange)
Chewable Vitamin C with Acerola (100 mg, 300 mg, 500 mg)
Chromium Picolinate
Dieters Multi
Ferrous Sulfate
Folic Acid
New & Improved Antioxidant Tablet
Niacin 100 mg
Physically Active Multivitamin/Multimineral
Selenomax
Space Kids Children's Chewable Vitamin
Super Multi with Herbs
Time Release Vitamin C
Vitamin B-12
Vitamin B-6
Vitamin C (250 mg, 500 mg, Release Vitamin C)
Vitamin E (200 I.U., 400 I.U., 800 I.U., 1000 I.U., 1200 I.U.)
Vitamin E Plus Added Antioxidants
Vitamin E Water Dispersible
Women's Multivitamin/Multimineral
HERBAL PRODUCTS
Bilberry
Cats' Claw
Cayenne
Dong Quai
Echinacea
Echinacea & Goldenseal
Feverfew
Garlic Oil 1500 mg
Garlic & Parsley
Ginkgo Biloba
Ginseng
Ginger
Grape Seed Extract
Green Tea Extract
Hawthorn
Kava Kava
Milk Thistle
Saw Palmetto
St. John's Wort
Valerian
OTHER NUTRITIONAL SUPPLEMENTS
Aloe Vera
Bee Pollen
Brewer's Yeast
Cardio Complex
Citrimax-TM- Weight Loss System*
Coenzyme Q10
Concentrated Garlic
Cranberry Capsules
DHA
DHEA
Evening Primrose Oil
Eye Care Complex
Fast Release Lysine
Fish Oil Concentrate 1000 mg
Gelatin 5 gr
Glucosamine Sulfate
Imperial Ginseng Tablets
L-Formula Lysine (500 mg & 1000 mg)
Memory Support
Papayazyme-TM-
Pycnogenol-Registered Trademark-*
Shark Cartilage
Soya Lecithin
- ------------------------------
* Trademark owned by third party. The Company sells product under license.
58
<PAGE>
Vita Health produces more than 25 different types of vitamins and minerals.
However, the majority of Vita Health's sales in this segment are concentrated in
a few core product categories. The top 5 product categories, which comprise over
one-half of Vita Health's vitamin sales, are vitamin C products, vitamin E
products, multivitamins, herbal products and vitamin B products. Vita Health has
extensive experience and expertise with herbal products which is the fastest
growing segment of the United States vitamin market.
OTC PHARMACEUTICALS. The Company markets over 100 different OTC
pharmaceutical products in over 1,575 SKUs, including products comparable to
most major national brands in the analgesic, cough and cold remedy and digestive
aid categories. The Company sells its OTC pharmaceuticals under its customers'
private labels as well as its own broadline brand, PHARMACIST
FORMULA-Registered Trademark-, first introduced in 1989.
The following table sets forth representative OTC pharmaceutical products
marketed by the Company and the names of comparable nationally advertised brands
(which names are owned by others) with which the Company's products compete.
Virtually all of the Company's products listed below are marketed under the
Company's Pharmacist Formula-Registered Trademark- brand and private label.
<TABLE>
<CAPTION>
COMPARABLE NATIONALLY
COMPANY PRODUCTS ADVERTISED BRANDS
<S> <C>
ANALGESICS
Buffered Aspirin................................................ Bufferin-Registered Trademark-
Children's Non-Aspirin Elixir................................... Children's
Tylenol-Registered Trademark-
Enteric Coated Aspirin.......................................... Ecotrin-Registered Trademark-
Extra Strength Pain Reliever.................................... Excedrin-Registered Trademark-
Fruit Flavored Non-Aspirin Chewables............................ Children's
Tylenol-Registered Trademark-
Ibuprofen Tablets............................................... Advil-Registered Trademark-
Tablets
Infant No-Aspirin Suspension Drops.............................. Tylenol-Registered Trademark-
Infant Drops
Micro-coated Aspirin............................................ Bayer-Registered Trademark-
Non-Aspirin 160 mg Caplets...................................... Tylenol-Registered Trademark-
Junior Strength
Pain Reliever Without Aspirin (Acetaminophen)................... Tylenol-Registered Trademark-
Tablets
COUGH AND COLD
12-hour Nasal Spray............................................. Afrin-Registered Trademark-
Advanced Formula Cold Tablets................................... Dristan-Registered Trademark-
Complete Allergy Medication Tablet.............................. Benadryl-Registered Trademark-
Daytime Liquid Caps............................................. Day
Quil-Registered Trademark-
Liqui-Caps-Registered Trademark-
Flu & Cold Drink................................................ Thera-Flu-Registered Trademark-
Hista-Tabs...................................................... Actifed-Registered Trademark-
Minicol......................................................... Triaminicol-Registered Trademark-
Multisymptom Cold Tablets....................................... Comtrex-Registered Trademark-
Nasal Spray 1/2%................................................ Neo-Synephrine-Registered Trademark-
Nite Time Liquid................................................ Nyquil-Registered Trademark-
Nite Time Liquid Caps........................................... Nyquil-Registered Trademark-
Liqui-Caps
Pseudoephedrine Tablets......................................... Sudafed-Registered Trademark-
Tap DM Elixir................................................... Dimetapp-Registered Trademark-
Tussin Expectorant.............................................. Robitussin-Registered Trademark-
ANTACIDS
Antacid II Liquid with Simethicone.............................. Maximum Strength
Fast-Acting
Mylanta-Registered Trademark-
Antacid Liquid.................................................. Maalox-Registered Trademark-
Antacid Liquid with Simethicone................................. Mylanta-Registered Trademark-
Assorted Antacids Tablets....................................... Tums-Registered Trademark-
Pink Bismuth Liquid............................................. Pepto-Bismol-Registered Trademark-
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
LAXATIVES
Fiber Laxative Caplets.......................................... Fibercon-Registered Trademark-
Natural Fiber Laxative.......................................... Metamucil-Registered Trademark-
Women's Laxative Tablets........................................ Correctol-Registered Trademark-
ANTI-DIARRHEAL
Loperamide Hydrochloride........................................ Imodium
AD-Registered Trademark-
Caplets
</TABLE>
Vita Health's OTC pharmaceutical sales are primarily analgesic products and
cough and cold products. In Canada, there are two primary classes of analgesic
products, those with codeine and those without. Vita Health produces both types
of products.
SERVICES; OTHER PRODUCTS. The Company offers drug repackaging services to
major prescription pharmaceutical wholesalers and a major drug store chain. In
addition, the Company performs contract manufacturing services on a limited
basis for selected consumer products companies. In order to leverage further its
existing distribution system and marketing expertise, the Company markets
certain niche products. For example, the Company developed and markets the
BODYCOLOGY-Registered Trademark- line of hair, skin and bath care products.
CUSTOMER SERVICE: SALES, MARKETING SUPPORT, LABEL AND PACKAGING DESIGN
The Company, through its sales force and account marketing managers,
provides retailers with sales and marketing support, designed to maximize
retailers' sales and profits, including integrated schedules of merchandising
programs, advertising and promotions.
SALES. The Company has a sales force of over 30 professionals who regularly
call on the Company's customers to develop an in-depth understanding of each
customer's competitive environment and opportunities. Leiner's sales force is
intended to enable the Company to establish close relationships with its
customers. The Company's sales department consists of account managers organized
into regional divisions. Each regional sales manager has broad authority in
negotiating with and supporting the retail customers in their territory. The
sales executives utilize financial costing models in order to understand the
profitability of specific sales contracts. The Company has attracted and
retained sales executives who have been trained at many of the leading
pharmaceutical and consumer products companies. The Company believes its sales
force constitutes a competitive advantage over companies that have less
extensive sales forces and therefore rely more heavily on outside brokers.
MARKETING SUPPORT. The Company provides retailers with comprehensive
marketing support designed to maximize their sales and profits. Leiner's
marketing activities are organized into four operating groups: (i) account
marketing, which provides category management and marketing services to
retailers, (ii) brand marketing, which focuses on supporting the Company's
branded products, (iii) new product development, which develops new products and
new product differentiation strategies and (iv) international marketing, which
gains access to foreign markets.
The brand management group focuses on building the sales of the Company's
branded products, primarily YOUR LIFE-Registered Trademark- and DAILY
PAKS-Registered Trademark-. The Company uses marketing programs for its branded
products similar to those used for the Company's private label customers. In
addition to utilizing retailer advertising vehicles, the Company supports its
brands with consumer advertising, in print and radio, and with regular coupon
support provided through free standing inserts in newspapers across the country.
The new product development group seeks to develop new products in response
to scientific research and consumer trends and often consults with the
Scientific Advisory Board in developing and introducing new products. New
products and formulas are developed in the Company's dedicated research
facilities under rigorous testing procedures.
The international marketing group is responsible for developing formulations
and packaging for the Company's foreign markets, as well as obtaining trademark
registrations and authorizations for importation and sale of the Company's
products in countries outside the United States.
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LABEL AND PACKAGING DESIGN. The Company believes that its resources and
expertise in label design and management are significant competitive advantages
in servicing the complex needs of its private label customers. The Company's
graphics design Staff consists of 35 professionals who produce design concepts,
artwork, graphics and copy for over 5,450 private label products. Leiner's
in-house graphics capability enables the Company to deliver quick turnaround
times for private label design projects and allows its customers to participate
in the development and production of labeling and packaging. Leiner's customers
benefit from the Company's significant investment in computer design equipment,
as well as in-house expertise in marketing strategies and regulatory matters
applicable to labels and packaging. The Company believes that the competitive
advantage derived from its graphics facilities has been enhanced by the
increased use of "structure/function" claims and other nutritional claims on
vitamin product labels as a result of DSHEA. The Company currently operates four
packaging facilities equipped with 32 packaging lines in order to satisfy the
complex demands and rapid response time required by its customers.
The Company has received "Vendor of the Year" awards from several of the
nation's leading retailers, including Albertson's, Revco, Rite-Aid, Safeway and
Target. Vita Health was recently named "Vendor of the Year" by Wal-Mart Canada.
MANUFACTURING AND DISTRIBUTION
MODERN FACILITIES. Leiner's active manufacturing and distribution
facilities consist of approximately 1.0 million square feet of owned or leased
plant and office facilities in six locations and five states. The Company also
recently added Vita Health's site in Canada and announced the construction of a
new plant in South Carolina. Combined, the Company is the largest manufacturer
in the North American vitamin products industry and is capable of packaging over
18 billion doses each year. In April 1995, Leiner was the first major vitamin
product manufacturer to be certified as being in compliance with USP's vitamin
manufacturing standards, which became effective in January 1995. The Company's
U.S. facilities were audited by an independent quality assurance laboratory and
received the laboratory's highest categorical rating. All of the Company's U.S.
manufacturing facilities also have been audited by the FDA and have been found
to be in compliance with the FDA's "Current Good Manufacturing Practices for
Finished Pharmaceuticals" ("cGMP").
Leiner has two U.S. manufacturing facilities, which are located in Garden
Grove, California and Kalamazoo, Michigan. The primary manufacturing facility
for the Company's vitamin products is its 138,500 square foot Garden Grove
plant. The primary manufacturing facility for the Company's OTC pharmaceuticals
is the Company's 51,250 square foot Kalamazoo plant. In the event of a
catastrophic casualty to one of the Company's primary vitamin or OTC tableting
facilities, the Company has the ability to shift production to other facilities.
The Company operates 38 tableting machines in its Garden Grove, California
facility and 23 tableting machines in its Kalamazoo, Michigan facility. The
Company operates four packaging and distribution facilities, which are located
in Carson, California; West Unity, Ohio; Madison, Wisconsin; and Sherburne, New
York, occupying 471,500, 204,200, 95,500 and 10,300 square feet, respectively.
These facilities are equipped with a total of 32 packaging lines, and, as with
tableting, products can be shifted between facilities in the event such a need
arises. See "Properties."
The Company intends to establish a new 535,000 square foot regional
manufacturing and distribution center in Fort Mill, South Carolina. The center
will serve the Company's retail customers throughout the eastern United States
and will employ approximately 700 employees when it becomes fully operational
within the next three years. Construction of the facility has begun. The Company
has begun training the staff required for initial operations at a temporary
121,767 square foot facility adjacent to the permanent site of the Fort Mill
center. Occupancy of the permanent site is expected by late summer of 1998.
Within the first year of operation at the permanent site, the Company plans to
hire up to 450 employees to work at the new center. The majority of these
employees will be recruited from the local labor force with a smaller percentage
relocating from the Company's other facilities. As the new facility becomes
operational, other facilities located in the midwestern United States will be
closed.
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Vita Health currently tablets, bottles and packages its products in a
modern, 100,000 square foot facility in Manitoba. The facility contains 80,000
square feet of manufacturing and distribution space and 20,000 square feet of
office space.
The Company purchases approximately 600 different bulk raw materials which
it mixes into over 480 proprietary formulations and fabricates into a wide
variety of tablets, caplets and liquid products. Upon receipt by the Company,
the raw materials are sampled and tested in the Company's laboratories and
compared against rigid product specifications. After the bulk raw materials are
tested and released, they are available to the manufacturing department where
they are weighed, mixed and (in the case of tableting) compressed. Finished bulk
products are then packaged or filled into a wide variety of bottle counts and
labels producing over 6,000 SKUs. The Company performs comprehensive quality
control procedures from the receipt of raw materials to the release of the
packaged product, including extended stability and dissolution tests on the
finished products. All of the Company's vitamin and OTC pharmaceutical products
are manufactured according to cGMP and all of the Company's vitamin products are
manufactured according to USP standards. In addition, the Company's
manufacturing activities include packaging bulk products purchased from certain
suppliers.
EDI AND VMI. In order to enhance its customers' ability to place orders
efficiently and accurately, Leiner has established an EDI system, which links
Leiner electronically with many of its customers. Leiner receives over 83% of
its sales volume via EDI. The Company also employs EDI, for example, to receive
status reports on customers' warehouse balances, warehouse issues, and consumer
sales, to notify customers in advance of what shipped and how it shipped, to
invoice customers, and to receive payments. The Company has recently added EDI
connections to its freight carriers, so that en route shipments and actual
deliveries can now be monitored automatically. The Company maintains a Staff
dedicated to increasing its connectivity to the customer, and new features are
added each year.
Another advanced aspect of the Company's customer service offering is its
VMI system. As part of the VMI process, the Company electronically receives
sales data generated by scanning equipment at its customers' cashier stations or
warehouses. Using this data, the Company monitors and automatically restocks
customer inventory as needed. In essence, the Company initiates its own purchase
orders for VMI customers, operating on the customers' behalf according to
mutually agreed operating practices. The EDI and VMI systems allow paperless
order placement and increase the accuracy and timeliness of order processing,
while enabling the customer and the Company to decrease inventory levels without
losing sales due to products being out of stock. In addition, by communicating
customer sales data to the Company, VMI allows the Company to better anticipate
customer needs and enhances the Company's ability to manage production
scheduling.
The Company believes that it is a leader among vitamin product manufacturers
and marketers in providing advanced order processing services and expects to
provide these services to an increasing number of customers. The Company also
believes that its new modern manufacturing and distribution facilities provide
the Company with an increased capability to respond quickly to customers' sales
orders while maintaining high levels of quality control.
VITA HEALTH DISTRIBUTION. Vita Health distributes through all leading
retail channels including mass-market stores and health food stores. However,
the bulk of the Vita Health's sales are concentrated in the mass market, which
reflects the overall market distribution in Canada. Mass merchandisers
(Wal-Mart, Kmart, etc.) still represent a relatively small percentage of sales
compared to the United States, but is the fastest growing channel in Canada. The
Company believes that Vita Health should benefit from its strong relationship
with Wal-Mart, as this company continues to gain market share in Canada.
MANUFACTURING PROGRAM/COST REDUCTION. Leiner is committed to being a low
cost producer of vitamin products and OTC pharmaceuticals. In support of this
commitment, during the last five years, Leiner invested approximately $29.5
million in the implementation of its manufacturing program with respect to
expanding and restructuring its tableting and its western U.S. packaging and
distribution facilities. This
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<PAGE>
program reduced costs per unit in tableting, western packaging, and western
distribution by approximately 8%, 10%, and 20%, respectively. In April 1997, the
Company announced its decision to consolidate its eastern U.S. packaging and
distribution operations into a new plant in York County, South Carolina. The
Company believes that it can achieve cost savings from the eastern restructuring
commensurate with those it achieved in the west.
The acquisition of XCEL, as well as other acquisitions made by the Company
prior to 1989, resulted in a number of separate facilities with overlapping
functions, creating opportunities to realize manufacturing cost reductions by
consolidating the acquired facilities into a smaller number of larger, more
efficient units equipped with modern tableting equipment. In response to these
opportunities, in fiscal 1994, Leiner formulated a specific program, which
called for the consolidation and expansion of its western U.S. tablet
manufacturing, packaging and distribution facilities. The Company consolidated
two packaging facilities and one distribution facility into one combined
operation in Carson, California, increasing the aggregate space dedicated to
distribution and packaging from 266,000 to 403,000 square feet. As a result of
moving packaging operations out of the Company's Garden Grove, California
facility and dedicating that facility primarily to tableting, the total
tableting space at Garden Grove was expanded from 66,000 to 120,000 square feet.
Into this space in Garden Grove, the Company consolidated the Warren, Michigan
tableting plant, which was then closed, in fiscal 1996. The planned eastern U.S.
restructuring will consolidate the remaining smaller packaging and distribution
facilities into another facility much like the one in Carson.
The Company has benefited from its significant investments in modern
tableting and packaging equipment. The Company's newly purchased tableting
presses run significantly faster than its older equipment and have reduced raw
material yield loss. In addition, the new presses' advanced design and computer
controls allow quicker setups and longer runs between cleanups. The newly
purchased packaging equipment also runs significantly faster than the Company's
older equipment and allows the Company to reduce changeover time, which
increases packaging throughput and flexibility. The consolidation and consequent
simplification of the Company's manufacturing system have allowed the Company to
benefit from economies of scale (through increased average batch sizes) and to
reduce manufacturing costs (through reduced overhead and handling associated
with multiple subscale facilities). The Company has also reduced packaging
changeover downtime by increased dedication of lines by bottle size.
CUSTOMERS
The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets, including drug store, supermarket, mass merchandising,
and warehouse club chains, as well as in convenience stores and through the
United States military outlets worldwide. Leiner is the vitamin category manager
for many leading retailers. The Company's vitamin product customers include the
country's 20 largest drug store chains (including Walgreens, American Stores,
Eckerd, CVS, Rite Aid and Revco), 18 of the 20 largest supermarket chains
(including Safeway, Winn-Dixie, Albertson's, A&P and Lucky Stores), 10 of the
largest mass merchandising chains (including Wal-Mart, Target, Kmart and
Venture) and the two largest warehouse club chains (Sam's Club and Costco). The
Company has approximately 200 active U.S. customers. In fiscal 1997, Wal-Mart
Stores, Inc. and Walgreen Co. accounted for approximately 27% and 12%,
respectively, of the Company's sales. Each of the Company's other major
customers accounted for less than 10% of the Company's sales for fiscal 1997.
The Company's top ten customers in the aggregate accounted for approximately 71%
of the Company's sales for fiscal 1997.
BACKLOG ORDERS
The Company had approximately $25.2 million in backlog orders, believed to
be firm, as of September 30, 1997. Substantially all of these orders will be
shipped in the fiscal 1998. The Company had $11.8 million in backlog orders,
believed to be firm, as of September 30, 1996.
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PURCHASED MATERIALS
The Company purchases from third party suppliers certain important
ingredients and products that the Company cannot manufacture. Although the
Company currently has supply arrangements with several suppliers of these
ingredients and products, and the Company's purchased materials are generally
available from numerous sources, an unexpected interruption of supply could
materially adversely affect the Company's results of operations. Two suppliers
provided approximately 31% of the materials purchased during fiscal 1997 by the
Company (excluding purchases by Vita Health). No other single supplier accounts
for more than 10% of the Company's material purchases.
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes on the basis of customer service, product quality, pricing and
marketing support. In the mass market vitamin product business, the Company
believes that its major U.S. competitors are Pharmavite Corp., Rexall Sundown,
Inc. and NBTY, Inc. (manufacturer of Nature's Bounty vitamin products). In the
OTC pharmaceuticals business, the Company believes its major U.S. competitor is
Perrigo Company.
In the United States, the Company sells substantially all of its vitamin
products in the mass market. Although the Company does not currently participate
significantly in other U.S. distribution channels such as health food stores,
direct mail and direct sales, the Company's products may face competition from
such alternative channels as more customers utilize these channels of
distribution to obtain vitamin products. The mass market channel accounted for
approximately 53% of all U.S. vitamin product sales in calendar year 1996.
The Company competes with other major private label and broadline brand
manufacturers, certain of which are larger and have access to greater resources
than the Company. Among other factors, competition among private label
manufacturers is based upon price. If one or more manufacturers significantly
reduce their prices in an effort to gain market share, the Company's results of
operations or market position could be adversely affected. However, the Company
believes that it competes favorably with other companies because of its (i) low
manufacturing costs, (ii) sales and marketing strategies, (iii) customer service
(including complexity and speed of delivery) and (iv) reputation of being a
quality supplier of products.
The Company also competes with manufacturers of nationally advertised brand
name products such as American Home Products Corp., Bayer Group and
Bristol-Myers Squibb Co., which are larger and have resources substantially
greater than those of the Company, and are substantially less leveraged than the
Company. In the future, one or more of these companies could seek to compete
more directly with the Company by manufacturing private label products or by
significantly lowering the prices of their national brand products. The Company
believes, however, that the mass-oriented manufacturing and marketing methods
used by national brand manufacturers are less suited to the customized packaging
and marketing requirements of private label customers, which the Company
satisfies by utilizing its packaging and graphics facilities. See "--Customer
Service: Sales, Marketing Support, Label and Packaging Design."
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PROPERTIES
The following table sets forth the location, type of facility, square
footage and ownership interest in each of the Company's principal facilities. In
addition to the facilities shown below, the Company has a prearranged, assigned
purchase and leaseback facility to occupy a new 535,000 square foot facility in
Fort Mill, South Carolina. The Company has arranged for a third party to
purchase the facility on its behalf and to lease it back to the Company. See
"--Manufacturing and Distribution" for a description of the Company's ongoing
consolidation program.
<TABLE>
<CAPTION>
APPROX. LEASED DATE OF
SQUARE OR LEASE
LOCATION TYPE OF FACILITY FEET OWNED EXPIRATION
- ------------------------ ------------------------------------------------ --------- --------- -------------
<S> <C> <C> <C> <C>
Carson, CA.............. Packaging, distribution and corporate offices 471,500 Leased 3/31/04(1)
Garden Grove, CA........ Manufacturing 138,500 Leased 10/31/02
Kalamazoo, MI........... Manufacturing 51,250 Owned --
Kalamazoo, MI........... Auxiliary warehouse 10,000 Leased Mo.-to-mo.
Winnipeg, Canada........ Manufacturing, packaging, distribution 100,000 Owned --
West Unity, OH.......... Packaging and distribution 204,200 Leased 5/31/99(2)
Madison, WI............. Packaging and distribution 95,500 Owned --
Madison, WI............. Auxiliary warehouse 40,000 Leased Mo.-to-mo.
Sherburne, NY........... Packaging and distribution 10,300 Owned --
Sherburne, NY........... Auxiliary warehouse 13,600 Leased Mo.-to-mo.
Chicago, IL............. Not in use; held for sale 379,000 Owned --
Fort Mill, SC........... Manufacturing, packaging and distribution (for 121,767 Leased 5/31/98
short-term use)
</TABLE>
- ------------------------
(1) The Company has the option to extend by 10 years.
(2) The Company has the option to extend by 3 years. The Company also has an
option to cancel with one year's notice.
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition.
EMPLOYEES
As of September 30, 1997, the Company had approximately 1,386 full-time
employees. Approximately 404 employees were engaged in executive or
administrative capacities and approximately 982 employees were engaged in
manufacturing, packaging or distribution. In addition, as of September 30, 1997,
the Company employed approximately 825 temporary employees. The large number of
temporary employees gives the Company significant flexibility to adjust staffing
levels in response to seasonal fluctuations in demand. None of the Company's
employees is represented by a collective bargaining unit. The Company considers
its relations with its employees to be good.
YEAR 2000 COMPLIANCE
The Company is in the process of modifying, upgrading or replacing its
computer software applications and systems to accommodate the "year 2000" dating
changes necessary to permit correct recording of year dates for 2000 and later
years. The Company does not expect that the cost of its year 2000 compliance
program will be material to its financial condition or results of operations.
The Company believes that it will be able to achieve compliance by the end of
1998, and does not currently anticipate any material disruption in its
operations as the result of any failure by the Company to be in compliance. The
Company does not currently have any information concerning the compliance status
of its suppliers and customers.
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In the event that any of the Company's significant suppliers or customers do not
successfully and timely achieve year 2000 compliance, the Company's business or
operations could be adversely affected.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling, advertising
and sale of the Company's products are subject to regulation by one or more
United States and Canadian federal agencies, including the FDA, the FTC, the
CPSC and Health Canada. The activities are also regulated by various agencies of
the states, provinces and localities in which the Company's products are sold.
In addition, the Company manufactures and markets certain of its products in
compliance with the guidelines promulgated by voluntary standard organizations,
such as the USP.
FDA. The United States Food and Drug Administration exercises authority
over three aspects of the Company's business: (i) the labeling and marketing of
dietary supplements, (ii) the labeling and marketing of OTC pharmaceuticals and
(iii) the operation of its manufacturing and packaging facilities.
DIETARY SUPPLEMENTS. The Dietary Supplement Health and Education Act of
1994 was enacted on October 25, 1994 and amends the Federal Food, Drug and
Cosmetic Act to (i) define dietary supplements, (ii) expand with certain
limitations the number of products that can be marketed as dietary supplements,
(iii) permit "structure/function" statements for all vitamin products, including
herbal products and other nutritional supplements, and (iv) permit the use of
published literature in the sale of vitamin products. Dietary supplements are
regulated as foods under DSHEA, and the FDA is prohibited from regulating the
dietary ingredients in supplements as food additives, or the supplements as
drugs, unless product claims trigger drug status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. The FDA has proposed the form of these requirements, which are
proposed to become effective January 1, 1998. DSHEA permits substantiated,
truthful and non-misleading statements of nutritional support to be made in
labeling, including describing the positive effects on general well-being from
consumption of a dietary ingredient or the role of a nutrient or dietary
ingredient in affecting or maintaining structure or function of the body. In
addition, DSHEA also authorizes the FDA to promulgate current good manufacturing
practices specific to the manufacture of dietary supplements, to be modeled
after food current good manufacturing practices. The Company currently
manufactures its dietary supplement products pursuant to the more detailed OTC
pharmaceutical current good manufacturing practices.
The FDA has begun proposing regulations to implement DSHEA. The Company
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. Regulations in the form currently proposed by the
FDA will likely require, among other things, expanded or different labeling. In
addition, regulations promulgated by the FDA in the future could significantly
limit certain provisions of DSHEA that are beneficial to the sales of vitamin
products.
The Nutrition Labeling and Education Act of 1990 (the "NLEA"), in part
modified by DSHEA, requires the FDA to establish regulations (i) governing
nutrition labeling of all foods, including dietary supplements, (ii) regulating
the use of nutrient content descriptors (e.g., "high" or "low") and (iii)
establishing permitted health claims. The FDA issued final regulations under the
NLEA in January 1993. A limited number of the Company's vitamin products are
foods subject to all of the January 1993 NLEA regulations; most of the Company's
vitamin products are dietary supplements subject to the health claim regulations
only.
Based on the changes to the NLEA effected by DSHEA, the FDA has proposed new
dietary supplement regulations (i) adopting standard formats for nutrition
information on dietary supplement labels and (ii) applying existing approved and
proposed new descriptors to dietary supplements. Under the current FDA proposal,
the nutrition information and descriptor regulations for dietary supplements
would apply to packages labeled on or after January 1, 1998. Previously labeled
packages could be sold through
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the distribution chain. The health claim regulations took effect for packages
labeled, or claims made, after July 1, 1994. While packages labeled before July
1, 1994 are protected from charges under the NLEA for making unapproved health
claims, the FDA is not prevented from using these health claims to allege that
the relevant product is a drug and, therefore, is subject to applicable drug
regulations. The Company has established accounting reserves in connection with
the anticipated cost of complying with the new regulations, which the Company
believes are adequate.
The Company cannot determine what effect the FDA's future regulations, when
and if promulgated, would have on its business in the future. Such regulations
could, however, among other things, require expanded documentation of the
properties of certain products, or scientific substantiation regarding
ingredients, product claims or safety. In addition, the Company cannot predict
whether new legislation regulating the Company's activities will be enacted, or
what effect any such legislation would have on the Company's business.
OTC PHARMACEUTICALS. FDA regulation of OTC pharmaceuticals takes two forms.
Most of the Company's OTC pharmaceutical products are governed by FDA monographs
covering well-known ingredients and specifying, among other things, permitted
claims, required warnings and precautions, allowable combinations of ingredients
and dosage levels. Marketing a product governed by a monograph or pending
monograph requires no prior approval of the FDA, only compliance with the
applicable monograph. Monographs may be changed from time to time, requiring
formulation, packaging or labeling changes for an affected product. While such
changes may cause the Company to incur costs to comply with such changes,
disruption of distribution or material obsolescence of inventory due to any such
changes is not likely.
In the future, the Company may desire to market as over-the-counter products
previously "prescription only" pharmaceuticals ("Rx-to-OTC switch products"),
which require FDA approval before the products can be marketed. The marketing of
such products by the Company will require that the Company obtain FDA approvals
or arrange to obtain such products from manufacturers that have obtained FDA
approval. In addition, the Drug Price Competition & Patent Term Restoration Act
of 1984 (the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic
Act) gives a three-year period of marketing exclusivity to a company that
obtains FDA approval of a switch requiring clinical evidence of effectiveness of
the OTC pharmaceutical dose. Unless Leiner establishes relationships with such
companies having exclusive marketing rights, the Company's ability to market
Rx-to-OTC switch products and offer its customers products comparable to
national brand products would be delayed until the expiration of the exclusivity
granted to the company initiating such a switch. There can be no assurance that,
in the event that the Company applies for FDA approvals, the Company would
obtain such approvals to market Rx-to-OTC switch products or, alternatively,
that the Company would be able to obtain such products from other manufacturers.
The Company is also subject to the requirements of the Comprehensive
Methamphetamine Control Act of 1996, a new law designed to allow the Drug
Enforcement Administration (DEA) to monitor transactions involving chemicals
that may be used illegally in the production of methamphetamine. The
Methamphetamine Control Act of 1996 establishes certain registration and
recordkeeping requirements for manufacturers of OTC cold, allergy, asthma and
diet medicines that contain ephedrine, pseudoephedrine or phenylpropanolamine.
While certain of the Company's OTC pharmaceutical products contain
pseudoephedrine, none of the Company's products contain ephedrine, a chemical
compound that is distinct from pseudoephedrine. Pseudoephedrine is a common
ingredient in decongestant products manufactured by the Company and other
pharmaceutical companies.
MANUFACTURING AND PACKAGING. All facilities where foods (including dietary
supplements) and pharmaceuticals are manufactured, packed, warehoused, or sold
must comply with the FDA manufacturing standards applicable to that type of
product. All of the Company's products are manufactured according to the Current
Good Manufacturing Practices for Finished Pharmaceuticals. The failure of a
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<PAGE>
facility to be in compliance may lead to a breach of representations made to
private label customers or to regulatory action against the products made in
that facility, including seizure, injunction or recall. The Company believes
that its facilities are in compliance in all material respects with the cGMPs
and other applicable requirements for each facility.
CPSC. The United States Consumer Product Safety Commission ("CPSC") has
authority, under the Poison Prevention Packaging Act, to designate those
products, including vitamin products and OTC pharmaceuticals, that require child
resistant closures to help reduce the incidence of poisonings. The CPSC has
adopted regulations requiring numerous OTC pharmaceuticals and iron-containing
dietary supplements to have such closures, and has adopted rules on the testing
of such closures by both children and adults. The Company, working with its
packaging suppliers, believes that it is in compliance with all CPSC
requirements.
FTC. The United States Federal Trade Commission ("FTC") exercises primary
jurisdiction over the advertising and other promotional practices of food and
OTC pharmaceuticals marketers, and has concurrent jurisdiction with the FDA over
the advertising and promotional practices of marketers of dietary supplements.
The FTC has historically applied a different standard to health-related claims
than the FDA; the FTC has applied a "substantiation standard," which is less
restrictive than the standard under the NLEA. The FTC NLEA enforcement policy
uses FDA regulations as a baseline (and safe harbor) and permits (i) nutrient
content descriptions that are reasonable synonyms of FDA-permitted terms, and
(ii) qualified health claims not approved by FDA where adequate substantiation
exists for the qualified or limited claims.
STATE REGULATION. All states regulate foods and drugs under local laws that
parallel federal statutes. Because the NLEA gave the states the authority to
enforce many labeling prohibitions of the Federal Food, Drug, and Cosmetic Act,
after notification to the FDA, the Company and other dietary supplement
manufacturers may be subject to increasing state scrutiny for NLEA compliance,
as well as increasing FDA review.
USP. The United States Pharmacopoeia Convention, Inc. is a
non-governmental, voluntary standard-setting organization. Its drug standards
are incorporated by reference into the Federal Food, Drug, and Cosmetic Act as
the standards that must be met for the listed drugs, unless compliance with
those standards is specifically disclaimed. USP standards exist for most OTC
pharmaceuticals. The FDA requires USP compliance as part of cGMP.
The USP began adopting standards for vitamin and mineral dietary supplements
in 1994. These standards cover composition (nutrient ingredient potency and
combinations), disintegration, dissolution, manufacturing practices and testing
requirements. These standards are codified in the USP Monographs and the USP
Manufacturing Practices. In 1995, USP compliance included the standards for
disintegration and dissolution. While USP standards for vitamins are voluntary,
and not incorporated into federal law, customers of the Company may demand that
products they are supplied meet these standards. Label claims of compliance with
the USP may expose a company to FDA scrutiny for such claims. In addition, the
FDA may in the future require compliance, or such a requirement may be included
in new dietary supplement legislation. All of the Company's vitamin products
(excluding certain nutritional supplements products for which no USP standards
have been adopted) are formulated to comply with existing USP standards.
CANADIAN REGULATION. In Canada, the Company's products are subject to
federal and provincial law, particularly federal drug legislation. All
substances sold for ingestion by humans are regulated either as a food or drug
under the Canadian Act. In addition, certain of the Company's products are
subject to government regulation under the CDSA. The Canadian Act and the CDSA
are enforced by Health Canada--Health Protection Branch (the "HPB").
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<PAGE>
The Canadian Act governs the processing, formulation, packaging, labelling,
advertising and sale of the Company's products and regulates what may be
represented to the public on labels and in promotional material, in respect of
the properties of the various products. The Canadian Act also provides that any
drugs sold in Canada must have a label affixed thereto which shows certain
information such as its proper scientific or common name, the name and address
of the distributor, its lot number, adequate directions for use, a quantitative
list of its medical ingredients and its expiration date. In addition, no person
may sell a drug unless it has been assigned a DIN or GP. DINs and GPs are
obtained through an application to the HPB. Regulations under the Canadian Act
require all manufacturers to pay annual fees for their DINs and GPs. HPB
approval for the sale of the Company's products may be subject to significant
delays despite the Company's best efforts.
The CDSA governs the manufacture and sale of controlled substances as
defined in the CDSA. The CDSA contains requirements for licenses of the factory,
approved security, a qualified person in charge of the factory and detailed
record keeping in connection with the manufacturing of controlled substances.
Regulations under the Canadian Act set out mandatory and rigorous
procedures, practices and standards for manufacturers. Health Canada performs
inspections of companies in the industry to ensure compliance with the Canadian
Act and the CDSA. For each of the Company's products, the development process,
the manufacturing procedures, the use of equipment, and laboratory practices and
premises must comply with Good Manufacturing Practices and Establishment
Licensing regulations under the Canadian Act.
The Company's herbal products which are being marketed with drug claims or
which contain drug substances require regulatory approval in the form of a DIN
or GP issued by Health Canada. In addition, the Canadian government has
established a panel to review the regulatory framework for herbal products. If
the Canadian government implements new or amended requirements for herbal
products it may result in additional costs to the Company for the requisite
regulatory approval, delay the entry of some products onto the market or
adversely affect sales of herbal products.
LEGAL PROCEEDINGS AND PRODUCT LIABILITY
The Company is currently engaged in various legal actions and governmental
proceedings, and, although ultimate liability cannot be determined at the
present time, the Company is currently of the opinion that the amount of any
such liability from these other actions and proceedings, when taking into
consideration the Company's product liability coverage, will not have a material
adverse effect on its financial position.
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has an aggregate of $57.0 million of insurance coverage, including
primary products liability and umbrella liability coverage with deductibles of
(i) in the case of OTC pharmaceuticals, $0.25 million per claim subject to an
annual, aggregate deductible limit of $0.75 million and (ii) in the case of
vitamins and all other products, $0.25 million per claim, subject to an annual,
aggregate deductible limit of $0.75 million.
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of August 14, 1997, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 668 lawsuits of which 658 have been settled. The Company's supplier of
bulk L-Tryptophan has agreed to assume the defense of all claims (including any
future claims that may be made) and pay all settlements and judgments, other
than for certain punitive damages, against the Company arising out of the
ingestion of these L-Tryptophan products. To date, such supplier has funded all
settlements and paid all legal fees and expenses incurred by the Company related
to these matters. No punitive damages have been awarded
69
<PAGE>
in the 658 cases that have been settled. In light of such agreement and such
supplier's performance to date thereunder, and the Company's product liability
insurance (which is subject to deductibles not to exceed $1.6 million in the
aggregate with respect to the 10 pending cases), the Company does not expect to
be required to make any material payments in connection with the resolution of
the remaining 10 cases.
The Company learned in the first quarter of fiscal 1998 of an FDA proposal
to ban the use of phenolthalein in laxatives. The FDA reportedly took this
action in response to certain studies which concluded that the administration of
very high doses of yellow phenolthalein could cause cancer in laboratory
animals. The reports concerning these studies state that these dosages
administered substantially exceeded the dosages commonly used by human beings.
In response, the Company voluntarily discontinued production of its laxative
product containing yellow phenolthalein and notified its customers that they may
return this product. The Company has reformulated this product and expects to be
shipping the reformulated version in November 1997.
INTELLECTUAL PROPERTY
The Company owns trademarks registered with the United States Patent and
Trademark Office and/or similar foreign authorities for 127 trademarks. In
addition, the Company has applications pending for 62 trademark registrations.
The Company regards its trademarks and other proprietary rights as valuable
assets and believes they are important in the marketing of the Company's
products. Leiner's most significant trademarks include YOUR
LIFE-Registered Trademark-, PHARMACIST FORMULA-Registered Trademark-, PROVEN
RELEASE-Registered Trademark-, DAILY PAK-Registered Trademark-,
NATURALIZED-Registered Trademark-, CENTRAL-VITE-Registered Trademark-,
PHYTOGRAPH-Registered Trademark- and BODYCOLOGY-Registered Trademark-. The
Company intends to maintain the registrations on its important trademarks so
long as they remain valuable to its business. The Company vigorously protects
its trademarks against infringement.
The Company does not have any patents on its proprietary processes. The
Company believes that it can better protect its trade secrets by maintaining the
confidentiality of the relevant information as opposed to generating the public
exposure inherent in the procedure of applying for patents.
ENVIRONMENTAL MATTERS
The Company is subject to various United States and Canadian federal, state,
provincial and local environmental laws and regulations. The costs of complying
with such laws and regulations have not been, and are not expected to have a
material adverse effect on the business of the Company.
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MANAGEMENT
DIRECTORS
Management of the business of LHP is vested in its Board of Directors (the
"Board"). The Board is currently comprised of Messrs. Baird, Kaminski, Bensussen
and Towne. The Board of Directors of Leiner Group, LHP's indirect corporate
parent, is currently comprised of Mr. Baird, who was appointed Chairman of such
Board following the Recapitalization, Messrs. Kaminski and Bensussen who already
were members of such Board prior to the Recapitalization, and Messrs. Barry
Twomey, Bruce Gorchow and Alan Colner, who were appointed as members of such
Board in September 1997. Until the formation of North Castle, Mr. Baird was a
Managing Director of AEA. Pursuant to the terms of the Stockholders Agreement,
the AEA Group has the right to elect one member of the Board of Directors of
Leiner Group and North Castle has the right to elect the remaining directors.
EXECUTIVE OFFICERS OF LEINER HEALTH PRODUCTS INC.
The following table sets forth with respect to each of the executive
officers of the Company, their respective years of employment with the Company,
ages and positions.
<TABLE>
<CAPTION>
YEARS
WITH
NAME COMPANY AGE POSITION
- ------------------------------ ------- --- ------------------------------------------------------
<S> <C> <C> <C>
Robert M. Kaminski............ 19 47 Chief Executive Officer and Director
Gale K. Bensussen............. 23 50 President and Director
Kevin J. Lanigan.............. 24 50 Executive Vice President and Chief Operations Officer
William B. Towne.............. 1 53 Executive Vice President, Chief Financial Officer,
Director, Treasurer and Secretary
Stanley J. Kahn............... 17 44 Executive Vice President--Sales
Giffen H. Ott................. 4 37 Senior Vice President--Operations
Scott C. Rexinger............. 10 52 Senior Vice President--Product Marketing & Development
Robert J. LaFerriere.......... 1 48 Senior Vice President--Marketing
</TABLE>
Robert M. Kaminski has been the Chief Executive Officer of LHP since May
1992, and a Director of LHP since June 1992. He has been Chief Executive Officer
of Leiner Group since March 1994 and Vice Chairman of Leiner Group since July
1996. From 1988 to 1992, Mr. Kaminski was Chief Operating Officer of the
Predecessor Company and from 1982 to 1988, he was Vice President--Sales of the
Predecessor Company. Mr. Kaminski joined the Predecessor Company in 1978.
Gale K. Bensussen has been a Director of LHP since June 1992 and President
of LHP since May 1992. He has been a Director of Leiner Group since June 1992
and President of Leiner Group since March 1994. Mr. Bensussen was Senior Vice
President--Marketing and Corporate Development of the Predecessor Company from
May 1991 to May 1992. From July 1988 to May 1991, Mr. Bensussen was Senior Vice
President--Sales and Marketing of the Predecessor Company. Mr. Bensussen joined
the Predecessor Company in 1974.
Kevin J. Lanigan became Executive Vice President and Chief Operations
Officer of LHP in May 1992 and of Leiner Group in March 1994. From 1986 to 1992,
Mr. Lanigan was Senior Vice President-- Operations Planning of the Predecessor
Company and, from 1979 to 1986, was Vice President--Operations. Before joining
the Predecessor Company in 1973, he held various engineering positions in the
aerospace industry.
William B. Towne became Executive Vice President and Chief Financial Officer
of LHP and Leiner Group in June 1996, Treasurer of LHP in June 1996 and
Secretary of LHP and Leiner Group in October 1997. Mr. Towne has been a Director
of LHP since June 1996. From 1995 to 1996, Mr. Towne served as
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<PAGE>
Executive Vice President, Finance and Chief Financial Officer at L. Galoob Toys,
Inc. From 1990 to 1995, Mr. Towne served as Executive Vice President, Chief
Financial Officer for Forstmann & Co., Inc. From 1982 to 1990, Mr. Towne worked
for Tambrands, Inc. where he rose from Manager of Forecast and Planning to Chief
Financial Officer of its International Division.
Stanley J. Kahn became Senior Vice President--Sales of LHP in May 1992 and
of Leiner Group in March 1994. Mr. Kahn became Executive Vice President--Sales
of Leiner Group in April 1997. From September 1989 to 1992, Mr. Kahn was Vice
President--Sales of the Predecessor Company and, from July 1988 to September
1989, was Vice President--Business Development. Mr. Kahn was National Key
Account Manager from 1985 to 1988. Mr. Kahn joined the Predecessor Company in
1980 as Regional Sales Manager.
Giffen H. Ott became Senior Vice President--Operations of LHP in April 1997.
Mr. Ott became Vice President--Operations in September 1995 after joining LHP in
March 1993 as Vice President of Manufacturing Development. Prior to joining LHP
Mr. Ott worked as a Manager with Bain & Company, the international management
consulting firm, where the engagements he led included an evaluation of the
Company's market position and operations on behalf of AEA.
Scott C. Rexinger became Senior Vice President--Product Marketing and
Development of LHP in June 1996. From May 1992 to June 1996, Mr. Rexinger was
Vice President, Product Marketing, and from April 1991 to May 1992, he was
Director, New Category Development. Mr. Rexinger was Group Marketing Manager,
New Products and Brands from August 1988 to April 1991, and Marketing Manager,
Brands from November 1987 to August 1988. Prior to joining the Company, Mr.
Rexinger held various marketing positions in the consumer packaged goods
industry.
Robert J. LaFerriere became Senior Vice President--Marketing of LHP in
February 1997 and was a consultant to LHP from 1996 to 1997. From 1992 to 1996,
Mr. LaFerriere was President and Chief Executive Officer of Slim Fast Foods and
was a Vice President, then Senior Vice President--Purchasing, at Thrifty Drug
and Discount Stores from 1984 until 1990.
EXECUTIVE COMPENSATION
The following table sets forth the compensation of each of the Company's
chief executive officer and the four most highly paid executive officers (other
than the chief executive officer) (collectively, the "named executive officers")
for fiscal 1997.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)(2)
-------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- -------------------------------------------------------------------------- ---------- ---------- -------------
<S> <C> <C> <C>
Robert M. Kaminski........................................................ $ 424,365 $ 360,000 --
Chief Executive Officer
Gale K. Bensussen......................................................... 266,731 225,000 --
President
William B. Towne.......................................................... 199,038 125,000 $ 55,829
Executive Vice President
Kevin J. Lanigan.......................................................... 223,654 190,000 --
Executive Vice President
Stanley J. Kahn........................................................... 266,731 250,000 --
Executive Vice President
</TABLE>
- ------------------------
(1) The compensation described in this table does not include medical and group
life insurance received by the named executive officers which are available
generally to all salaried employees of the Company and certain perquisites
and other personal benefits received by the named executive officers, the
value of which does not exceed the lesser of $50,000 or 10% of any such
officer's total salary and bonus disclosed in this table.
(2) The compensation described in this table does not include the compensation
of $395,000 and an additional payment of $588,000 received by Mr. David F.
Brubaker, former Chairman of LHP, in fiscal 1997. Mr. Brubaker retired
effective September 1996.
The following table sets forth the stock option grants to each of the named
executive officers for fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
--------------------------------------------------------------- STOCK PRICE
% OF TOTAL APPRECIATION FOR
NUMBER OF OPTIONS GRANTED EXERCISE OPTION TERM*
SECURITIES UNDERLYING TO EMPLOYEES PRICE EXPIRATION --------------------
NAME OPTIONS GRANTED IN FISCAL YEAR ($/SH) DATE 5% 10%
- --------------------------------------- --------------------- --------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Kaminski..................... 4,074 67 $175 12/31/06 $448,384 $1,136,239
Gale K. Bensussen...................... 1,000 16 175 12/31/06 110,060 278,900
William B. Towne....................... -- -- -- -- -- --
Kevin J. Lanigan....................... -- -- -- -- -- --
Stanley J. Kahn........................ -- -- -- -- -- --
</TABLE>
- ------------------------
* Sets forth potential option gains based on assumed annualized rates of stock
price appreciation from the exercise price at the date of grant of 5% and
10% (compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission, and do not represent the Company's estimate or projection of
future Common Stock prices.
The following table sets forth the stock option exercises for the fiscal
year ended March 31, 1997 and the stock option values as of March 31, 1997, in
each case, for each of the named executive officers.
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AS OF MARCH 31, 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
YEAR END FISCAL YEAR END*
SHARES ACQUIRED VALUE ---------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ------------------- ----------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Kaminski................. -- -- 12,305 4,555 $ 1,916,400 $ 484,950
Gale K. Bensussen.................. -- -- 10,536 1,250 1,707,190 137,500
William B. Towne................... -- -- 2,000 2,000 240,640 240,640
Kevin J. Lanigan................... -- -- 7,524 -- 1,243,868 --
Stanley J. Kahn.................... -- -- 9,024 500 1,479,348 70,160
</TABLE>
- ------------------------
* Sets forth values for "in-the-money" options that represent the positive
spread between the respective exercise prices of outstanding stock options
and the value of the Company's Common Stock as of March 31, 1997 based on an
assumed value of approximately $265 per share for the Common Stock in the
Recapitalization. In connection with the Recapitalization, all of these
options were either exchanged for Equity Rights or cashed out. The Equity
Rights represent the right to receive Recapitalized Common Stock upon the
occurrence of certain events, including the termination of the holder's
employment with the Company, a public offering or a change of control. See
"The Recapitalization."
SEVERANCE ARRANGEMENTS
In November 1991, the Predecessor Company entered into certain severance
agreements with certain members of LHP's senior management, pursuant to which
LHP will pay severance benefits if the individual's employment is terminated by
LHP other than for cause or if the individual resigns his or her employment with
LHP for good reason. In May 1997, LHP entered into a substantially similar
agreement with William B. Towne.
The severance benefits that the Company has agreed to provide to each of
Robert M. Kaminski, Gale K. Bensussen, William B. Towne and Stanley J. Kahn
include (a) a lump-sum severance payment equal to the sum of (i) one year's base
salary, plus (ii) any annual individual performance bonus or targeted
commission, both as in effect at the time of the termination or resignation; (b)
outplacement assistance at the Company's expense, up to a maximum cost to the
Company of $20,000; and (c) any rights under applicable Company plans or
programs, including but not limited to stock option and incentive plans, as may
be determined pursuant to the terms of such plans or programs. The severance
benefits provided to Kevin J. Lanigan include a lump-sum severance payment equal
to three times the sum of one year's base salary plus any annual individual
performance bonus or targeted commission, both as in effect at the time of
termination or resignation, as well as the benefits described in clauses (b) and
(c) above; subject to certain limitations to the extent that the Company
determines that the foregoing benefits would not be deductible by the Company
because such payments constitute an "excess parachute payment" (as defined in
section 280G of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code")).
In March 1997, the Company entered into a non-competition and retirement
agreement with Mr. David F. Brubaker, former Chairman of LHP, pursuant to which,
among other things, the Company has agreed to pay Mr. Brubaker an amount equal
to approximately $1 million spread across several installments through February
2000. The agreement provides that under certain circumstances all of the
Company's payment obligations to Mr. Brubaker would accelerate.
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<PAGE>
STOCK OPTION PLAN
Leiner Group has authorized options for issuance to members of management
and employees ("Management Options") representing the right to acquire an
additional 10% of the Group Common Stock on a fully-diluted basis immediately
after the Recapitalization (giving effect to the exercise of such options but
without giving effect to the exercise of the Warrants referred to under "The
Recapitalization" below), exercisable at a price equal to the greater of the
purchase price paid by North Castle or the fair market value of such shares at
the time of grant. A total of 83,843 of these Management Options were issued as
of June 30, 1997. It is expected that the remaining Management Options will be
granted in the ordinary course of business.
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<PAGE>
OWNERSHIP OF CAPITAL STOCK
All of the shares of common stock of LHP are owned by PLI Holdings Inc. and
all of the shares of common stock of PLI Holdings Inc. are owned by Leiner
Group.
The following table sets forth information regarding beneficial ownership of
common stock of Leiner Group as of July 31, 1997, by (i) each person who is
known by the Company to beneficially own more than 5% of voting Group Common
Stock, (ii) each director of Leiner Group, (iii) each named executive officer of
the Company listed on the Summary Compensation Table above and (iv) by all
directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF SHARES OF NON-
VOTING GROUP VOTING GROUP
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED PERCENTAGE OF CLASS
- --------------------------------------------------------- -------------- --------------- ------------------------
<S> <C> <C> <C> <C>
North Castle Partners I, L.L.C.(1)....................... 808,988 -- 85.6%
Baird Investment Group, L.L.C.(2)........................ 808,988 -- 85.6%
Charles F. Baird, Jr..................................... 833,858(3) -- 88.2%
Alan Colner.............................................. -- -- --
Bruce Gorchow............................................ -- -- --
Barry Twomey............................................. -- -- --
Robert M. Kaminski (4)................................... 4,146 -- 0.4%
Gale K. Bensussen (4).................................... 8,490 -- 0.9%
William B. Towne (4)..................................... -- -- --
Kevin J. Lanigan (4)..................................... -- 16,582 25.7%
Stanley J. Kahn (4)...................................... -- 4,245 6.6%
Executive officers and directors as a group (4).......... 846,494 20,827 89.5% Voting
32.3% Non-Voting
</TABLE>
- ------------------------
(1) The address for North Castle Partners I, L.L.C. ("North Castle") is 11
Meadowcroft Lane, Greenwich, CT 06830.
(2) North Castle is an investment fund formed as a limited liability company.
Baird Investment Group, L.L.C. ("Baird Investment") is the sole managing
member of North Castle. Mr. Baird is the sole managing member of Baird
Investment. The address for Baird Investment is 11 Meadowcroft Lane,
Greenwich, CT 06830.
(3) Includes 24,870 shares of voting Group Common Stock owned by Mr. Baird and
the shares of Group Common Stock owned by North Castle which Mr. Baird may
be deemed to have beneficial ownership of by virtue of his status as the
managing member of Baird Investment. Mr. Baird expressly disclaims such
beneficial ownership. Does not include 3,255 shares of voting Group Common
Stock held by a trust in favor of Mr. Baird's children. Mr. Baird expressly
disclaims beneficial ownership of such shares.
(4) Does not reflect Equity Rights owned by Messrs. Kaminski, Bensussen, Towne,
Lanigan and Kahn reflecting the right to receive 24,607 shares, 18,484
shares, 4,812 shares, 4,938 shares and 5,570 shares of Group Common Stock,
respectively, as such Equity Rights are not exercisable within 60 days of
their acquisition.
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<PAGE>
THE RECAPITALIZATION
The following is a summary of the structure of the Recapitalization and the
Merger and certain provisions of the Recapitalization Agreement. This summary
does not purport to be complete and is qualified in its entirety by reference to
the Recapitalization Agreement. The Recapitalization Agreement is filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL. Leiner Group entered into the Recapitalization Agreement, among
Leiner Group, North Castle and the Merger Entity, to effect the
Recapitalization. The Recapitalization was accomplished through the Merger of
the Merger Entity with and into Leiner Group, with Leiner Group continuing as
the surviving corporation in the Merger. The Recapitalization Agreement does not
provide for the survival of any representations and warranties and none of the
parties has any post-closing indemnification obligations under the
Recapitalization Agreement. The Recapitalization has been accounted for as a
recapitalization of the Leiner Group, which has had no impact on the historical
basis of assets and liabilities as reflected in its consolidated financial
statements.
North Castle, a Delaware limited liability company, is an investment fund
formed by Mr. Baird for the purpose of participating in the Recapitalization.
Mr. Baird was formerly a Managing Director of AEA, which, together with
management, arranged the 1992 acquisition of the Company. Prior to the
Recapitalization, the AEA Group and Mr. Baird were the holders of approximately
92% of the outstanding shares of the Existing Common Stock. Other Existing
Shareholders, consisting of certain current and former managers and employees of
the Company, held the remaining 8%. North Castle, in conjunction with the
Company's management, effected the Recapitalization of the Company in order to
pursue continuing growth opportunities for the Company in the vitamin industry.
Upon consummation of the Recapitalization, (i) current managers and
employees of the Company who had been Existing Shareholders had some of their
Existing Common Stock exchanged for cash, but together with Mr. Baird, retained
approximately 8.3% of the Group Equity (consisting of approximately 58.6% of the
non-voting Group Common Stock and 5.6% of the Voting Group Common Stock) and
received Equity Rights equal to approximately 7.4% of the Group Equity, as well
as Warrants, (ii) the AEA Group and certain former managers of the Company, all
of whom had been Existing Shareholders, had most of their Existing Common Stock
purchased for cash, but also retained Group Common Stock equal to approximately
10.1% of the Group Equity (consisting of approximately 41.4% of the non-voting
Group Common Stock and 8.8% of the voting Group Common Stock), as well as
Warrants, and (iii) North Castle acquired the remainder of the Group Equity,
primarily through the purchase of newly issued voting Group Common Stock equal
to approximately 73.8% of the Group Equity for a cash investment of $80.4
million. In connection with the Recapitalization, existing stock options held by
Management Shareholders were cashed out, exercised for Existing Common Stock, or
converted into Equity Rights.
The Warrants were issued to the Existing Shareholders as part of the
consideration received by them in connection with the Recapitalization and are
intended to provide the holders of the Warrants with a means to participate in
any substantial increase in the equity value of Leiner Group. The Warrants
provide the Existing Shareholders the right to purchase approximately 20.1% of
the Group Common Stock on a fully-diluted basis giving effect to the exercise of
such Warrants, the Equity Rights and the Management Options. The initial
exercise price of the Warrants is 125% of the $100.00 purchase price per share
paid by North Castle for its investment in the Recapitalization, or $125.00 per
share. Commencing on the first anniversary of the Recapitalization Closing Date,
the exercise price will increase at a rate of 25% per year in years two and
three and then at a rate of 10% per year for the subsequent two years. After
year five, the exercise price will remain constant. These increases will result
in exercise prices of approximately $156.25, $195.31 and $214.84 on the second,
third and fourth anniversaries of the Recapitalization Closing Date and
approximately $236.33 on and after the fifth anniversary of such date. The
Warrants will become exercisable upon the earlier of (i) a change of control (as
defined), (ii) an initial public offering (as defined) and (iii) June 30, 2002,
and will expire two years after becoming exercisable. Shares of Group
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Common Stock issued upon exercise of the Warrants will be non-voting. The
Warrants include customary anti-dilution provisions. If all of the Warrants, the
Management Options and the Equity Rights were fully exercised, on a fully
diluted basis giving effect to such exercise, 1,517,647 shares of Group Common
Stock would be issued and outstanding, of which North Castle would own
approximately 53.3%, Mr. Baird and current managers and employees of the Company
would own approximately 21.7%, and the AEA Group and former managers of the
Company would own approximately 25.0%.
In connection with the Recapitalization, the Company established a
management transaction bonus pool of $5.1 million which was paid by the Company
following consummation of the Recapitalization.
A portion of a minority preferred stock interest in Vita Health was redeemed
in connection with the Recapitalization. The portion that remains outstanding
can be exchanged at the holders' option, in whole or in part, for an aggregate
of up to $1.0 million in cash or 10,000 shares of Group Common Stock, or a
combination thereof.
FINANCING FOR THE RECAPITALIZATION. The closing of the Recapitalization
occurred simultaneously with the closing of the offering of the Existing Notes.
Immediately following consummation of the Recapitalization and the Merger, the
obligations of Leiner Group under the New Credit Facility and the Existing Notes
were assigned to and assumed by LHP, and LHP became the obligor on the Notes.
The cash sources of financing for the Recapitalization consisted of North
Castle's investment in Group Common Stock, the proceeds of the Existing Notes
and the term and revolving credit borrowings under the New Credit Facility. See
"Description of New Credit Facility" and "Description of the New Notes." These
funds were applied to acquire Common Stock for cash, to cash out options for
Group Common Stock, to redeem preferred stock of Leiner Group and Vita Health,
to refinance substantially all existing indebtedness of LHP other than certain
capitalized leases, and to pay transaction-related fees and expenses.
The following table sets forth the sources and uses of funds for the
Recapitalization of Leiner Group, which closed on June 30, 1997.
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT
- ---------------------------------------- -----------
<S> <C>
(DOLLARS IN
MILLIONS)
Revolving Credit Facility............... $ 74.8(a)
Term Loans.............................. 85.0(b)
Existing Notes.......................... 85.0
-----------
Total Debt.............................. 244.8
Total Common Equity of Leiner Group..... 109.0(c)
-----------
TOTAL SOURCES OF FUNDS.................. $ 353.8
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS AMOUNT
- ---------------------------------------- ------
<S> <C>
Repurchased and Retained Equity
of Leiner Group....................... $211.1(d)
Repayment of Debt and
Preferred Stock....................... 119.8(e)
Management Transaction
Bonuses............................... 5.2(f)
Estimated Fees and Expenses............. 17.7(g)
------
TOTAL USES OF FUNDS..................... $353.8
------
------
</TABLE>
- ------------------------
(a) Consists of borrowings under the Revolving Credit Facility provided under
the New Credit Facility. See "Description of New Credit Facility."
(b) Consists of borrowings under a $45.0 million term B loan facility and a
$40.0 million term C loan facility under the New Credit Facility, which were
fully drawn on the Recapitalization Closing Date. See "Description of New
Credit Facility."
(c) Consists of the Group Equity, comprised of (1) a new equity investment by
North Castle in Group Common Stock for cash of $80.4 million, (2) a retained
equity investment in Group Common Stock and Equity Rights with a value of
$17.6 million (based on the per share value of the North Castle equity
investment), held by certain current managers and employees of the Company
and Mr. Baird, and (3) a retained equity investment in Group Common Stock
with a value of $11.0 million (based on
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the per share value of the North Castle equity investment), to be held by
the AEA Group and certain former managers of the Company.
(d) Includes transaction-related fees and expenses of $6.1 million, incurred by
Leiner Group, that were an adjustment to the amount received by the Existing
Shareholders.
(e) Consists of $102.2 million in outstanding borrowings and accrued interest
under the Company's existing senior credit agreement, an aggregate $13.9
million redemption price for outstanding pay-in-kind redeemable preferred
stock of Leiner Group held by AEA, and an aggregate $3.7 million redemption
price for a minority preferred stock interest in Vita Health.
(f) Members of the Company's management received $5.1 million in transaction
bonuses ($3.1 million on an after-tax basis), which were paid by the Company
following the Recapitalization Closing Date. In addition, the Company paid
$0.1 million in employer payroll taxes related to the bonus payments.
(g) Does not include any fees and expenses that were an adjustment to the amount
received by the Existing Shareholders, which are included in (d) above.
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CERTAIN TRANSACTIONS
STOCKHOLDERS AGREEMENT. On the Recapitalization Closing Date, Leiner Group
and the stockholders of Leiner Group entered into the Stockholders Agreement,
which contains, among other terms and conditions, provisions relating to
corporate governance, certain restrictions with respect to transfer of
Recapitalized Common Stock by certain parties thereunder, certain rights and
obligations with respect to transfers of Recapitalized Common Stock and certain
registration rights granted by the Company with respect to shares of
Recapitalized Common Stock. The Stockholders Agreement gives the AEA Group the
power to elect one member of Leiner Group's Board of Directors and, so long as
North Castle owns at least 40% of all outstanding Group Equity, gives North
Castle the power to elect the remaining directors of Leiner Group, and through
Leiner Group, all the directors of LHP. If North Castle's ownership of Group
Equity falls below 40%, it may elect the number of directors that is
proportionate to its shareholdings. Accordingly, North Castle controls the
Company and has the power to appoint new management and approve any action
requiring the approval of the holders of Group Common Stock, including adopting
amendments to Leiner Group's certificate of incorporation and approving mergers
or sales of substantially all of the Company's assets.
The Stockholders Agreement also restricts the ability of existing
shareholders to transfer their Group Equity to third parties prior to June 30,
1998, and gives certain of these shareholders a right of first refusal after
that date. These restrictions either do not apply or change if there is a public
offering, or if North Castle sells more than 5% of all outstanding Group Equity.
If North Castle seeks to sell more than 5% of the outstanding Group Equity,
other existing shareholders have the right to sell their shares at the same
time. The Agreement also gives North Castle rights to require Leiner Group to
register Group Equity under the Securities Act, subject to certain limitations
and conditions.
MANAGEMENT AGREEMENTS. Following the LHP Acquisition on May 4, 1992, AEA
entered into a management agreement with Leiner Group, pursuant to which AEA has
been providing management, consulting and financial services to the Company for
an annual fee of $0.35 million plus expenses. In connection with the Vita Health
Acquisition, the Company paid to AEA an additional transaction fee of $0.3
million for services in arranging, structuring, and negotiating the terms of the
Vita Health Acquisition and related refinancing, and reimbursed it for certain
related expenses. AEA received a transaction fee of $3.5 million for similar
services rendered in connection with the Recapitalization.
Upon consummation of the Recapitalization, Leiner Group's management
agreement with AEA was terminated, and Leiner Group and LHP entered into a
consulting agreement with North Castle Partners, L.L.C. (the "Sponsor"), an
affiliate of North Castle, to provide the Company with certain business,
financial and managerial advisory services. Mr. Baird acts as the managing
member of the Sponsor through Baird Investment Group, L.L.C. In exchange for
such services, Leiner Group and LHP have agreed to pay the Sponsor an annual fee
of $1.5 million, 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's shares. The agreement also terminates on June 30,
2007, unless Baird Investment Group ceases to be the managing member of North
Castle or North Castle terminates before that date. Leiner Group and LHP have
also paid the Sponsor a transaction fee of $3.5 million for services relating to
arranging, structuring and financing the Recapitalization, and reimbursed the
Sponsor's related out-of-pocket expenses.
RELATIONSHIP OF MR. BAIRD WITH AEA. Prior to the formation of North Castle
in 1997, Mr. Baird served for seven years as Managing Director of AEA and as
such oversaw the LHP Acquisition and was thereafter closely involved in the
management of the Company. The aggregate valuation of the Company, upon which
the financial terms and conditions of the Recapitalization were based, was
determined on the basis of negotiations between the Existing Shareholders,
including AEA, and Mr. Baird. North Castle and the Company believe that such
valuation was the result of bona fide arm's length negotiations. In addition,
prior to the Recapitalization, Leiner Group obtained a fairness opinion from
Lehman Brothers to the
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effect that the consideration to be received by the Existing Shareholders in
connection with Recapitalization was fair from a financial point of view.
MANAGEMENT. As part of the Recapitalization, the current managers and
employees of the Company were afforded the opportunity to choose the amount of
their existing equity they wished to retain in Leiner Group in the form of Group
Equity. Managers and employees who retained their equity in Leiner Group will,
as a result of the increased leverage on the Company incurred as part of the
Recapitalization, acquired a greater percentage equity ownership. Under the
Stockholders Agreement, current managers have the right, upon their death or
permanent disability, to require Leiner Group to purchase their Group Common
Stock for its then fair market value.
In connection with the Recapitalization, the Company paid senior managers
transaction bonuses of $5.1 million in the aggregate. In addition, Leiner Group
has established a new stock option plan which provides for the Board of Leiner
Group to grant Management Options to acquire 122,222 shares of Group Common
Stock. A total of 83,842 of these Management Options were issued as of June 30,
1997.
The Board of Leiner Group and management of the Company are currently
considering instituting a stock purchase plan pursuant to which certain managers
and employees of the Company would be afforded the opportunity to purchase Group
Common Stock. The Company currently expects that the gross proceeds of such an
offering would not exceed $1 to $2 million.
OTHER. Merrill Lynch & Co. acquired $15 million in limited liability
company interests of North Castle and The Bank of Nova Scotia also acquired $3
million of such interests.
On June 25, 1997, Baird Investment Group, L.L.C. ("Baird Group "), the
managing member of North Castle, entered into separate agreements with three of
the principal investors in North Castle, Electra Fleming Inc. ("Electra"), Moore
Capital Management, Inc. ("Moore") and PPM America, Inc. ("PPM"). As part of
these agreements, Baird Group caused North Castle to exercise its rights under
the Stockholders Agreement to nominate one person designated by Electra, Moore
and PPM to serve on the Board of Directors of Leiner Group. In connection with
these agreements, Leiner Group paid Electra, Moore and PPM a one-time board
representation fee of $100,000, $75,000 and $75,000, respectively.
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DESCRIPTION OF NEW CREDIT FACILITY
GENERAL. In connection with the Recapitalization, Leiner Group and Vita
Health entered into the New Credit Facility with a syndicate of financial
institutions, The Bank of Nova Scotia ("Scotiabank") as administrative agent
(the "Administrative Agent"), Merrill Lynch Capital Corporation as documentation
agent, and Salomon Brothers Holding Company Inc as syndication agent. On the
Recapitalization Closing Date, immediately following the consummation of the
Recapitalization, Leiner Group assigned to LHP, and LHP assumed, all of Leiner
Group's rights and obligations in respect of the New Credit Facility and the
Existing Notes. Leiner Group was released and discharged from all further
obligations in respect of the New Credit Facility and the Existing Notes. The
following is a summary of the principal terms of the credit agreement governing
the New Credit Facility and the related loan documents (the "Credit
Documentation") and is subject to and qualified in its entirety by reference to
the Credit Documentation. Copies of the Credit Documentation are filed as
Exhibits to the Registration Statement of which this Prospectus forms a part.
The New Credit Facility provides for senior secured credit facilities in an
aggregate amount of $210.0 million, consisting of (i) U.S. and Canadian
revolving credit facilities in an aggregate amount of $125.0 million comprising
the Revolving Credit Facility, and (ii) a $45.0 million term B loan facility
(the "Term B Facility") and a $40.0 million term C loan facility (the "Term C
Facility" and together with the Term B Facility, the "Term Facilities"). The
Revolving Credit Facility initially consists of a $105.0 million revolving
credit facility made available to Leiner Group (the "U.S. Revolving Facility")
and a Canadian dollar-denominated revolving credit facility in an amount
equivalent to $20.0 million (the "Canadian Revolving Facility") made available
to Vita Health. The Company will be entitled to vary from time to time the
allocation of the aggregate Revolving Credit Facility commitment between the
U.S. Revolving Facility and the Canadian Revolving Facility, decreasing the
allocation to one while increasing it to the other (but not over the Canadian
dollar equivalent of $20.0 million, in the case of the Canadian Revolving
Facility). The Revolving Credit Facility also provides for a U.S. swingline
subfacility of $15.0 million, a U.S. letter of credit subfacility of $35.0
million, a Canadian letter of credit subfacility of up to Cdn.$13.0 million and
a Canadian swingline subfacility of up to Cdn.$1.0 million.
USE OF FACILITY. In connection with the Recapitalization, Leiner Group
fully drew down the $85.0 million in term loan borrowings under the Term
Facilities, and Leiner Group and Vita Health borrowed $74.8 million under the
Revolving Credit Facility, as part of the financing for the Recapitalization.
See "The Recapitalization." The remaining unused commitment under the Revolving
Credit Facility is available to the Company for working capital and general
corporate purposes.
GUARANTEE; SECURITY. The obligations of LHP under the U.S. Revolving
Facility and the Term Facilities are guaranteed by its direct parent PLI
Holdings Inc. and by any direct or indirect U.S. subsidiaries of LHP. The
obligations of Vita Health under the Canadian Revolving Facility are guaranteed
by LHP and all of its direct and indirect U.S. subsidiaries, by PLI Holdings
Inc. and by all direct and indirect subsidiaries of Vita Health. The Term
Facilities and the Revolving Credit Facility are secured by substantially all
assets of LHP and any direct or indirect U.S. subsidiaries of LHP, all of the
capital stock of LHP and any such direct or indirect U.S. subsidiaries, and 65%
of the capital stock of any direct non-U.S. subsidiaries of LHP and its U.S.
subsidiaries. The Canadian Revolving Facility is also secured by substantially
all assets of Vita Health, its direct and indirect Canadian parents and any
direct or indirect non- U.S. subsidiaries of LHP, and all of the capital stock
of any such direct or indirect non-U.S. subsidiaries.
AMORTIZATION; INTEREST; FEES. Loans under the Term Facilities amortize in
equal quarterly installments. Annual scheduled repayments under the Term B
Facility amount to $450,000 for the first six years following the
Recapitalization Closing Date, $27.0 million in the seventh year, and $15.3
million in the final six months, with the facility maturing seven and one-half
years after the Recapitalization Closing Date. Annual scheduled repayments under
the Term C Facility amount to $400,000 for the first seven years, $24.0
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million in the eighth year, and $13.2 million in the final six months, with the
facility maturing eight and one-half years after the Recapitalization Closing
Date. The Revolving Credit Facility will mature six years after the
Recapitalization Closing Date, with all amounts then outstanding thereunder
becoming due.
At LHP's option, the U.S. Revolving Facility and the Term Facilities may
bear interest at variable rates equal to either Scotiabank's alternate base rate
("ABR") or reserve-adjusted LIBO rate ("LIBOR"), plus the applicable margin as
described below (the "Applicable Margin"). At Vita Health's option, the Canadian
Revolving Facility may bear interest at either Scotiabank's Canadian prime rate
or bankers acceptance ("BA") rate, plus the Applicable Margin. The Applicable
Margin is based on the Company's Leverage Ratio, defined generally as the ratio
of total funded indebtedness to the consolidated EBITDA, and will vary as
follows: (a) for revolving credit borrowings, from 0.75% to 2.5% for LIBOR- or
BA-based loans and from zero to 1.5% for ABR- or Canadian prime rate-based
loans, (b) for loans under the Term B Facility, from 2.375% to 2.875% for
LIBOR-based loans and from 1.375% to 1.875% for ABR-based loans, and (c) for
loans under the Term C Facility, from 2.5% to 3.0% for LIBOR-based loans and
from 1.5% to 2.0% for ABR-based loans.
The transaction fees and expenses set forth in the sources and uses of funds
for the Recapitalization (see "The Recapitalization") include transaction fees
paid in connection with the provision of the New Credit Facility. In addition, a
commitment fee is payable quarterly on the daily average unused portion of the
U.S. Revolving Facility by LHP, and of the Canadian Revolving Facility by Vita
Health, in an amount calculated at a rate varying from 0.25% or 0.50% based on
the Company's Leverage Ratio. A letter of credit fee is payable to the New
Credit Facility lenders on the outstanding amount of letters of credit
calculated at the then Applicable Margin. Customary fees are also payable to
Scotiabank as administrative agent and letter of credit issuing bank.
PREPAYMENTS. The New Credit Facility permits the prepayment of loans
thereunder without premium or penalty. In addition, mandatory repayments are
required to be made from (i) 100% of net proceeds from non-ordinary asset sales,
(ii) 50% of annual excess cash flow (as defined in the New Credit Facility) for
each year in which the Company's Leverage Ratio was greater than or equal to 3.5
to 1, and (iii) 50% of the net proceeds from certain sales or issuances of
equity securities. Mandatory prepayments will be applied to term loans ratably
in accordance with remaining amortization payments until all term loans are paid
in full, and then to revolving credit loans, with an accompanying commitment
reduction in the case of prepayments from the proceeds of asset sales.
COVENANTS AND EVENTS OF DEFAULT. The New Credit Facility contains covenants
that impose certain restrictions on the Company, including restrictions on its
ability to incur additional debt, enter into sale-leaseback transactions, incur
contingent liabilities, make dividends or distributions, incur or grant liens,
sell or otherwise dispose of assets, make investments or capital expenditures,
repurchase or prepay the Notes or other subordinated debt, or engage in certain
other activities. The Company must also comply with certain financial ratios and
tests, including a minimum net worth requirement, a maximum Leverage Ratio
(beginning at 6.50:1 and declining to 3.25:1 in fiscal 2004 through 2006), a
minimum fixed charge coverage ratio (beginning at 1.10:1, increasing to 1.20:1
in fiscal 2001 through 2003, and declining thereafter to 1.00:1 in fiscal 2005
and 2006) and a minimum interest coverage ratio (beginning at 1.60:1 and
increasing to 3.25:1 in fiscal 2005 and 2006). In addition, the Company will be
required to apply certain asset sale proceeds, as well as 50% of its excess cash
flow (as defined in the New Credit Facility) unless a leverage ratio test is
met, to prepay the borrowings under the New Credit Facility. The Company has
entered into an interest rate protection arrangement effective July 30, 1997 for
a period of three years with respect to $29.4 million of its indebtedness under
the New Credit Facility that provides an effective cap of 6.17% on LIBOR plus
applicable margin (2.25%) for the interest payable thereon.
The New Credit Facility contains customary events of default, including a
cross default (beyond all applicable grace periods) to other indebtedness of the
Company and default upon any change of control (as defined).
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THE EXCHANGE OFFER
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and reference is made to the
provisions of the Registration Rights Agreement, which has been filed as an
Exhibit to the Registration Statement of which this Prospectus forms a part.
TERMS OF THE EXCHANGE OFFER
GENERAL. In connection with the issuance of the Existing Notes pursuant to
a Purchase Agreement, dated as of June 19, 1997, among Leiner Group, LHP and the
Initial Purchasers, the Initial Purchasers and their respective assignees became
entitled to the benefits of the Registration Rights Agreement.
Under the Registration Rights Agreement, LHP has agreed to use its best
efforts (i) to file with the Commission within 60 days after June 30, 1997, the
Recapitalization Closing Date and date the Existing Notes were issued, the
Registration Statement of which this Prospectus is a part with respect to a
registered offer to exchange the Existing Notes for the New Notes, (ii) to cause
the Registration Statement to be declared effective under the Securities Act
within 120 days after the Recapitalization Closing Date, (iii) to keep the
Registration Statement effective until consummation of the Exchange Offer, and
(iv) to consummate the Exchange Offer not later than 150 days after the
Recapitalization Closing Date. LHP will keep the Exchange Offer open for
acceptance for not less than 30 days after the date notice of the Exchange Offer
is mailed to holders of the Existing Notes. The Exchange Offer being made hereby
will satisfy those requirements under the Registration Rights Agreement.
However, because the Registration Statement will not have been declared
effective and the Exchange Offer will not have been consummated within the time
periods described in this paragraph, certain additional interest will be payable
in respect of the Notes. See "Registration Rights."
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, all Existing Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date will be
accepted for exchange. New Notes will be issued in exchange for an equal
principal amount of outstanding Existing Notes accepted in the Exchange Offer.
The terms of the New Notes are identical in all material respects to the terms
of the Existing Notes for which they may be exchanged pursuant to The Exchange
Offer, except that the New Notes will have been registered under the Securities
Act, and thus will not bear restrictive legends restricting their transfer
pursuant to the Securities Act. Existing Notes may be tendered only in integral
multiples of $1,000, and New Notes will be issued in denominations of $1,000 or
integral multiples thereof. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Existing Notes as of
, 1997. The Exchange Offer is not conditioned upon any minimum
principal amount of Existing Notes being tendered for exchange. However, the
obligation to accept Existing Notes for exchange pursuant to the Exchange Offer
is subject to certain conditions as set forth herein under "--Conditions."
Existing Notes shall be deemed to have been accepted as validly tendered
when, as and if LHP has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders of
Existing Notes for the purposes of receiving the New Notes and delivering New
Notes to such holders.
Based on interpretations by the Staff of the Commission as set forth in
no-action letters issued to third parties (including EXXON CAPITAL HOLDINGS
CORPORATION (available May 13, 1988), MORGAN STANLEY & CO. INCORPORATED
(available June 5, 1991), K-III COMMUNICATIONS CORPORATION (available July 2,
1993) and SHEARMAN & STERLING (available July 2, 1993)), LHP believes that the
New Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and otherwise transferred by any holder thereof (other than any such
holder that is a broker-dealer or an "affiliate" of LHP within the meaning of
Rule 405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that (i) such New
Notes are acquired in the ordinary course of business, (ii) at the time of the
commencement of the Exchange Offer such holder has no arrangement with any
person to
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participate in a distribution of such New Notes and (iii) such holder is not
engaged in, and does not intend to engage in, a distribution of such New Notes.
LHP has not sought, and does not intend to seek, a no-action letter from the
Commission with respect to the effects of the Exchange Offer, and there can be
no assurance that the Staff would make a similar determination with respect to
the New Notes as it has in such no-action letters.
By tendering Existing Notes in exchange for New Notes and executing the
Letter of Transmittal, each holder of Existing Notes will represent to LHP that:
(i) it is not an affiliate of LHP, (ii) any New Notes to be received by it will
be acquired in the ordinary course of business and (iii) at the time of the
commencement of the Exchange Offer it had no arrangement with any person to
participate in a distribution of the New Notes and, if such holder is not a
broker-dealer, it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If a holder of Existing Notes is unable to make the
foregoing representations, such holder may not rely on the applicable
interpretations of the Staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction unless such sale is made
pursuant to an exemption from such requirements.
Each broker-dealer that receives New Notes for its own account in exchange
for Existing Notes where such Existing Notes were acquired by such broker-dealer
as a result of market-making or other trading activities, must acknowledge that
it will deliver a prospectus meeting the requirements of the Securities Act and
that it has not entered into any arrangement or understanding with LHP or any
affiliate of LHP to distribute New Notes in connection with any resale of such
New Notes. See "Plan of Distribution."
After the Expiration Date and subject to certain limited exceptions, holders
of Existing Notes who do not exchange their Existing Notes for New Notes in the
Exchange Offer will no longer be entitled to registration rights and will not be
able to offer or sell their Existing Notes, unless such Existing Notes are
subsequently registered under the Securities Act (which, subject to certain
limited exceptions, LHP will have no obligation to do), except pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION. The term "Expiration
Date" shall mean , 1997 (30 days following the commencement of the
Exchange Offer), unless LHP, in its sole discretion, extends the Exchange Offer,
in which case the term "Expiration Date" shall mean the latest date to which the
Exchange Offer is extended. Notwithstanding any extension of the Exchange Offer,
the interest rate borne by the Existing Notes shall be increased by one-half of
one percent (0.5%) per annum from and including November 28, 1997 until but
excluding the date the Exchange Offer is consummated. See "Registration Rights."
To extend the Expiration Date, LHP will notify the Exchange Agent of any
extension by oral or written notice and will notify the holders of the Existing
Notes by means of a press release or other public announcement prior to 9:00
A.M., New York City time, on the next business day after the previously
scheduled Expiration Date. Such announcement may state that LHP is extending the
Exchange Offer for a specified period of time.
LHP reserves the right (i) to delay acceptance of any Existing Notes, to
extend the Exchange Offer or to terminate the Exchange Offer and not permit
acceptance of Existing Notes not previously accepted if any of the conditions
set forth herein under "--Conditions" shall have occurred and shall not have
been waived by LHP, by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, or (ii) to amend the terms of the Exchange
Offer in any manner deemed by it to be advantageous to the holders of the
Existing Notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the Exchange Agent. If the Exchange Offer is amended in a manner
determined by LHP to constitute a material change, LHP will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
Existing
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Notes of such amendment. Furthermore, any such amendment may require LHP to make
a post-effective amendment to this Registration Statement.
Without limiting the manner in which LHP may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, LHP shall have no obligations to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely release
to an appropriate news agency.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest at the rate of 9 5/8% per annum from the
Issue Date of the Existing Notes or the most recent date to which interest has
been paid thereon or duly provided for. Interest on the New Notes is payable on
January 1 and July 1 of each year, commencing January 1, 1998. In addition, it
is expected that additional interest will accrue on the Notes at a rate of 0.5%
per annum for the periods (i) from and including the 121st day following the
Recapitalization Closing Date (October 29, 1997) until but excluding the date
the Registration Statement was declared effective, and (ii) from and including
the 151st day following the Recapitalization Closing Date (November 28, 1997)
until but excluding the date of consummation of the Exchange Offer. See
"--Registration Rights."
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to 5:00 p.m., New York City
time, on the Expiration Date. In addition, either (i) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Existing Notes into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer described
below, must be received by the Exchange Agent prior to the Expiration Date or
(ii) the holder must comply with the guaranteed delivery procedures described
below. THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY
MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN
RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO
ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OTHER REQUIRED DOCUMENTS
SHOULD BE SENT TO THE COMPANY. Delivery of all documents must be made to the
Exchange Agent at its address set forth below. Holders may also request their
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender for such holders.
The tender by a holder of Existing Notes will constitute an agreement
between such holder and LHP in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Any beneficial
owner whose Existing Notes are registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and who wishes to tender should
contact such registered holder promptly and instruct such registered holder to
tender on his behalf.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by any member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor" institution within the meaning of Rule
17Ad-15 under the Exchange Act (each an "Eligible Institution") unless the
Existing Notes tendered pursuant thereto are tendered for the account of an
Eligible Institution.
If the Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such person should
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so indicate when signing, and unless waived by LHP, evidence satisfactory to LHP
of their authority to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal of the tendered Existing Notes will be determined by LHP
in its sole discretion, which determination will be final and binding. LHP
reserves the absolute right to reject any and all Existing Notes not validly
tendered or any Existing Notes which, if accepted, would, in the opinion of
counsel for LHP, be unlawful. LHP also reserves the absolute right to waive any
irregularities or conditions of tender as to particular Existing Notes. LHP's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Existing Notes must be cured within such time as LHP shall determine. Neither
LHP, the Exchange Agent nor any other person shall be under any duty to give
notification of defects or irregularities with respect to tenders of Existing
Notes, nor shall any of them incur any liability for failure to give such
notification. Tenders of Existing Notes will not be deemed to have been made
until such irregularities have been cured or waived. Any Existing Notes received
by the Exchange Agent that are not validly tendered and as to which the defects
or irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, LHP reserves the right in its sole discretion, subject to the
provisions of the Indenture, (i) to purchase or make offers for any Existing
Notes that remain outstanding subsequent to the Expiration Date or, as set forth
under "--Conditions", (ii) to terminate the Exchange Offer in accordance with
the terms of the Registration Rights Agreement, (iii) to redeem Existing Notes
as a whole or in part at any time and from time to time, as set forth under
"Description of Notes--Optional Redemption" and (iv) to the extent permitted by
applicable law, to purchase Existing Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
could differ from the terms of the Exchange Offer.
ACCEPTANCE OF EXISTING NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or, if applicable, waiver of all of the conditions to the
Exchange Offer and as soon as practicable after the Expiration Date, LHP will
accept all Existing Notes properly tendered and not validly withdrawn, deliver
or cause delivery of such Existing Notes to the Trustee for cancellation, and
issue and cause the Trustee to promptly authenticate and deliver New Notes in
exchange therefor. See "-- Conditions." For purposes of the Exchange Offer,
Existing Notes shall be deemed to have been accepted as validly tendered for
exchange when, as and if LHP has given oral or written notice thereof to the
Exchange Agent.
In all cases, issuance of New Notes for Existing Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of a Book-Entry Confirmation of such Existing Notes into
the Exchange Agent's account at the Book-Entry Transfer Facility, a properly
completed and duly executed Letter of Transmittal and all other required
documents. If any tendered Existing Notes are not accepted for any reason set
forth in the terms and conditions of the Exchange Offer, such unaccepted or such
nonexchanged Existing Notes will be credited to an account maintained with such
Book-Entry Transfer Facility as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Existing Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Existing Notes by causing the
Book-Entry Transfer Facility to
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transfer such Existing Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for transfer. However, the Letter of Transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
EXCHANGING BOOK-ENTRY NOTES
The Exchange Agent and the Depository Trust Company (the "DTC") have
confirmed that any financial institution that is a participant in DTC may
utilize the Book-Entry Transfer Facility Automated Tender Offer Program ("ATOP")
procedures to tender Existing Notes.
Any DTC participant may make book-entry delivery of Existing Notes by
causing DTC to transfer such Existing Notes into the Exchange Agent's account in
accordance with DTC's ATOP procedures for transfer. However, the exchange for
the Existing Notes so tendered will only be made after a Book-Entry Confirmation
of such book-entry transfer of Existing Notes into the Exchange Agent's account,
and timely receipt by the Exchange Agent of an Agent's Message (as such term is
defined in the next sentence) and any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by DTC and
received by the Exchange Agent and forming part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from a participant
tendering Existing Notes that are the subject of such Book-Entry Confirmation
that such participant has received and agrees to be bound by the terms of the
Letter of Transmittal, and that LHP may enforce such agreement against such
participant.
GUARANTEED DELIVERY PROCEDURES
If the procedures for book-entry transfer cannot be completed on a timely
basis, a tender may be effected if (i) the tender is made through an Eligible
Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Letter of
Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by LHP (by facsimile transmission, mail or
hand delivery), setting forth the name and address of the holder of Existing
Notes and the amount of Existing Notes tendered, stating that the tender is
being made thereby and guaranteeing that within three New York Stock Exchange
("NYSE") trading days after the date of execution of the Notice of Guaranteed
Delivery, a Book-Entry Confirmation and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) a Book-Entry Confirmation and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL OF TENDERS
Tenders of Existing Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent prior to 5:00 p.m., New York City time on the
Expiration Date at one of the addresses set forth below under "--Exchange
Agent." Any such notice of withdrawal must specify the name of the holder, the
name and number of the account at the Book-Entry Transfer Facility from which
the Existing Notes was tendered, identify the principal amount of the Existing
Notes to be withdrawn, specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Existing Notes
and otherwise comply with the procedures of such facility and state that such
holder is withdrawing its election to have those Existing Notes exchanged. All
questions as to the validity, form and eligibility
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(including time of receipt) of such notice will be determined by the Company,
whose determination shall be final and binding on all parties. Any Existing
Notes so withdrawn will be deemed not to have been validly tendered for exchange
for purposes of the Exchange Offer. Any Existing Notes which have been tendered
for exchange but which are not exchanged for any reason will be credited to an
account maintained with such Book-Entry Transfer Facility for the Existing Notes
as soon as practicable after withdrawal, rejection of tender or termination of
the Exchange Offer. Properly withdrawn Existing Notes may be retendered by
following one of the procedures described under "--Procedures for Tendering" and
"--Book-Entry Transfer" above at any time on or prior to the Expiration Date.
CONDITIONS
LHP has no obligation to consummate the Exchange Offer if the New Notes to
be received by such holder or holders of Existing Notes in the Exchange Offer,
upon receipt, will not be tradable by such holder without restriction under the
Securities Act and the Exchange Act and without material restrictions under the
"blue sky" or securities laws of the several states of the United States. The
Exchange Offer is also subject to the condition that it not violate applicable
law or any applicable interpretation of the Commission or its Staff. All
conditions to the Exchange Offer (with the exception of certain necessary
governmental approvals) must be satisfied or waived prior to the Expiration
Date.
LHP reserves the right in its sole discretion to waive any conditions to the
Exchange Offer. In the event that the Company deems satisfied any such
condition, where it is unreasonable to do so, such action may be the equivalent
of a waiver by the Company of such condition. If such action would be such a
waiver, and such waiver constitutes a material change to the Exchange Offer or
in the information previously disclosed to the holders of the Existing Notes,
the Company will, in accordance with the applicable rules of the Commission,
disseminate promptly disclosure of such change in a manner reasonably calculated
to inform holders of the Existing Notes to such change. If it is necessary to
permit adequate dissemination of information regarding such change, the Company
will extend the Exchange Offer to permit an adequate time for holders of
Existing Notes to consider the additional information.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent addressed as follows:
<TABLE>
<CAPTION>
BY MAIL: BY HAND BEFORE 4:30 P.M.:
<S> <C> <C>
P.O. Box 843 Telephone: United States Trust Company of New York
Cooper Station (800) 548-6565 111 Broadway
New York, NY 10276 New York, NY 10006
Attention: Corporate Trust Facsimile: Attention: Lower Level Corporate
Services (212) 780-0592 Trust Window
(FOR ELIGIBLE INSTITUTIONS ONLY)
Attn: Customer Service
Confirm by Telephone to:
(800) 548-6565
BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M.:
770 Broadway
13th Floor 10003
New York, NY 10036
Attention: Corporate Trust Services
</TABLE>
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FEES AND EXPENSES
LHP will pay all fees and expenses incident to its performance of the
Exchange Offer under the Registration Rights Agreement, including fees and
expenses of the Exchange Agent and Trustee and accounting, legal, printing and
related fees and expenses. These fees and expenses include the cost of
registering the New Notes under the Securities Act and applicable Blue Sky laws
and of soliciting tenders under the Exchange Offer. The principal solicitation
for tenders pursuant to the Exchange Offer is being made by mail; however,
additional solicitations may be made by telegraph, telephone, telecopy or in
person by officers and regular employees of LHP.
LHP will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. LHP, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
the Exchange Agent for its reasonable out-of-pocket expenses in connection
therewith. LHP may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of the Prospectus and related documents to the beneficial owners of the
Existing Notes and in handling or forwarding tenders for exchange.
LHP will pay all transfer taxes, if any, applicable to the transfer of
Existing Notes to it or to its order pursuant to the Exchange Offer. If,
however, New Notes or Existing Notes for principal amounts not tendered or
accepted for exchange are to be registered or issued in the name of any person
other than the registered holder of the Existing Notes tendered, or if tendered
Existing Notes are registered in the name of any person other than the person
signing the Letter of Transmittal, or if a transfer tax is imposed for any
reason other than the exchange of Existing Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Existing Notes who do not exchange their Existing Notes for New
Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Existing Notes as set forth in the legend
thereon as a consequence of the issuance of the Existing Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Existing Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. LHP
does not currently anticipate that it will register the Existing Notes under the
Securities Act. To the extent that Existing Notes are tendered and accepted in
the Exchange Offer, the trading market for untendered and tendered but
unaccepted Existing Notes could be adversely affected.
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REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, in the event that (i)
applicable interpretations of the staff of the Commission do not permit LHP to
effect such an Exchange Offer, (ii) for any other reason the Exchange Offer is
not consummated within 150 days of the Recapitalization Closing Date, (iii) a
holder of Existing Notes is not permitted by applicable law to participate in
the Exchange Offer or does not receive freely tradeable New Notes pursuant to
the Exchange Offer or, (iv) under certain circumstances, LHP or the Initial
Purchasers or the holders of a majority in aggregate principal amount of
Existing Notes so request (any of (i) through (iv) being an "Event" and the date
thereof, the "Event Date"), LHP will, at its cost, use its best efforts to (a)
as promptly as practicable and, in any event, within 30 days after such Event
Date (which shall be no earlier than 90 days after the Recapitalization Closing
Date), file a shelf registration statement (the "Shelf Registration Statement")
covering resales of the Existing Notes, (b) cause the Shelf Registration
Statement to be declared effective under the Securities Act and (c) keep
effective the Shelf Registration Statement for a period of two years after the
Recapitalization Closing Date or such shorter period that will terminate when
all Existing Notes have been sold thereunder. LHP will, in the event a Shelf
Registration Statement is declared effective, provide to each applicable holder
of the Existing Notes copies of the prospectus which is a part of the Shelf
Registration Statement and notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required to
permit unrestricted resales of the Existing Notes.
A holder of Existing Notes that sells such Existing Notes pursuant to the
Shelf Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification obligations).
If on or prior to 60 days following the Recapitalization Closing Date, an
Exchange Offer Registration Statement has not been filed with the Commission,
additional interest will accrue on the Existing Notes from and including the
61st day following the Recapitalization Closing Date until, but excluding, the
date such registration statement is filed. In addition, if on or prior to 120
days following the Recapitalization Closing Date, such Exchange Offer
Registration Statement is not declared effective, additional interest will
accrue on the Existing Notes from and including the 121st day following the
Recapitalization Closing Date until, but excluding, the date such registration
statement is declared effective. Further, if on or prior to 150 days following
the Recapitalization Closing Date the Exchange Offer is not consummated,
additional interest will accrue on the Notes from and including the 151st day
following the Closing Date until, but excluding, the date of consummation of the
Exchange Offer. If an Event shall have occurred, and if by 180 days after the
Recapitalization Closing Date a Shelf Registration is not declared effective,
additional interest will accrue on the Existing Notes not exchanged as a result
of such Event from and including the 181st day after the Recapitalization
Closing Date, until, but excluding, the effective date of the Shelf Registration
Statement. In each case, additional interest will be payable semi-annually in
arrears, with the first semiannual payment due on the first interest payment
date in respect of the Existing Notes following the date from which additional
interest begins to accrue, and will accrue, under each circumstance set forth
above, at a rate per annum equal to an additional one-half of one percent (0.5%)
of the principal amount of the Existing Notes upon the occurrence of each such
circumstance, which rate will increase by one half of one percent (0.5%) for
each 90-day period that such additional interest continues to accrue under any
such circumstance, with an aggregate maximum increase in the interest rate per
annum equal to one percent (1.0%).
As a result of the foregoing provisions, it is expected that additional
interest will accrue on the Notes at a rate of 0.5% per annum for the periods
(i) from and including the 121st day following the Recapitalization Closing Date
(October 29, 1997) until but excluding the date the Registration Statement was
declared effective, and (ii) from and including the 151st day following the
Recapitalization Closing Date (November 28, 1997) until but excluding the date
of consummation of the Exchange Offer.
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If applicable, in the event that the Shelf Registration Statement ceases to
be effective prior to the second anniversary of the Recapitalization Closing
Date for a period in excess of 45 days, whether or not consecutive, in any given
year, then, the interest rate borne by the Existing Notes shall increase by an
additional one half of one percent (0.5%) per annum on the 46th day in the
applicable year such Shelf Registration Statement ceases to be effective. Such
interest rate will increase by an additional one half of one percent (0.5%) per
annum for each additional 90 days that such Shelf Registration Statement is not
effective, subject to the same aggregate maximum increase in the interest rate
per annum of one percent (1.0%) referred to above. Upon the filing of the
Registration Statement, the effectiveness of the Registration Statement, or the
consummation of the Exchange Offer or the effectiveness of the Shelf
Registration Statement, as the case may be, the interest rate borne by the
Existing Notes from the date of such filing, effectiveness or consummation will
be reduced by the full amount of any such increase, provided that none of the
conditions that trigger an interest rate increase exist.
Pursuant to the Registration Rights Agreement, upon the consummation of the
Exchange Offer made hereby, LHP will have no further obligation in respect of
the filing or effectiveness of the Shelf Registration Statement (subject to
certain limited exceptions).
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Existing Notes were issued, and the New Notes offered hereby will be
issued, under an Indenture (the "Indenture"), dated as of June 30, 1997, by and
between Leiner Group and United States Trust Company of New York as the Trustee.
Immediately following the Recapitalization, pursuant to a supplemental indenture
(the "Supplemental Indenture") between LHP and the Trustee, LHP assumed (the
"Assumption") all of the obligations of Leiner Group under the Indenture and the
Existing Notes, and thereby became the obligor on the Existing Notes. Following
consummation of the Assumption, Leiner Group was released and discharged from
all further obligations in respect of the Indenture and the Existing Notes. Upon
the issuance of the New Notes, the Indenture will be subject to and governed by
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
terms of the New Notes are identical in all material respects to the terms of
the Existing Notes for which they may be exchanged pursuant to the Exchange
Offer, except that the New Notes will have been registered under the Securities
Act, and thus will not bear restrictive legends restricting their transfer
pursuant to the Securities Act. As used in this "Description of the New Notes"
section, the term "Notes" means the Existing Notes and the New Notes,
collectively, and the term "Company" means Leiner Health Products Inc., but not
any of its subsidiaries (unless the context otherwise requires).
The following is a summary of the material provisions of the Indenture and
does not purport to be complete and is subject to the detailed provisions of,
and is qualified in its entirety by reference to, the Trust Indenture Act, the
Notes and the Indenture, including the definitions of certain terms contained
therein and including those terms made part of the Indenture by reference to the
Trust Indenture Act. The Indenture and the Supplemental Indenture are filed as
Exhibits to the Registration Statement of which this Prospectus forms a part.
The definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions." Reference is made to the Indenture for the
full definition of all such terms, as well as any other capitalized terms used
herein for which no definition is provided.
MATURITY AND INTEREST
The New Notes will be unsecured senior subordinated obligations of the
Company limited in aggregate principal amount to $85,000,000. The New Notes will
mature on July 1, 2007. Interest on the New Notes will accrue at the rate of
9 5/8% per annum and will be payable semi-annually in arrears on January 1 and
July 1 in each year, commencing on January 1, 1998, to holders of record on the
immediately preceding December 15 and June 15, respectively. Interest on the New
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the Issue Date. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
In addition, it is expected that additional interest will accrue on the
Notes at a rate of 0.5% per annum for the periods (i) from and including the
121st day following the Recapitalization Closing Date (October 29, 1997) until
but excluding the date the Registration Statement was declared effective, and
(ii) from and including the 151st day following the Recapitalization Closing
Date (November 28, 1997) until but excluding the date of consummation of the
Exchange Offer. See "--Registration Rights."
Principal of, and premium, if any, and interest on, the New Notes will be
payable at the office or agency of the Company maintained for such purpose in
The City of New York or, at the option of the Company, payment of interest may
be made by check mailed to the holders of the New Notes at their respective
addresses as set forth in the register of holders of Notes. Until otherwise
designated by the Company, the Company's office or agency in The City of New
York will be the office of the Trustee maintained for such purpose. The New
Notes will be issued in fully registered form, without coupons, and in
denominations of $1,000 and integral multiples thereof. No service charge will
be made for any transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
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SUBORDINATION
The payment of the principal of, and premium, if any, and interest on, the
New Notes will be subordinated, as set forth in the Indenture, in right of
payment to the prior payment in cash in full of all existing and future Senior
Debt. The New Notes will be senior subordinated indebtedness of the Company
ranking PARI PASSU with all other existing and future senior subordinated
indebtedness of the Company. The New Notes will also be effectively subordinated
to any secured indebtedness of the Company to the extent of the value of the
assets securing such indebtedness, and to all indebtedness of the Company's
Subsidiaries. As of June 30, 1997, after giving effect to the Recapitalization
and the financing therefor on a pro forma basis, there was outstanding
approximately $164.7 million principal amount of Senior Debt of the Company
(including Indebtedness of Vita Health in an amount equivalent to approximately
$15.0 million, which would be Guaranteed by the Company).
The Indenture provides that in the event of any insolvency or bankruptcy
case or proceeding, or any receivership, liquidation, reorganization or other
similar case or proceeding in connection therewith, relating to the Company or
its assets, or any liquidation, dissolution or other winding-up of the Company,
whether voluntary or involuntary, or any assignment for the benefit of creditors
or other marshalling of assets or liabilities of the Company, all Senior Debt
must be paid in full in cash or cash equivalents, or such payment duly provided
for to the satisfaction of holders of Senior Debt, before any payment or
distribution, whether in cash, property or securities (excluding certain
permitted equity or junior debt securities of the Company), is made, directly or
indirectly on account of the Senior Subordinated Note Obligations or for the
acquisition of any of the Notes.
During the continuance of any default in the payment when due (whether at
stated maturity, by acceleration or otherwise) of principal of, or premium, if
any, or interest on, or of unreimbursed amounts under drawn letters of credit or
fees relating to letters of credit constituting or other fees in respect of, any
Senior Debt (in each case, a "Payment Default"), no direct or indirect payment
of any kind or character by or on behalf of the Company or from any source
whatsoever shall be made on account of the Senior Subordinated Note Obligations
of the Company or for the acquisition of any of the Notes unless and until such
default has been cured or waived or has ceased to exist or such Senior Debt has
been discharged or paid in full in cash or cash equivalents.
In addition, during the continuance of any other default with respect to any
Designated Senior Debt of the Company pursuant to which the maturity thereof may
be accelerated (a "Non-payment Default"), after receipt by the Trustee and the
Company from an agent or other representative of holders of such Designated
Senior Debt of a written notice of such Non-payment Default specifying, among
other things, the applicable Designated Senior Debt the Company to which such
Non-payment Default relates, no direct or indirect payment of any kind or
character may be made by the Company on account of the Senior Subordinated Note
Obligations or for the acquisition of any of the Notes for the period specified
below (the "Payment Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee and the Company from an agent or other
representative of holders of Designated Senior Debt stating that such notice is
a payment blockage notice pursuant to the Indenture and shall end on the
earliest to occur of the following events: (i) 179 days shall have elapsed since
the receipt of such notice; (ii) the date on which such default is cured or
waived or ceases to exist (provided that no other Payment Default or Non-payment
Default has occurred or is then continuing after giving effect to such cure or
waiver); (iii) the date on which such Designated Senior Debt is discharged or
paid in full in cash or cash equivalents; or (iv) the date on which such Payment
Blockage Period shall have been terminated by express written notice to the
Company or the Trustee from the agent or other representative of holders of
Designated Senior Debt initiating such Payment Blockage Period, after which the
Company, subject to the existence of any Payment Default, shall promptly resume
making any and all required payments in respect of the Notes including any
missed payments. Only one Payment Blockage Period with respect to the Notes may
be commenced within any 360 consecutive day period. No Non-payment Default with
respect to Designated Senior Debt that existed or was continuing on the date of
the commencement of any Payment
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Blockage Period with respect to the Designated Senior Debt initiating such
Payment Blockage Period (other than any such Non-payment Default which was not
and could not reasonably be expected to have been known by the holders or the
agent or other representative of such Designated Senior Debt) will be, or can
be, made the basis for the commencement of a second Payment Blockage Period,
whether or not within a period of 360 consecutive days, unless such default has
been cured or waived for a period of not less than 90 consecutive days (it being
acknowledged that any subsequent action, or any breach of any financial
covenants during the period after the date of commencement of such Payment
Blockage Period, that, in either case, would give rise to a Non-payment Default
pursuant to any provision under which a Non-payment Default previously existed
or was continuing shall constitute a new Non-payment Default for this purpose;
PROVIDED that, in the case of a breach of a particular financial covenant, the
Company shall have been in compliance for at least one full 90 consecutive day
period after the date of commencement of such Payment Blockage Period). In no
event will a Payment Blockage Period extend beyond 179 days from the date of the
receipt by the Trustee of the notice and there must be a 181 consecutive day
period in any 360 day period during which no Payment Blockage Period is in
effect.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would constitute an Event of Default
under the Indenture and would enable the holders of the Notes to accelerate the
maturity thereof. See "--Events of Default."
If the Company shall make any payment to the Trustee on account of the
principal of, or premium, if any, or interest on, the Notes, or any other Senior
Subordinated Note Obligations, or the holders of the Notes shall receive from
any source any payment on account of the principal of, or premium, if any, or
interest on, the Notes or any other Senior Subordinated Note Obligations, at a
time when such payment is prohibited by the subordination provisions of the
Indenture, the Trustee or such holders shall hold such payment in trust for the
benefit of, and shall pay over and deliver to, the holders of Senior Debt (pro
rata as to each of such holders on the basis of the respective amounts of such
Senior Debt held by them), or their representative or the trustee under the
indenture or other agreement (if any) pursuant to which such Senior Debt may
have been issued, as their respective interests may appear, for application to
the payment of all outstanding Senior Debt until all such Senior Debt has been
paid in full in cash, after giving effect to all other payments or distributions
to, or provisions made for, the holders of Senior Debt.
By reason of such subordination, in the event of liquidation, receivership,
reorganization or insolvency, creditors of the Company who are holders of Senior
Debt may recover more, ratably, than the holders of the Notes, and funds which
would be otherwise payable to the holders of the Notes will be paid to the
holders of the Senior Debt to the extent necessary to pay the Senior Debt in
full, and the Company may be unable to meet its obligations in full with respect
to the Notes.
REDEMPTION
MANDATORY REDEMPTION. The Notes are not subject to any mandatory sinking
fund redemption prior to maturity.
OPTIONAL REDEMPTION. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after July 1, 2002 at the redemption
prices (expressed as percentages of the principal amount of the Notes) set forth
below plus in each case accrued and unpaid interest, if any, to the date of
redemption, if redeemed during the twelve-month period beginning on July 1 of
the years indicated below.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2002.............................................................................. 104.813%
2003.............................................................................. 103.208%
2004.............................................................................. 101.604%
2005 and thereafter............................................................... 100.000%
</TABLE>
In addition, at any time prior to July 1, 2000, the Company may, at its
option, redeem up to 30% of the aggregate principal amount of Notes originally
issued with the net cash proceeds of one or more Public
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Equity Offerings (as defined below), at 109 5/8 % of the aggregate principal
amount thereof plus accrued and unpaid interest, if any, to the date of
redemption; PROVIDED, HOWEVER, that not less than $60.0 million principal amount
of the Notes is outstanding immediately after giving effect to such redemption
(other than any Notes owned by the Company or any of its Affiliates) and such
redemption is effected within 60 days of such issuance. As used in this
paragraph, a "Public Equity Offering" means an underwritten primary public
offering of common stock (other than Disqualified Stock) of the Company, Leiner
Group or PLI pursuant to an effective registration statement filed under the
Securities Act, all of the net proceeds of which, if issued by Leiner Group or
PLI, are contributed as common equity to the Company; PROVIDED that the first
public equity offering pursuant to which the Company redeems Notes pursuant to
this paragraph shall have resulted in gross proceeds to the issuer in such
offering of not less than $50 million. Such a primary offering may be undertaken
either independently or in conjunction with any secondary offering of securities
by the issuer thereof.
The Notes will be subject to redemption as a whole, at the option of the
Company, prior to July 1, 2002, at any time within 180 days after a Change of
Control at a redemption price equal to 100% of the principal amount thereof plus
the Applicable Premium as of, and accrued and unpaid interest, if any, to, the
date of redemption (the "Redemption Date"). Each holder of Notes will also have
certain rights to require the Company to purchase such Notes upon the occurrence
of a Change of Control. See "--Change of Control."
SELECTION AND NOTICE. If less than all of the Notes are to be redeemed at
any time, selection of the Notes to be redeemed will be made by the Company in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not listed on a
securities exchange, on a pro rata basis or by lot or any other method as the
Trustee shall deem fair and appropriate; PROVIDED, that Notes redeemed in part
shall only be redeemed in integral multiples of $1,000; PROVIDED, FURTHER, that
any such redemption pursuant to the provisions relating to a Public Equity
Offering shall be made on a pro rata basis or on as nearly a pro rata basis as
practicable (subject to the procedures of The Depository Trust Company, New
York, New York ("DTC") or any other Depository). Notices of any optional or
mandatory redemption shall be mailed by first class mail at least 30 but not
more than 60 days before the redemption date to each holder of Notes to be
redeemed at such holder's registered address. If any Note is to be redeemed in
part only, the notice of redemption that relates to such Note shall state the
portion of the principal amount thereof to be redeemed, and the Trustee shall
authenticate and mail to the holder of the original Note a new Note in principal
amount equal to the unredeemed portion of the original Note promptly after the
original Note has been cancelled. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption.
CHANGE OF CONTROL
The Indenture provides that, in the event that any of certain "Change of
Control" events occurs, each holder of Notes will have the right, subject to the
terms and conditions of the Indenture, to require the Company to offer to
purchase all or any portion of such holder's Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest, if any, to the date of purchase, in accordance with the terms set
forth below (a "Change of Control Offer"). The term "Change of Control" is
defined in the Indenture. See "-- Certain Definitions." Generally, a "Change of
Control" consists of one or more of (i) certain events involving the acquisition
by a person, entity or group of more than 50% of the voting power of the
Company, Leiner Group or PLI, (ii) certain changes in the composition of a
majority of the Board of Directors of the Company, Leiner Group or PLI that are
not approved by certain existing directors, or (iii) certain dispositions of all
or substantially all of the assets of the Company, Leiner Group or PLI.
Unless the Company has exercised its right to redeem all of the Notes as
described under "--Optional Redemption," the Company shall mail on or before the
30th day following the occurrence of any Change of Control (or at the Company's
option, prior to such Change of Control but after the public announcement
thereof), to each holder of Notes at such holder's registered address a notice
stating: (i) that a
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Change of Control has occurred or will occur and that such holder has (or upon
such occurrence will have) the right to require the Company to purchase all or a
portion (equal to $1,000 or an integral multiple thereof) of such holder's Notes
at a purchase price in cash equal to 101% of the aggregate principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase (the
"Change of Control Purchase Date"), which shall be a Business Day, specified in
such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest, if
any, as of the Change of Control Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Change of
Control Offer, any Notes accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control Purchase Date,
(v) the procedures, consistent with the Indenture, to be followed by a holder of
Notes in order to accept a Change of Control Offer or to withdraw such
acceptance, (vi) such other information as may be required by the Indenture and
applicable laws and regulations and (vii) if such Change of Control Offer is
made prior to the occurrence of such Change of Control, payment is conditioned
on the occurrence of such Change of Control.
On the Change of Control Purchase Date, provided that such Change of Control
has occurred, the Company will (i) accept for payment all Notes or portions
thereof tendered pursuant to the Change of Control Offer, (ii) deposit with the
Paying Agent the aggregate purchase price of all Notes or portions thereof
accepted for payment and any accrued interest on such Notes as of the Change of
Control Purchase Date, and (iii) deliver or cause to be delivered to the Trustee
all Notes tendered pursuant to the Change of Control Offer. The Paying Agent
shall promptly mail to each holder of Notes or portions thereof accepted for
payment an amount equal to the purchase price for such Notes plus accrued and
unpaid interest, if any, thereon, and the Trustee shall promptly authenticate
and mail to each holder of Notes accepted for payment in part a new Note equal
in principal amount to any unpurchased portion of the Notes, and any Note not
accepted for payment in whole or in part shall be promptly returned to the
holder of such Note. On and after a Change of Control Purchase Date, interest
will cease to accrue on the Notes or portions thereof accepted for payment,
unless the Company defaults in the payment of the purchase price therefor. The
Company will announce the results of the Change of Control Offer to holders of
the Notes on or as soon as practicable after the Change of Control Purchase
Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Change
of Control Offer and will be deemed not to be in violation of any of the
covenants under the Indenture to the extent such compliance is in conflict with
such covenants.
The Company will not be required to make a Change of Control Offer, upon a
Change of Control, if a third party makes such an offer in the manner, at the
times and in compliance with the same requirements in the Indenture as apply to
the Company. The third party must purchase all Notes validly tendered and not
withdrawn under the terms of the Change of Control Offer.
The term "all or substantially all of the assets" of the Company is not
defined in the Indenture or the Trust Indenture Act. This may create uncertainty
for holders in the event that some, but not all of the assets of the Company,
PLI or Leiner Group are sold. In such event, if the parties disagree as to how
to characterize a particular sale, the Company nonetheless may or may not
initiate a Change of Control Offer and the parties may need to seek legal
redress for clarification of their rights.
The New Credit Facility prohibits the Company from purchasing any Notes
pursuant to a Change of Control Offer prior to repayment in full of the
indebtedness under the New Credit Facility. Any additional credit agreements or
other agreements relating to unsubordinated indebtedness to which the Company
becomes a party may contain similar restrictions and provisions. Moreover, the
New Credit Facility contains a "change of control" provision that in relevant
part is similar to the provision in the Indenture relating to a Change of
Control, and the occurrence of such a "change of control" would constitute a
default under the New Credit Facility. The Company's obligations under the New
Credit Facility represent obligations senior in right of payment to the Notes,
and the New Credit Facility will not permit the purchase of the Notes absent
consent of the lenders thereunder in the event of a Change of Control
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(although the failure by the Company to comply with its obligations in the event
of a Change of Control would constitute a Default under the Indenture).
If the Company is unable to obtain the requisite consents and/or repay all
indebtedness which prohibits the repurchase of the Notes upon the occurrence of
a Change of Control, the Company would remain prohibited by such indebtedness
from purchasing any Notes and, as a result, the Company could not commence a
Change of Control Offer to purchase the Notes within 30 days of the occurrence
of the Change of Control, which would constitute an Event of Default under the
Indenture. The Company's failure to commence such a Change of Control Offer
would also constitute an event of default under the New Credit Facility which
would permit the lenders thereunder to accelerate all of the Company's
indebtedness under the New Credit Facility. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient assets
to first satisfy its obligations under the New Credit Facility or other
agreements relating to any such indebtedness, if accelerated, and then to
purchase all of the Notes that might be delivered by holders seeking to accept a
Change of Control Offer.
CERTAIN COVENANTS
LIMITATION ON INCURRENCE OF INDEBTEDNESS. The Indenture will provide that
the Company will not, and will not permit any Restricted Subsidiary to, create,
incur, assume or directly or indirectly enter into any Guarantee of, or in any
other manner become directly or indirectly liable for ("incur"), any
Indebtedness (including Acquired Debt), except that the Company and any
Subsidiary Guarantor may incur Indebtedness if, at the time of, and immediately
after giving PRO FORMA effect to, such incurrence of Indebtedness, the
Consolidated Cash Flow Coverage Ratio of the Company for the most recently ended
four fiscal quarters for which financial statements are available would be at
least 2.0 to 1.0 until July 1, 1999, and 2.25 to 1.0 thereafter.
The foregoing limitations will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"), each of which shall be given
independent effect:
(i) Indebtedness incurred by the Company or any Subsidiary Guarantor
pursuant to the Credit Facility in a maximum principal amount not to exceed
at any time
(a) an aggregate principal amount of $85.0 million under the Term
Loan Facility, minus the aggregate amount of all scheduled repayments of
principal, and all mandatory prepayments of principal with Net Proceeds
from Asset Sales, whether or not such repayments or prepayments are
actually made (unless the relevant provision requiring any such repayment
or prepayment is waived or amended by the lenders thereunder in
accordance therewith), applied to permanently reduce the Indebtedness
outstanding under the Term Loan Facility, and plus (in the case of any
refinancing thereof) the aggregate amount of fees, underwriting
discounts, premiums and other costs and expenses incurred in connection
with such refinancing, and
(b) an aggregate principal amount outstanding at any time under the
Revolving Credit Facility not to exceed an amount equal to (A) an amount
(the "Total Amount") equal to the greater of (x) an amount equal to
$125.0 million, minus the amount of all mandatory prepayments of
principal with Net Proceeds from Asset Sales applied to permanently
reduce the commitments under the Revolving Credit Facility, and plus (in
the case of any refinancing thereof) the aggregate amount of fees,
underwriting discounts, premiums and other costs and expenses incurred in
connection with such refinancing, and (y) the Borrowing Base, minus (B)
without duplication, the amount then outstanding (I.E., advanced, and
received by, and available for use by, the Company) under any Receivables
Financing (as set forth in the books and records of the Company and
confirmed by the agent, trustee or other representative of the
institution or group providing such Receivables Financing) that has been
entered into by the Company, any Restricted Subsidiary or any Receivables
Subsidiary since the Issue Date and that, as of such date of
determination, has not expired or otherwise terminated, minus (C) the
aggregate principal amount of Indebtedness incurred under the Revolving
Credit Facility by Restricted Subsidiaries pursuant to clause (ii) below;
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(ii) Indebtedness incurred by any Restricted Subsidiary under the
Revolving Credit Facility in an aggregate principal amount at any one time
outstanding not to exceed the greater of (A) $25.0 million and (B) 20.0% of
the Total Amount, and any Guarantees thereof;
(iii) Indebtedness of Foreign Subsidiaries and any Guarantees in respect
thereof; PROVIDED that the aggregate principal amount of such Indebtedness
outstanding at any time does not exceed, as to all such Foreign
Subsidiaries, the greater of (A) $20.0 million and (B) an amount equal to
9.0% of Consolidated Tangible Assets (calculated on a PRO FORMA basis giving
effect to any Acquisition being financed with any such Indebtedness);
(iv) Indebtedness represented by the Notes or the Exchange Notes, any
Guarantees in respect thereof, and any Indebtedness arising by reason of any
Lien granted to secure any of the foregoing Indebtedness;
(v) Indebtedness owed by any Restricted Subsidiary to the Company or to
another Restricted Subsidiary, or owed by the Company to any Restricted
Subsidiary; PROVIDED, HOWEVER, that any such Indebtedness shall be at all
times held by a Person which is either the Company or a Restricted
Subsidiary of the Company; PROVIDED, FURTHER, HOWEVER, that upon either (a)
the transfer or other disposition of any such Indebtedness to a Person other
than the Company or another Restricted Subsidiary or (b) the sale, lease,
transfer or other disposition of shares of Capital Stock (including by
consolidation or merger) of any such Restricted Subsidiary to a Person other
than the Company or another Restricted Subsidiary, the incurrence of such
Indebtedness shall be deemed to be an incurrence that is not permitted by
this clause (v);
(vi) Indebtedness of the Company or any Restricted Subsidiary in the
form of Purchase Money Obligations, Capital Lease Obligations or
Attributable Debt, in an aggregate amount at any one time outstanding not to
exceed the greater of (A) $5.0 million and (B) an amount equal to 3.0% of
Consolidated Tangible Assets;
(vii) Indebtedness of the Company or any Restricted Subsidiary arising in
the ordinary course of business with respect to Interest Rate Agreement
Obligations or Currency Agreement Obligations incurred for the purpose of
fixing or hedging interest rate risk or currency risk with respect to any
fixed or floating rate Indebtedness that is permitted by the terms of the
Indenture to be outstanding or any foreign currency exposure;
(viii) Indebtedness of the Company or any Restricted Subsidiary arising
from the honoring of a check, draft or similar instrument of such Person
drawn against insufficient funds, provided that such Indebtedness is
extinguished within five Business Days of its incurrence;
(ix) Indebtedness of the Company or any Restricted Subsidiary consisting
of Guarantees, indemnities, or Obligations in respect of purchase price
adjustments, in connection with the acquisition or disposition of assets,
including pursuant to the Recapitalization;
(x) Indebtedness of the Company or any Restricted Subsidiary in respect
of (A) letters of credit, bankers' acceptances or other similar instruments
or obligations, issued in connection with liabilities incurred in the
ordinary course of business (including those issued to governmental entities
in connection with self-insurance under applicable workers' compensation
statutes), or (B) surety, judgment, appeal, performance and other similar
bonds, instruments or obligations provided in the ordinary course of
business or (C) Guarantees of Senior Debt or incurred in compliance with the
"Limitation on Issuances of Guarantees of Indebtedness by Subsidiaries"
covenant, or (D) Indebtedness arising by reason of any Lien securing Senior
Debt or incurred in compliance with the "Limitation on Liens" covenant;
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(xi) Indebtedness (A) of the Company or any Subsidiary Guarantor
consisting of Guarantees of up to an aggregate principal amount of $2.0
million of borrowings by Management Investors in connection with the
purchase of Capital Stock of the Company, Leiner Group or PLI by such
Management Investors or (B) of the Company or any Restricted Subsidiary
consisting of Guarantees in respect of loans or advances made to officers or
employees of Leiner Group, the Company or any Restricted Subsidiary, or
Guarantees otherwise made on their behalf, (1) in respect of travel,
entertainment and moving-related expenses incurred in the ordinary course of
business, or (2) in the ordinary course of business not exceeding $500,000
in the aggregate outstanding at any time;
(xii) Indebtedness of a Receivables Subsidiary secured by a Lien on all
or part of the assets disposed of in, or otherwise incurred in connection
with, a Financing Disposition;
(xiii) Any Indebtedness incurred in connection with or given in exchange
for the renewal, extension, substitution, refunding, defeasance,
refinancing, repayment or replacement (a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (iv), (xiii), (xiv) or (xv) hereof or
of any Indebtedness permitted to be incurred pursuant to the first paragraph
of this "Limitation on Incurrence of Indebtedness" covenant ("Refinancing
Indebtedness"); PROVIDED, HOWEVER, that (a) the principal amount of such
Refinancing Indebtedness shall not exceed the principal amount (or accrued
amount, if less) of the Indebtedness so renewed, extended, substituted,
refunded, defeased, refinanced, repaid or replaced ("refinanced"), plus the
fees, underwriting discounts, premium (not to exceed the stated amount of
any premium required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced) and other costs
and expenses incurred in connection therewith, (b) with respect to
Refinancing Indebtedness of any Indebtedness other than Senior Debt, the
Refinancing Indebtedness shall have a Weighted Average Life to Maturity
equal to or greater than the Weighted Average Life to Maturity of the
Indebtedness being refinanced; (c) with respect to Refinancing Indebtedness
other than Senior Debt, such Refinancing Indebtedness shall rank no more
senior than, and shall be at least as subordinated in right of payment to,
the Notes as the Indebtedness being refinanced; and (d) the obligor on such
Refinancing Indebtedness shall be the obligor on the Indebtedness being
refinanced, the Company or any Subsidiary Guarantor, or (in the case of
Indebtedness of a Foreign Subsidiary that is being refinanced) any Foreign
Subsidiary;
(xiv) Indebtedness of the Company or any Restricted Subsidiary which is
outstanding on the Issue Date;
(xv) Acquired Debt of any Restricted Subsidiary and any Guarantee
thereof, PROVIDED that at the time of such incurrence and after giving
effect thereto on a PRO FORMA basis, (x) no Default or Event of Default will
have occurred and be continuing or would result therefrom and (y) the
Company could incur at least $1.00 of additional Indebtedness pursuant to
the first paragraph of this "Limitation on Incurrence of Indebtedness"
covenant; and
(xvi) Indebtedness of the Company or any Subsidiary Guarantor in addition
to that described in clauses (i) through (xv) above, and any renewals,
extensions, substitutions, refinancings or replacements of such
Indebtedness, so long as the aggregate principal amount at any one time
outstanding of all such Indebtedness incurred pursuant to this clause (xvi)
does not exceed the greater of (a) $15.0 million and (b) an amount equal to
7.0% of Consolidated Tangible Assets.
For purposes of determining compliance with, and the outstanding principal
amount of any particular Indebtedness incurred pursuant to and in compliance
with, this covenant, (i) any other obligation of the obligor on such
Indebtedness (or of any other Person that could have incurred such Indebtedness
as the obligor thereon) arising under any Guarantee, Lien or letter of credit
supporting such Indebtedness shall be disregarded to the extent that such
Guarantee, Lien or letter of credit secures the principal amount of such
Indebtedness; (ii) in the event that Indebtedness meets the criteria of more
than one of the types of Indebtedness described in the preceding paragraphs, the
Company, in its sole discretion, shall classify such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
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such clauses; and (iii) the amount of Indebtedness issued at a price that is
less than the principal amount thereof shall be equal to the amount of the
liability in respect thereof determined in accordance with GAAP.
For purposes of determining compliance with any Dollar-denominated
restriction on the incurrence of Indebtedness denominated in a foreign currency,
the Dollar-equivalent principal amount of such Indebtedness incurred pursuant
thereto shall be calculated based on the relevant currency exchange rate in
effect on the date that such Indebtedness was incurred, in the case of term
debt, or first committed, in the case of revolving credit debt, provided that
(x) the Dollar-equivalent principal amount of any such Indebtedness outstanding
on the Issue Date shall be calculated based on the relevant currency exchange
rate in effect on the Issue Date and (y) if such Indebtedness is incurred to
refinance other Indebtedness denominated in a foreign currency, and such
refinancing would cause the applicable Dollar-denominated restriction to be
exceeded if calculated at the relevant currency exchange rate in effect on the
date of such refinancing, such Dollar-denominated restriction shall be deemed
not to have been exceeded so long as the principal amount of such refinancing
Indebtedness does not exceed the principal amount of such Indebtedness being
refinanced and (z) the Dollar-equivalent principal amount of Indebtedness
denominated in a foreign currency and incurred pursuant to the Credit Facility
shall be calculated based on the relevant currency exchange rate in effect on,
at the Company's option, (i) the Issue Date, (ii) any date on which any of the
respective commitments under the Credit Facility shall be reallocated between or
among facilities or subfacilities thereunder, or on which such rate is otherwise
calculated for thereunder, or on which such rate is otherwise calculated for any
purpose thereunder, or (iii) the date of such incurrence. The principal amount
of any Indebtedness incurred to refinance other Indebtedness, if incurred in a
different currency from the Indebtedness being refinanced, shall be calculated
based on the currency exchange rate applicable to the currencies in which such
respective Indebtedness is denominated that is in effect on the date of such
refinancing.
Indebtedness of any Person that is not a Restricted Subsidiary, which
Indebtedness is outstanding at the time such Person becomes a Restricted
Subsidiary or is merged with or into or consolidated with the Company or a
Restricted Subsidiary, shall be deemed to have been incurred at the time such
Person becomes a Restricted Subsidiary or is merged with or into or consolidated
with the Company or a Restricted Subsidiary, and Indebtedness which is assumed
at the time of the acquisition of any asset shall be deemed to have been
incurred at the time of such acquisition.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture will provide that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, make any Restricted Payment, unless at the time of and immediately
after giving effect to the proposed Restricted Payment (with the value of any
such Restricted Payment, if other than cash, to be as determined in good faith
by the Board of Directors of the Company, which determination shall be
conclusive), (i) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, (ii) the Company could incur
at least $1.00 of additional Indebtedness pursuant to the first paragraph under
the "Limitation on Incurrence of Indebtedness" covenant and (iii) the aggregate
amount of all Restricted Payments made after the Issue Date shall not exceed the
sum of (a) an amount equal to 50% of the Company's aggregate cumulative
Consolidated Net Income accrued on a cumulative basis from the Issue Date (or,
if such aggregate cumulative Consolidated Net Income for such period shall be a
deficit, minus 100% of such deficit), PLUS (b) the aggregate amount of all net
cash proceeds (other than proceeds from the issuance of the common stock of
Leiner Group to North Castle Partners on the Issue Date) received since the
Issue Date by the Company (w) as capital contributions in the form of common
equity to the Company after the Issue Date, (x) from the issuance and sale
(other than to a Restricted Subsidiary) of Capital Stock (other than
Disqualified Stock), (y) from the issuance to a Person who is not a Subsidiary
of the Company of any options, warrants or other rights to acquire Capital Stock
of the Company (in each case, exclusive of any Disqualified Stock or any
options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
Notes) and (z) from the issuance and sale by the
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Company or any Restricted Subsidiary after the Issue Date of Disqualified Stock
or debt securities that have been converted into or exchanged for Capital Stock
of the Company (other than Disqualified Stock), PLUS the amount of cash received
by the Company or any Restricted Subsidiary upon such conversion or exchange, in
each case to the extent that such proceeds are not used to redeem, repurchase,
retire or otherwise acquire Capital Stock or any Indebtedness of the Company or
any Restricted Subsidiary, pursuant to clause (ii) of the next paragraph, PLUS
(c) the amount of the net reduction in Investments by the Company in
Unrestricted Subsidiaries resulting from (x) the payment of cash dividends or
the repayment in cash of the principal of loans or the cash return on any
Investment, in each case to the extent received by the Company or any Restricted
Subsidiary from Unrestricted Subsidiaries, (y) the release or extinguishment of
any Guarantee of Indebtedness of any Unrestricted Subsidiary, and (z) the
redesignation of Unrestricted Subsidiaries as Restricted Subsidiaries of the
Company (valued as provided in the definition of "Investment"), such aggregate
amount of the net reduction in Investments not to exceed in the case of any
Unrestricted Subsidiaries the amount of Restricted Investments previously made
by the Company or any Restricted Subsidiary in such Unrestricted Subsidiary,
which amount was included in the calculation of the amount of Restricted
Payments, PLUS (d) to the extent that any Restricted Investment that was made
after the Issue Date is sold for cash or otherwise liquidated or repaid for
cash, the amount of cash proceeds received with respect to such Restricted
Investment, net of taxes and the cost of disposition, not to exceed the amount
of Restricted Investments made after the Issue Date.
The foregoing provisions will not prohibit the following actions
(collectively, "Permitted Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such payment would have
been permitted under the Indenture and such payment shall be deemed to have
been paid on such date of declaration for purposes of clause (iii) of the
preceding paragraph;
(ii) the redemption, repurchase, retirement or other acquisition of any
Capital Stock or any Indebtedness of the Company that is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of,
the substantially concurrent sale (other than to a Restricted Subsidiary) of
Capital Stock of the Company (other than any Disqualified Stock);
(iii) Restricted Investments in an amount such that the sum of the
aggregate amount of Restricted Investments made pursuant to this clause
(iii) after the Issue Date and outstanding (net of any returns in cash
thereof or cash received in liquidation or on disposition thereof) does not
exceed at any time the greater of (A) $15.0 million and (B) 7.0% of
Consolidated Tangible Assets;
(iv) loans, advances, dividends or distributions to Leiner Group or PLI
to the extent necessary to permit Leiner Group to repurchase or otherwise
acquire, or payments by the Company to purchase or otherwise acquire,
Capital Stock of Leiner Group (including options, warrants or other rights
to acquire such Capital Stock) from departing or deceased directors,
officers or employees of Leiner Group, the Company or its Subsidiaries, or
other Management Investors (or payments in lieu of issuing and reacquiring
any such Capital Stock, made to or on behalf of any such Person), whether
pursuant to the terms of an employee benefit plan or employment agreement or
otherwise; PROVIDED that the aggregate amount of all such repurchases shall
not exceed $2.5 million during any fiscal year and $5.0 million during any
period of five consecutive fiscal years (plus the net cash proceeds received
by the Company after the Issue Date as a capital contribution from the sale
to Management Investors of Capital Stock of Leiner Group or options,
warranty or other rights in respect thereof);
(v) payments to Leiner Group or PLI to permit Leiner Group to pay, or
the payment by the Company directly of, the payments provided for by clause
(viii) of the exceptions to the "Limitation on Transactions with Affiliates"
covenant;
(vi) loans, advances, dividends or distributions by the Company or any
Restricted Subsidiary to Leiner Group or PLI not to exceed an amount
necessary to permit Leiner Group or PLI to (A) pay its
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costs (including all professional fees and expenses) incurred to comply with
its reporting obligations under federal or state laws or under the
Indenture, including any reports filed with respect to the Securities Act,
Exchange Act or the respective rules and regulations promulgated thereunder,
(B) make payments in respect of its indemnification obligations owing to
directors, officers, employees or other Persons under its charter or by-laws
or pursuant to written agreements with any such Person, to the extent such
payments relate to the Company and its Subsidiaries, (C) pay all reasonable
fees and expenses payable by it in connection with the Recapitalization and
related transactions (including without limitation the financing thereof),
or (D) pay its other operational expenses (other than taxes) incurred in the
ordinary course of business and not exceeding $500,000 in the aggregate in
any fiscal year;
(vii) payments by the Company or any Restricted Subsidiary to Leiner
Group or PLI (A) pursuant to the Tax Sharing Agreement, (B) to pay or permit
Leiner Group to pay any taxes, charges or assessments, including but not
limited to sales, use, transfer, rental, ad valorem, value-added, stamp,
property, consumption, franchise, license, capital, net worth, gross
receipts, excise, occupancy, intangibles or similar taxes, charges or
assessments ("Taxes") (other than federal, state or local taxes measured by
income and federal, state or local withholding imposed on payments made by
Leiner Group), required to be paid by Leiner Group or PLI by virtue of its
being incorporated or having capital stock outstanding (but not by virtue of
owning stock of any corporation other than PLI or the Company or any of its
Subsidiaries), or being a holding company parent of PLI or the Company or
receiving dividends from or other distributions in respect of the stock of
PLI or the Company, or having guaranteed any obligations of PLI or the
Company or any of its Subsidiaries, or having made any payment in respect of
any of the items for which the Company is permitted to make payments to
Leiner Group or PLI pursuant to this covenant, (C) to pay or permit Leiner
Group or PLI to pay any other federal, state, foreign, provincial or local
taxes measured by income for which Leiner Group or PLI is liable up to an
amount not to exceed with respect to such federal taxes the amount of any
such taxes which the Company would have been required to pay on a separate
company basis or on a consolidated basis if the Company had filed a
consolidated return on behalf of an affiliated group (as defined in Section
1504 of the Internal Revenue Code of 1986, as amended, or an analogous
provision of state, local or foreign law) of which it was the common parent,
or with respect to state and local taxes, on a combined basis if the Company
had filed a combined return on behalf of an affiliated group consisting only
of the Company and its Subsidiaries, (D) to pay or permit Leiner Group or
PLI to pay any Taxes attributable to periods prior to the issuance of the
Notes, or (E) to pay or permit Leiner Group or PLI to pay any Taxes
attributable to the Assumption or any dividend or distribution in respect of
the stock of PLI or the Company;
(viii) the payment by the Company of, or loans, advances, dividends or
distributions by the Company to Leiner Group or PLI to pay, dividends on the
common stock of the Company, Leiner Group or PLI, as applicable, following
an initial public offering of such common stock, in an amount not to exceed
in any fiscal year 6% of the net proceeds received by the Company, in or
from such public offering;
(ix) loans, advances, dividends or distributions by the Company or any
Restricted Subsidiary in an aggregate amount not to exceed $5.0 million;
PROVIDED, HOWEVER, that the Company or any Restricted Subsidiary shall not
be permitted to make Restricted Payments under this clause (ix) unless,
after giving effect thereto (including the incurrence of any Indebtedness to
fund such Restricted Payment), the Consolidated Coverage Ratio of the
Company would be at least equal to 2.25:1.00; and
PROVIDED, FURTHER, that in the case of clauses (viii) and (ix) no Default or
Event of Default shall have occurred or be continuing at the time of such
payment after giving effect thereto.
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For purposes of clause (iii) of the first paragraph of this covenant,
Permitted Payments made pursuant to clauses (i), (iii), (iv), (viii) and (ix) of
the immediately preceding paragraph shall be included (with respect to clause
(i), as of the date of declaration) as Restricted Payments made since the Issue
Date.
LIMITATION ON ASSET SALES. The Indenture will provide that the Company will
not, and will not permit any Restricted Subsidiary to, make any Asset Sale
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration (including by way of relief from, or by any other Person
assuming responsibility for, any liabilities, contingent or otherwise) at the
time of such Asset Sale at least equal to the Fair Market Value of the assets or
other property sold or disposed of in the Asset Sale, as such Fair Market Value
may be determined (and shall be determined, to the extent such Asset Sale or any
series of related Asset Sales involves aggregate consideration in excess of $1.0
million) in good faith by the Board of Directors, whose determination shall be
conclusive (including as to the value of all noncash consideration), and (ii) at
least 75% of such consideration (excluding, in the case of an Asset Sale of
assets, any consideration by way of relief from, or by any other Person assuming
responsibility for, any liabilities, contingent or otherwise, which are not
Indebtedness) consists of either cash or Cash Equivalents. For purposes of this
covenant, "cash" shall include (1) the amount of any Indebtedness (other than
any Indebtedness that is by its terms expressly subordinated in right of payment
to the Notes) of the Company or such Restricted Subsidiary that is assumed by
the transferee of any such assets or other property in such Asset Sale or
another Person (and excluding any liabilities that are incurred in connection
with or in anticipation of such Asset Sale), but only to the extent that such
assumption is effected on a basis under which there is no further recourse to
the Company or any of the Restricted Subsidiaries with respect to such
liabilities, (2) Indebtedness of a Restricted Subsidiary that is no longer a
Restricted Subsidiary as a result of such Asset Sale, to the extent that the
Company and each other Restricted Subsidiary is unconditionally released from
any Guarantee of such Indebtedness in connection with such Asset Sale, (3)
securities received by the Company or any Restricted Subsidiary from the
transferee that are promptly converted into cash and (4) consideration
consisting of Indebtedness of the Company or any Restricted Subsidiary (other
than Indebtedness that is by its terms expressly subordinated in right of
payment to the Notes), to the extent such Indebtedness is canceled and there is
no further recourse to the Company or any such Restricted Subsidiary, as the
case may be, under such Indebtedness.
Within 365 days after any Asset Sale, the Company may elect to apply an
amount equal to the Net Proceeds from such Asset Sale to (a) permanently reduce
any Senior Debt of the Company or Indebtedness (other than Preferred Stock) of a
Restricted Subsidiary and/or (b) make an investment in, or acquire assets
related to, a Related Business. Pending the final application of such amount,
the Company may temporarily reduce Senior Debt or Indebtedness of a Restricted
Subsidiary or temporarily invest such Net Proceeds in any manner permitted by
the Indenture. Any portion of such amount not applied or invested as provided in
the first sentence of this paragraph within 365 days of such Asset Sale will be
deemed to constitute "Excess Proceeds."
Each date on which the aggregate amount of Excess Proceeds in respect of
which an Asset Sale Offer has not been made exceeds $10.0 million shall be
deemed an "Asset Sale Offer Trigger Date." As soon as practicable, but in no
event later than 20 Business Days after each Asset Sale Offer Trigger Date, the
Company shall commence an offer (an "Asset Sale Offer") to purchase the maximum
principal amount of Notes and other Indebtedness of the Company that ranks PARI
PASSU in right of payment with the Notes (to the extent required by the
instrument governing such other Indebtedness) that may be purchased out of the
Excess Proceeds. Any Notes and other Indebtedness to be purchased pursuant to an
Asset Sale Offer shall, and any other Indebtedness to be purchased pursuant to
an Asset Sale Offer may, be purchased pro rata based on the aggregate principal
amount of Notes and all such other Indebtedness outstanding, and all Notes shall
be purchased at an offer price in cash in an amount equal to 100% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of purchase. To the extent that any Excess Proceeds remain after completion of
an Asset Sale Offer, the Company may use the remaining amount for general
corporate purposes otherwise permitted by the Indenture. In the event that the
Company is
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prohibited under the terms of any agreement governing outstanding Senior Debt of
the Company from repurchasing Notes with Excess Proceeds pursuant to an Asset
Sale Offer as set forth in this paragraph, the Company shall promptly use all
Excess Proceeds to permanently reduce such outstanding Senior Debt of the
Company. Upon the consummation of such permanent reduction, or of any Asset Sale
Offer, the amount of Excess Proceeds shall be deemed to be reset to zero.
Notice of an Asset Sale Offer shall be mailed by the Company not later than
the 20th Business Day after the related Asset Sale Offer Trigger Date to each
holder of Notes at such holder's registered address, stating: (i) that an Asset
Sale Offer Trigger Date has occurred and that the Company is offering to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds (to the extent provided in the immediately preceding paragraph),
at an offer price in cash in an amount equal to 100% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of the purchase
(the "Asset Sale Offer Purchase Date"), which shall be a Business Day, specified
in such notice, that is not earlier than 30 days or later than 60 days from the
date such notice is mailed, (ii) the amount of accrued and unpaid interest, if
any, as of the Asset Sale Offer Purchase Date, (iii) that any Note not tendered
will continue to accrue interest, (iv) that, unless the Company defaults in the
payment of the purchase price for the Notes payable pursuant to the Asset Sale
Offer, any Notes accepted for payment pursuant to the Asset Sale Offer shall
cease to accrue interest after the Asset Sale Offer Purchase Date, (v) the
procedures, consistent with the Indenture, to be followed by a holder of Notes
in order to accept an Asset Sale Offer or to withdraw such acceptance, and (vi)
such other information as may be required by the Indenture and applicable laws
and regulations.
On the Asset Sale Offer Purchase Date, the Company will (i) accept for
payment the maximum principal amount of Notes or portions thereof tendered
pursuant to the Asset Sale Offer that can be purchased out of Excess Proceeds
from such Asset Sale that are to be applied to an Asset Sale Offer (to the
extent provided in the second preceding paragraph), (ii) deposit with the Paying
Agent the aggregate purchase price of all Notes or portions thereof accepted for
payment and any accrued and unpaid interest, if any, on such Notes as of the
Asset Sale Offer Purchase Date, and (iii) deliver or cause to be delivered to
the Trustee all Notes tendered pursuant to the Asset Sale Offer. If less than
all Notes tendered pursuant to the Asset Sale Offer are accepted for payment by
the Company for any reason consistent with the Indenture, selection of the Notes
to be purchased by the Company shall be in compliance with the requirements of
the principal national securities exchange, if any, on which the Notes are
listed or, if the Notes are not so listed, on a pro rata basis or by lot;
PROVIDED, HOWEVER, that Notes accepted for payment in part shall only be
purchased in integral multiples of $1,000. The Paying Agent shall promptly mail
to each holder of Notes or portions thereof accepted for payment an amount equal
to the purchase price for such Notes plus accrued and unpaid interest, if any,
thereon, and the Trustee shall promptly authenticate and mail to such holder of
Notes accepted for payment in part a new Note equal in principal amount to any
unpurchased portion of the Notes, and any Note not accepted for payment in whole
or in part shall be promptly returned to the holder of such Note. On and after
an Asset Sale Offer Purchase Date, interest will cease to accrue on the Notes or
portions thereof accepted for payment, unless the Company defaults in the
payment of the purchase price therefor. The Company will announce the results of
the Asset Sale Offer to holders of the Notes on or as soon as practicable after
the Asset Sale Offer Purchase Date.
The Company will comply with the applicable tender offer rules, including
the requirements of Section 14(e) and Rule 14e-1 under the Exchange Act, and all
other applicable securities laws and regulations in connection with any Asset
Sale Offer and will be deemed not to be in violation of any of the covenants
under the Indenture to the extent such compliance is in conflict with such
covenants.
LIMITATION ON LIENS. The Indenture will provide that the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired by such Person, or any income or profits therefrom, or assign
or convey any right to receive income therefrom (any such Lien, including any
such assignment or conveyance, the "Initial Lien"), securing Indebtedness of the
Company or any Subsidiary Guarantor that is PARI PASSU with
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or expressly subordinated in right of payment to the Notes (other than Permitted
Liens), unless the Notes are equally and ratably secured thereby for so long as
such Indebtedness is so secured by the Initial Lien. Any such Lien thereby
created in favor of the Notes will be automatically and unconditionally released
and discharged upon (i) the release and discharge of the Initial Lien to which
it relates, or (ii) any sale, exchange or transfer to any Person not an
Affiliate of the Company of the property or assets secured by such Initial Lien,
or of all of the Capital Stock held by the Company or any Restricted Subsidiary
in, or all or substantially all the assets of, any Restricted Subsidiary
creating such Lien.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture will provide that the Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary to (i)
pay dividends or make any other distributions to the Company or any other
Restricted Subsidiary on its Capital Stock or with respect to any other interest
or participation in, or measured by, its profits, or pay any Indebtedness owed
to the Company or any other Restricted Subsidiary, (ii) make loans or advances
to the Company or any other Restricted Subsidiary or (iii) transfer any of its
properties or assets to the Company or any other Restricted Subsidiary, except
for such encumbrances or restrictions consisting of or existing under or by
reason of (a) the Credit Facility or any other agreement or instrument as in
effect on the Issue Date, and any amendments, restatements, renewals,
replacements or refinancings thereof; PROVIDED, HOWEVER, that such amendments,
restatements, renewals, replacements or refinancings are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the Credit Facility or such other agreement or instrument (or, if
more restrictive, than those contained in the Indenture) immediately prior to
any such amendment, restatement, renewal, replacement or refinancing, (b) any
requirement of any regulatory authority having jurisdiction over the Company or
any Restricted Subsidiary or any of their businesses, (c) any agreement or
instrument of a Person, or governing Indebtedness or Capital Stock of a Person,
acquired by or merged or consolidated with or into the Company or any Restricted
Subsidiary, or assumed by the Company or any Restricted Subsidiary in connection
with an acquisition of assets from such Person, as in effect at the time of such
acquisition, merger or consolidation (except to the extent that such
Indebtedness was incurred in connection with or in contemplation of such
acquisition, merger or consolidation), PROVIDED that for purposes of this clause
(c), if another Person is the Surviving Person, any Subsidiary or agreement
thereof shall be deemed acquired or assumed, as the case may be, by the Company
when such Person becomes the Surviving Person, (d) any provision that restricts
in a customary manner the subletting, assignment or transfer of any property or
asset that is subject to a lease, license or similar contract, or the assignment
or transfer of any lease, license or other contract, (e) any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any property
or assets of the Company or any Restricted Subsidiary not otherwise prohibited
by the Indenture, (f) mortgages, pledges or other security agreements securing
Indebtedness of a Restricted Subsidiary to the extent such encumbrance or
restrictions restrict the transfer of the property subject to such mortgages,
pledges or other security agreements, (g) customary provisions restricting
dispositions of real property interests set forth in any reciprocal easement
agreements of the Company or any Restricted Subsidiary, (h) encumbrances or
restrictions arising or agreed to in the ordinary course of business and that do
not, individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary, (i) any agreement or
instrument relating to any Indebtedness incurred by a Foreign Subsidiary
pursuant to the first paragraph, or clause (ii), (iii), (vii), (x)(A) and (x)(B)
of the second paragraph, of the "Limitation on Incurrence of Indebtedness"
covenant, (j) subordination provisions applicable to any note representing an
obligation of the Company or any Restricted Subsidiary owing to any Restricted
Subsidiary, (k) Purchase Money Obligations for property acquired in the ordinary
course of business that only impose restrictions on the property so acquired,
(l) an agreement relating to Indebtedness of or a Financing Disposition to or by
any Receivables Entity, (m) an agreement for the sale or disposition of the
Capital Stock or assets of any Restricted Subsidiary; PROVIDED, HOWEVER, that
such restriction is only applicable to such Restricted Subsidiary or assets, as
applicable, and such sale or disposition otherwise is permitted under the
"Limitation on Asset Sales" covenant, or (n)
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Refinancing Indebtedness permitted under the Indenture, PROVIDED, HOWEVER, that
the restrictions contained in the agreements governing such Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced immediately prior to
such refinancing.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted by the "Limitation on Liens"
covenant or (2) restricting the sale or other disposition of property or assets
of the Company or any of its Restricted Subsidiaries that secure Indebtedness of
the Company or any of its Restricted Subsidiaries.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than the Company or a
Restricted Subsidiary) unless (1) such transaction or series of related
transactions is on terms that taken as a whole are no less favorable to the
Company or such Restricted Subsidiary, as the case may be, than would be
available in a comparable transaction in arm's-length dealings with a Person
that was not such an Affiliate, and (2) the Company delivers to the Trustee (a)
with respect to any transaction or series of related transactions involving
aggregate payments in excess of $1.0 million, an Officers' Certificate
certifying that such transaction or series of related transactions complies with
clause (1) above and (b) with respect to any transaction or series of related
transactions involving aggregate payments in excess of $5.0 million, an
Officers' Certificate certifying that such transaction or series of related
transactions has been approved by a majority of the members of the Board of
Directors of the Company and approved by a majority of the Independent Directors
or, in the event there is only one Independent Director, by such Independent
Director, and evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate, and (c) with respect to any transaction or series of
related transactions involving aggregate payments in excess of $15.0 million, an
opinion issued by an investment banking firm or appraiser or accounting firm of
national standing as to the fairness to the Company or such Restricted
Subsidiary from a financial point of view. Notwithstanding the foregoing, this
covenant will not apply to (i) any transaction entered into by or among the
Company or one of its Restricted Subsidiaries with one or more Restricted
Subsidiaries; (ii) any Restricted Payment or Permitted Payment not prohibited by
the "Limitation on Restricted Payments" covenant; (iii) the payment of
reasonable and customary regular fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its
Subsidiaries; (iv) any transaction with an employee, officer or member of the
Board of Directors of the Company or any Restricted Subsidiary in the ordinary
course of business involving compensation, indemnity or employee benefit
arrangements; (v) loans or advances made to directors, officers or employees of
Leiner Group, PLI, the Company or any Restricted Subsidiary, or Guarantees in
respect thereof or otherwise made on their behalf (including any payments under
such Guarantees), (A) in respect of travel, entertainment or moving-related
expenses incurred in the ordinary course of business, or (B) in the ordinary
course of business not exceeding $500,000 in the aggregate outstanding at any
time; (vi) payments pursuant to the Tax Sharing Agreement; (vii) any agreement
as in existence on the Issue Date, as the same may be amended from time to time
in any manner not adverse to the holders of Notes; and (viii) the payment of
fees in an aggregate amount not to exceed $1.5 million in any fiscal year and
the reimbursement of reasonable out-of-pocket expenses incurred by North Castle
Partners, L.L.C., in each case in connection with its performance of services
pursuant to the Management Agreement; (ix) the Recapitalization and all related
transactions (including but not limited to the financing thereof), including
without limitation the incurrence and payment of all fees and expenses in
connection therewith; (x) any transaction in the ordinary course of business or
approved by a majority of the Independent Directors, between the Company or any
Restricted Subsidiary and any Affiliate of the Company controlled by the Company
that is a joint venture or similar entity primarily engaged in a Related
Business; and (xii) Guarantees of borrowings by Management Investors in
connection with the purchase of Capital Stock of the Company, Leiner Group or
PLI by such Management
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Investors, which Guarantees are permitted under the "Limitation on Incurrence of
Indebtedness" covenant, and payments thereunder.
LIMITATION ON INCURRENCE OF OTHER SENIOR SUBORDINATED INDEBTEDNESS. The
Company will not, and will not permit any Subsidiary Guarantor to, directly or
indirectly, incur any Indebtedness that is expressly subordinate in right of
payment in any respect to any other Indebtedness, unless such Indebtedness is
expressly subordinate in right of payment to, or ranks PARI PASSU with, the
Notes, in the case of the Company, or the Subsidiary Guarantees, in the case of
a Subsidiary Guarantor; PROVIDED that the foregoing restriction shall not apply
to distinctions between categories of Senior Debt or senior Indebtedness of a
Subsidiary Guarantor ("Guarantor Senior Debt") that exist solely by reason of
Liens or Guarantees arising or created in respect of some but not all such
Senior Debt or Guarantor Senior Debt, as the case may be.
LIMITATION ON THE SALE OR ISSUANCE OF PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES. The Company will not sell, and will not permit any Restricted
Subsidiary to, directly or indirectly, issue or sell, any shares of Preferred
Stock of any Restricted Subsidiary, except (i) to the Company or a Restricted
Subsidiary, or to directors as director's qualifying shares to the extent
required by applicable law, or (in the case of a Foreign Subsidiary) to the
extent required by applicable law, or (ii) for any sale in compliance with the
terms of the "Limitation on Asset Sales" covenant or (iii) for any Preferred
Stock incurred by any Restricted Subsidiary in compliance with the "Limitations
on Incurrence of Indebtedness" covenant.
LIMITATION ON DESIGNATION OF UNRESTRICTED SUBSIDIARIES. The Indenture will
provide that the Company will not designate any Subsidiary of the Company (other
than a newly created Subsidiary in which no Investment has previously been made
in excess of $1,000) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") unless:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) immediately after giving effect to such Designation the Company
would be able to incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the "Limitation on Incurrence of Indebtedness" covenant;
and
(c) the Company would not be prohibited under the Indenture from making
an Investment at the time of Designation in an amount (the "Designation
Amount") equal to the Fair Market Value of such Restricted Subsidiary on
such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the "Limitation
on Restricted Payments" covenant for all purposes of the Indenture in the
Designation Amount. The Indenture will further provide that neither the Company
nor any Restricted Subsidiary shall at any time (x) provide credit support for,
or a Guarantee of, any Indebtedness of any Unrestricted Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness); PROVIDED
that the Company may pledge Capital Stock or Indebtedness of any Unrestricted
Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever
against the Company other than to obtain such pledged property, (y) be directly
or indirectly liable for any Indebtedness of any Unrestricted Subsidiary or (z)
be directly or indirectly liable for any Indebtedness which provides that the
holder thereof may (upon notice, lapse of time or both) declare a default
thereon or cause the payment thereof to be accelerated or payable prior to its
final scheduled maturity upon the occurrence of a default with respect to any
Indebtedness of any Unrestricted Subsidiary (including any right to take
enforcement action against such Unrestricted Subsidiary), except to the extent
permitted under the "Limitation on Restricted Payments" covenant.
The Indenture will further provide that the Company will not revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation"),
unless:
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(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation shall be deemed to have
been incurred at such time and shall have been permitted to be incurred for
all purposes of the Indenture.
All Designations and Revocations must be evidenced by a resolution of the
Board of Directors of the Company delivered to the Trustee certifying compliance
with the foregoing provisions.
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES. The
Indenture will provide that the Company will not permit any U.S. Restricted
Subsidiary, directly or indirectly, to Guarantee any other Indebtedness of the
Company or any Subsidiary Guarantor ("U.S. Specified Indebtedness") unless such
U.S. Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for the Guarantee (a "U.S. Subsidiary
Guarantee") of the payment of the Notes by such U.S. Restricted Subsidiary,
which U.S. Subsidiary Guarantee shall be subordinated to such U.S. Restricted
Subsidiary's Guarantee of such U.S. Specified Indebtedness to the same extent as
the Notes or the Subsidiary Guarantees, as applicable, are subordinated to such
U.S. Specified Indebtedness under the Indenture; PROVIDED, HOWEVER, that a U.S.
Restricted Subsidiary will not be required to provide a U.S. Subsidiary
Guarantee under this covenant unless and until such time as such U.S. Restricted
Subsidiary, individually or together with all other U.S. Restricted Subsidiaries
that are otherwise obligated to provide a U.S. Subsidiary Guarantee under this
covenant, accounts for one percent or more of Consolidated Tangible Assets. The
Indenture will further provide that the Company will not permit any Foreign
Subsidiary, directly or indirectly, to Guarantee any other Indebtedness of the
Company or any Subsidiary Guarantor (the "Foreign Specified Indebtedness") that
(i) is PARI PASSU with or expressly subordinated in right of payment to the
Notes or the Subsidiary Guarantees, as applicable, or (ii) represents Public
Debt, in each case, unless such Foreign Subsidiary simultaneously executes and
delivers a supplemental indenture to the Indenture providing for the Guarantee
(a "Foreign Subsidiary Guarantee") of the payment of the Notes by such Foreign
Subsidiary, which Foreign Subsidiary Guarantee shall be subordinated to such
Foreign Subsidiary's Guarantee of such Foreign Specified Indebtedness to the
same extent as the Notes or the Subsidiary Guarantees, as applicable, are
subordinated to such Foreign Specified Indebtedness under the Indenture. A
Subsidiary Guarantor shall be deemed released from all of its obligations under
its U.S. Subsidiary Guarantee or Foreign Subsidiary Guarantee, as applicable, at
any such time that such Subsidiary Guarantor is released from all of its
obligations under all of its Guarantees in respect of U.S. Specified
Indebtedness or Foreign Specified Indebtedness, as the case may be, unless such
release results from payment under such Guarantee of U.S. Specified Indebtedness
or Foreign Specified Indebtedness, as applicable. In addition, the Company will
have the right to cause any Restricted Subsidiary to execute and deliver to the
Trustee a supplemental indenture pursuant to which such Subsidiary will
guarantee payment of the Notes. The obligations of each Subsidiary Guarantor
under its Guarantee will be limited to the maximum amount, as will, after giving
effect to all other contingent and fixed liabilities of such Subsidiary
Guarantor, result in the obligations of such Subsidiary Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer under
federal or state law. Notwithstanding the foregoing, any Guarantee by a
Restricted Subsidiary of the Notes shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon the sale or other
disposition, by way of merger or otherwise, to any Person not an Affiliate of
the Company, of all of the Company's stock in, or all or substantially all the
assets of, such Restricted Subsidiary. In addition, any Subsidiary Guarantee
will be automatically and unconditionally released and discharged upon the
merger or consolidation of the applicable Subsidiary Guarantor with and into the
Company or another Subsidiary Guarantor that is the surviving Person in such
merger or consolidation. The form of such supplemental indenture will be
attached as an exhibit to the Indenture.
PROVISION OF FINANCIAL STATEMENTS. The Indenture will provide that, whether
or not the Company is then subject to Section 13(a) or 15(d) of the Exchange
Act, the Company will file (unless such filing is not
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permitted under the Exchange Act) with the Commission, so long as Notes are
outstanding, the annual reports, quarterly reports and other periodic reports
which the Company would have been required to file with the Commission pursuant
to such Section 13(a) or 15(d) if the Company were so subject, and such
documents shall be filed with the Commission on or prior to the respective dates
(the "Required Filing Dates") by which the Company would have been required so
to file such documents if the Company were so subject. The Company will also in
any event (i) within 15 days of each Required Filing Date, (a) transmit by mail
to all holders of Notes, as their names and addresses appear in the Note
register, without cost to such holders and (b) file with the Trustee copies of
the annual reports, quarterly reports and other periodic reports which the
Company would have been required to file with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections
and (ii) if filing such documents by the Company with the Commission is
prohibited under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective holder at the Company's cost.
ADDITIONAL COVENANTS. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) maintenance of
corporate existence; (iv) payment of taxes and other claims; (v) maintenance of
properties; and (vi) maintenance of insurance.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Indenture will provide that the Company shall not, in any single
transaction or series of related transactions, consolidate or merge with or into
(whether or not the Company is the Surviving Person (other than a consolidation
or merger with or into a wholly owned Restricted Subsidiary; PROVIDED that, in
connection with any such merger or consolidation, no consideration (other than
Common Stock in the Surviving Person or the Company) shall be issued or
distributed to the shareholders of the Company)), or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of its properties
or assets in one or more related transactions to, another Person, and the
Company will not permit any Restricted Subsidiary to enter into any such
transaction or series of related transactions if such transaction or series of
related transactions, in the aggregate, would result in a sale, assignment,
transfer, lease, conveyance or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries, taken
as a whole, to another Person, unless (i) the Surviving Person is a corporation
organized or existing under the laws of the United States, any state thereof or
the District of Columbia; (ii) the Surviving Person (if other than the Company)
assumes all the obligations of the Company under the Notes (and the Guarantees
of the Company's subsidiaries shall be confirmed as applying to such Surviving
Person's obligations), and the Indenture pursuant to a supplemental indenture in
a form reasonably satisfactory to the Trustee; (iii) at the time of and
immediately after such Disposition, no Default or Event of Default shall have
occurred and be continuing; and (iv) at the time of such Disposition and after
giving pro forma effect thereto, the Surviving Person would be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the first paragraph
of the covenant described under "--Certain Covenants-- Limitation on Incurrence
of Indebtedness."
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the Surviving Person, the Surviving Person is to assume
all the obligations of the Company under the Notes, the Indenture and, if then
in effect, the Registration Rights Agreement pursuant to a supplemental
indenture or other written agreement, as the case may be, and such Surviving
Person shall succeed to, and be substituted for, and may exercise every right
and power of, the Company and the Company shall be discharged from its
obligations under the Indenture, the Notes and the Registration Rights
Agreement. In addition, each Subsidiary Guarantor, unless it is the other party
to the transaction or unless its Subsidiary Guarantee will be released and
discharged in accordance with its terms as a result of the transaction, will be
required to confirm, by supplemental indenture, that its Subsidiary Guarantee
will apply to the obligations of the Company or the Surviving Person under the
Indenture.
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EVENTS OF DEFAULT
The Indenture will provide that each of the following constitutes an Event
of Default:
(i) a default for 30 days in the payment when due of interest on any
Note (whether or not prohibited by the subordination provisions of the
Indenture);
(ii) a default in the payment when due of principal on any Note (whether
or not prohibited by the subordination provisions of the Indenture), whether
upon maturity, acceleration, optional or mandatory redemption, required
repurchase or otherwise;
(iii) the failure to perform or comply with any provision described in
"Merger, Consolidation and Sale of Assets" and the failure to offer to
repurchase or to repurchase the Notes in the event of a Change of Control in
accordance with the provisions described in "Change of Control";
(iv) the failure to perform or comply with any covenant or agreement in
the Indenture, the Notes or any Subsidiary Guarantee (other than the
defaults specified in clauses (i), (ii) or (iii) above) which failure
continues for 30 days after written notice thereof has been given to the
Company by the Trustee or to the Company and the Trustee by the holders of
at least 25% in aggregate principal amount of the then outstanding Notes;
(v) the occurrence of one or more defaults under any agreements,
indentures or instruments under which the Company or any Significant
Subsidiary then has outstanding Indebtedness in excess of $7.5 million in
the aggregate and, if not already matured at its final maturity in
accordance with its terms, such Indebtedness shall have been accelerated;
(vi) one or more judgments, orders or decrees for the payment of money
in an amount (net of any insurance or indemnity payments actually received
in respect thereof prior to or within 60 days from the entry thereof, or to
be received in respect thereof in the event any appeal thereof shall be
unsuccessful) in excess of $7.5 million, either individually or in the
aggregate, shall be entered against the Company, any Subsidiary Guarantor or
any Significant Subsidiary or any of their respective properties and which
judgments, orders or decrees are not paid, discharged, bonded or stayed or
stayed pending appeal for a period of 60 days after their entry;
(vii) certain events of bankruptcy, dissolution, insolvency,
reorganization, administration or similar proceedings of the Company, any
Subsidiary Guarantor or any Significant Subsidiary; or
(viii) any Subsidiary Guarantee of a Subsidiary Guarantor ceases to be in
full force and effect or is declared null and void or any Subsidiary
Guarantor denies in writing that it has any further liability under any
Subsidiary Guarantee, or gives written notice to such effect (other than by
reason of the termination of the Indenture or the release of any such
Subsidiary Guarantee in accordance with such Subsidiary Guarantee or the
Indenture).
If any Event of Default (other than as specified in clause (vii) of the
preceding paragraph with respect to the Company) occurs and is continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the then
outstanding Notes may, and the Trustee at the request of such holders shall,
declare all the Notes to be due and payable, immediately by notice in writing to
the Company, and to the Company and the Trustee if by the holders, specifying
the respective Event of Default and that such notice is a "notice of
acceleration," and the Notes shall become immediately due and payable; PROVIDED
that so long as the Credit Agreement shall be in full force and effect, if an
Event of Default shall have occurred and be continuing (other than as specified
in clause (vii) above with respect to the Company), and such acceleration shall
not be effective until the earlier to occur of (x) five Business Days following
delivery of a written notice of such acceleration of the Notes to the agent
under the Credit Agreement and (y) the acceleration of any Indebtedness under
the Credit Agreement. Notwithstanding the foregoing, in the case of an Event of
Default arising from the events specified in clause (vii) of the preceding
paragraph with respect to the Company, the principal of, and premium, if any,
and any accrued interest on, all outstanding
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Notes shall ipso facto become immediately due and payable without further action
or notice. Holders of the Notes may not enforce the Indenture or the Notes
except as provided in the Indenture.
Notwithstanding the foregoing, in the event of a declaration of acceleration
in respect of the Notes because an Event of Default specified in clause (v)
above shall have occurred and be continuing, such declaration of acceleration of
the Notes and such Event of Default shall be automatically annulled and
rescinded and be of no further effect if the Indebtedness that is the subject of
such Event of Default has been discharged or paid in full or such Event of
Default shall have been cured or waived by the holders of such Indebtedness and
if such Indebtedness has been accelerated, then the holders thereof have
rescinded their declaration of acceleration in respect of such Indebtedness and
written notice of such discharge, cure or waiver and rescission, as the case may
be, shall have been given to the Trustee within 60 days after such declaration
of acceleration in respect of the Notes by the Company or by the requisite
holders of such Indebtedness or a trustee, fiduciary or agent for such holders
or other evidence satisfactory to the Trustee of such events is provided to the
Trustee and no other Event of Default shall have occurred which has not been
cured or waived during such 60-day period.
The holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except (i) a continuing Default or Event of Default in the payment
of the principal of, or premium, if any, or interest on, the Notes (which may
only be waived with the consent of each holder of Notes affected), or (ii) in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the holder of each Note outstanding. Subject
to certain limitations, holders of a majority in principal amount of the then
outstanding Notes may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal, premium or interest) if it determines that withholding
notice is in their interest.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 30 days after receipt of such notice
and the Trustee, within such 30-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on, such Note on or
after the respective due dates expressed in such Note.
The Company is required to deliver to the Trustee annually a statement
regarding compliance by the Company with its obligations under the Indenture,
and the Company is required, upon becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement specifying such Default or Event
of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the principal of,
or premium, if any, or interest on, any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture or in any of
the Notes, or of any Subsidiary Guarantor in any Subsidiary Guarantee, or
because of the creation of any Indebtedness represented thereby, shall be had
against any incorporator, shareholder, officer, director, employee or
controlling person of the Company or of any successor Person thereof. Each
holder, by accepting the Notes, waives and releases all such liability.
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DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and any Subsidiary Guarantor discharged with respect
to the outstanding Notes ("defeasance"). Such defeasance means that the Company
shall be deemed to have paid and discharged the entire indebtedness represented
by the outstanding Notes and to have satisfied all other obligations under the
Notes and the Indenture except for (i) the rights of holders of the outstanding
Notes to receive, solely from the trust fund described below, payments in
respect of the principal of, and premium, if any, and interest on, such Notes
when such payments are due, (ii) the Company's obligations with respect to the
Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee under the Indenture, and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and any
Subsidiary Guarantor released with respect to certain covenants that are
described in the Indenture ("covenant defeasance") and any omission to comply
with such obligations shall not constitute a Default or an Event of Default with
respect to the Notes. In the event that a covenant defeasance occurs, certain
events (not including non-payment, bankruptcy and insolvency events) described
under "--Events of Default" will no longer constitute Events of Default with
respect to the Notes.
Either defeasance option may be exercised to any redemption date or to the
maturity date for the Notes. In order to exercise either defeasance or covenant
defeasance, (i) the Company shall irrevocably deposit with the Trustee, as trust
funds in trust, for the benefit of the holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the report of a
nationally recognized firm of independent public accountants or a nationally
recognized investment banking firm, to pay and discharge the principal of, and
premium, if any, and interest on the outstanding Notes to redemption or
maturity, as the case may be; (ii) the Company shall have delivered to the
Trustee an Opinion of Counsel in the United States to the effect that the
holders of the outstanding Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance or covenant
defeasance, as the case may be, and will be subject to Federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance or covenant defeasance, as the case may be, had not
occurred (in the case of defeasance, such opinion must refer to and be based
upon a ruling of the Internal Revenue Service or a change in applicable Federal
income tax laws); (iii) no Default or Event of Default shall have occurred and
be continuing on the date of such deposit or insofar as clause (vii) under the
first paragraph under "-- Events of Default" is concerned, at any time during
the period ending on the 91st day after the date of deposit; (iv) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a Default under, the Indenture or any other material agreement or
instrument to which the Company or any Subsidiary Guarantor is a party or by
which it is bound; and (v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each to the effect that all
conditions precedent under the Indenture to either defeasance or covenant
defeasance, as the case may be, have been complied with and (in the case of such
Officer's Certificate) that no violations under material agreements governing
any other outstanding Indebtedness would result therefrom.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (i) either (a)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) have been delivered to the
Trustee for cancellation or (b) all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable at their Stated Maturity within one year or (z) are to be called for
redemption within one year under arrangements reasonably satisfactory to the
Trustee for the giving of notice of redemption by the
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Trustee in the name, and at the expense, of the Company and, in each case, the
Company has irrevocably deposited or caused to be deposited with the Trustee an
amount in United States dollars, U.S. Government Obligations, or a combination
thereof, sufficient to pay and discharge the entire indebtedness on the Notes
not theretofore delivered to the Trustee for cancellation, for principal,
premium, if any, and interest to the date of deposit; (iii) the Company has paid
or caused to be paid all other sums payable under the Indenture by the Company;
and (iv) the Company has delivered to the Trustee an Officers' Certificate and
an Opinion of Counsel each to the effect that all conditions precedent under the
Indenture relating to the satisfaction and discharge of the Indenture have been
complied with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two paragraphs, the Indenture or the Notes
may be amended or supplemented with the written consent of the holders of at
least a majority in aggregate principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes), and any existing Default or Event of Default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of a majority in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange offer
for Notes).
Without the consent of each holder affected, an amendment or waiver shall
not: (i) reduce the principal amount of the Notes whose holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change the
fixed maturity of any Note, or reduce the premium payable upon the redemption of
any Note or change the time at which any Note may be redeemed as described under
"Redemption--Optional Redemption" above or, following the occurrence of a Change
of Control or an Asset Sale, amend, change or modify the obligation of the
Company to offer to repurchase and to repurchase the Notes in the event of a
Change of Control or make and consummate the Asset Sale Offer with respect to
any Asset Sale, including by modifying any of the provisions or definitions with
respect thereto, (iii) reduce the rate of or change the time for payment of
interest on any Notes, (iv) waive a Default or Event of Default in the payment
of principal of, or premium, if any, or interest on, the Notes (except that
holders of at least a majority in aggregate principal amount of the then
outstanding Notes may (a) rescind an acceleration of the Notes that resulted
from a non-payment default, and (b) waive the payment default that resulted from
such acceleration), (v) make any Note payable in money other than that stated in
the Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive payments
of principal of, or premium, if any, or interest on, the Notes, (vii) waive a
redemption payment with respect to any Note, (viii) make any change to the
subordination provisions of the Indenture (including definitions) that adversely
affects holders, (ix) make any change in the foregoing amendment and waiver
provisions, or (x) release any Subsidiary Guarantor that is a Significant
Subsidiary from any of its obligations under its Subsidiary Guarantee or the
Indenture other than in compliance with the terms of such Subsidiary Guarantee
or the Indenture.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
(i) to cure any ambiguity, omission, defect or inconsistency, (ii) to provide
for uncertificated Notes in addition to or in place of certificated Notes, (iii)
to provide for the assumption of the Company's obligations to holders of the
Notes in the event of any Disposition involving the Company in which the Company
is not the Surviving Person or to add Subsidiary Guarantees or to secure the
Notes, (iv) to make any change that would provide any additional rights or
benefits to the holders of the Notes or that does not adversely affect the
rights of any such holder, or (v) to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
No amendment to the subordination provisions of the Indenture or the Notes
described under "Subordination," including by modifying any of the definitions
relating thereto, may be made that
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adversely affects the rights of any Senior Debt then outstanding unless the
holders of such Senior Debt (or any group or representative thereof authorized
to give a consent) consent in writing to such amendment.
TRANSFER AND EXCHANGE
The registered holder of a Note will be treated as the owner of it for all
purposes. A holder may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture. Neither the Company nor the Registrar shall be
required to issue, register the transfer of or exchange any Note (i) during a
period beginning at the opening of business on the day that the Trustee receives
notice of any redemption from the Company and ending at the close of business on
the day the notice of redemption is sent to holders, (ii) selected for
redemption, in whole or in part, except the unredeemed portion of any Note being
redeemed in part may be transferred or exchanged, and (iii) during a Change of
Control Offer or an Asset Sale Offer if such Note is tendered pursuant to such
Change of Control Offer or Asset Sale Offer and not withdrawn.
THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Indenture (including the provisions of the Trust Indenture Act
incorporated by reference therein) will contain limitations on the rights of the
Trustee thereunder, should it become a creditor of the Company, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; PROVIDED, HOWEVER, if it acquires any
conflicting interest (as defined in the Trust Indenture Act) it must eliminate
such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Guarantees will be governed by the laws of
the State of New York, without regard to the principles of conflict of laws.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for the definition of all other terms used in the
Indenture.
"ACQUIRED DEBT" means (x) Indebtedness of any Person (the "Acquired Person")
existing at the time the Acquired Person merges or consolidates with or into, or
becomes a Restricted Subsidiary of, the Company or any Restricted Subsidiary, or
(y) Indebtedness of any Person assumed by the Company or any Restricted
Subsidiary in connection with its acquisition of assets from such Person, in
each case excluding Indebtedness incurred in connection with, or in
contemplation of, the Acquired Person merging or consolidating with or into, or
becoming a Restricted Subsidiary of, the Company or any Restricted Subsidiary,
or such acquisition of assets.
"ACQUISITION" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, stock purchase, merger, consolidation, or other transfer, and whether
or not for consideration.
"AEA" means AEA Investors Inc., a Delaware corporation, or any legal
successor thereto as a result of a reorganization thereof that does not involve
any change in control thereof.
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"AFFILIATE" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with") of any Person means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"APPLICABLE PREMIUM" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the then outstanding principal amount of such Note
and (ii) the excess of (A) the present value at such time of (1) the redemption
price of such Note at July 1, 2002 (such redemption price being described under
"--Optional Redemption"), plus (2) all required interest payments (excluding
accrued but unpaid interest) due on such Note through July 1, 2002, computed
using a discount rate equal to the Treasury Rate plus 75 basis points, over (B)
the then outstanding principal amount of such Note.
"ASSET SALE" means (i) any sale, lease, conveyance or other disposition by
the Company or any Restricted Subsidiary of any assets (including by way of a
sale-and-leaseback) other than (A) in the ordinary course of business, (B) the
sale, lease, conveyance or other disposition of the Discontinued Facilities, (C)
any Financing Disposition, (D) the sale, lease, conveyance or other disposition
of all or substantially all of the assets of the Company, which shall not be an
"Asset Sale" but instead shall be governed by the provisions of the Indenture
described under "Merger, Consolidation and Sale of Assets" and (E) any "fee in
lieu" or other disposition of assets to any governmental authority or agency
that continue in use by the Company or any Restricted Subsidiary, so long as the
Company or any Restricted Subsidiary may obtain title to such assets at any time
upon reasonable notice by paying a nominal fee, or (ii) the issuance or sale of
Capital Stock of any Restricted Subsidiary, in the case of each of (i) and (ii),
whether in a single transaction or a series of related transactions, to any
Person (other than to the Company or a Restricted Subsidiary) for Net Proceeds
in excess of $1.0 million.
"ATTRIBUTABLE DEBT" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
assumed in making calculations in accordance with FAS 13) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"BANK DEBT" means any and all amounts, whether outstanding on the Issue Date
or thereafter incurred, payable under or in respect of the Credit Facility,
including without limitation principal, premium (if any), interest (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company or any Restricted Subsidiary whether or
not a claim for post-filing interest is allowed in such proceedings), fees,
charges, expenses, reimbursement obligations, guarantees, other monetary
obligations of any nature and all other amounts payable thereunder or in respect
thereof.
"BORROWING BASE" means, as of any date, an amount equal to the sum of (i)
80% of the consolidated book value of the net accounts receivable that (x) are
owned by the Company or any of its Restricted Subsidiaries as shown on the
balance sheet of the Company and of its Restricted Subsidiaries for the most
recently ended fiscal quarter for which financial statements are available or
(y) are then outstanding as of such balance sheet date and held pursuant to the
terms of any Receivables Financing, and in each case that are not more than 90
days past due, plus (ii) 60% of the consolidated book value of the inventory
owned by the Company or any of its Restricted Subsidiaries as of such balance
sheet date, all as calculated on a consolidated basis and in accordance with
GAAP.
"BUSINESS DAY" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
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"CAPITAL LEASE OBLIGATION" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease for property leased by such Person that would at such time be
required to be capitalized on the balance sheet of such Person in accordance
with GAAP.
"CAPITAL STOCK" of any Person means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association, limited liability company
or business entity, any and all Equity Interests, (iii) in the case of a
partnership, partnership interests (whether general or limited) and (iv) any
other interest or participation that confers on a Person the right to receive a
share of the profits and losses of, or distributions of assets of, the issuing
Person, including any Preferred Stock.
"CASH EQUIVALENTS" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
instrumentality or agency thereof and backed by the full faith and credit of the
United States, in each case maturing within one year from the date of
acquisition thereof; (ii) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality or agency thereof maturing within one year from the
date of acquisition thereof and, at the time of acquisition, having one of the
two highest ratings obtainable from either Standard & Poor's Rating Group (a
division of McGraw Hill Inc.) or any successor rating agency ("S&P") or Moody's
Investors Service, Inc. or any successor rating agency ("Moody's"); (iii)
commercial paper maturing no more than one year from the date of creation
thereof and, at the time of acquisition, having a rating of at least A-1 from
S&P or at least P-1 from Moody's; (iv) certificates of deposit, time deposits or
bankers' acceptances (or, with respect to foreign banks, similar instruments)
maturing within one year from the date of acquisition thereof issued by (x) any
lender under the Credit Agreement or (y) a commercial banking institution that
is a member of the Federal Reserve System or a commercial banking institution
organized and located in a country recognized by the United States of America,
in each case under this clause (y), having combined capital and surplus and
undivided profits in excess of $500,000,000 (or the foreign currency equivalent
thereof); (v) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (iv) above; (vi)
investments in money market funds which invest substantially all their assets in
securities of the types described in clauses (i) through (v) above; and (vii)
other short-term investments utilized by Foreign Subsidiaries in accordance with
normal investment practices for cash management not exceeding $1.0 million in
aggregate principal amount outstanding at any time.
"CHANGE OF CONTROL" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of
the Exchange Act), other than Permitted Holders, is or becomes (including by
merger, consolidation or otherwise) the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire within one year, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 50% of the
voting power of the total outstanding Voting Stock of the Company; PROVIDED that
any "person" or "group" will be deemed to "beneficially own" any Voting Stock of
the Company held, directly or indirectly, by Leiner Group or PLI so long as such
person or group "beneficially owns," directly or indirectly, in the aggregate
more than 50% of the voting power of the total outstanding Voting Stock of
Leiner Group or PLI; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of any of the Company, Leiner Group or PLI (together with any new
directors whose election to such Board of Directors, or whose nomination for
election by the stockholders of the Company, was approved by the Permitted
Holders or by a vote of 66 2/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of such Board of Directors of the Company, Leiner Group or PLI then in
office, as applicable; or (iii) the sale or other disposition (including by
merger, consolidation or otherwise) of all or substantially all of the assets of
any of the Company, Leiner Group or PLI to any "person" or "group" (as defined
in Rule 13d-5 of the
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Exchange Act) as an entirety or substantially as an entirety in one transaction
or a series of related transactions unless immediately after giving effect to
such transaction, no "person" or "group," other than the Permitted Holders, is
or becomes (as a result of the acquisition, by merger or otherwise) the
beneficial owner, directly or indirectly, of more than 50% of the voting power
of the total outstanding Voting Stock of the surviving or transferee
corporation.
"COMPANY" means Leiner Health Products Inc., a Delaware corporation, which
upon the Assumption became the primary obligor on the Notes, and any successor
that thereafter replaces it in accordance with the Indenture.
"CONSOLIDATED CASH FLOW" means, with respect to any period, the Consolidated
Net Income for such period, plus without duplication (i) Consolidated Interest
Expense for such period, plus (ii) provision for taxes based on income, profits
or capital, to the extent such provision for taxes was included in computing
such Consolidated Net Income, plus (iii) depreciation, amortization (including,
without limitation, amortization of goodwill and other intangibles) and all
other non-cash charges (excluding any non-cash charge which requires an accrual
or reserve for cash charges for any future period), to the extent such
depreciation, amortization and other non-cash charges were deducted in computing
such Consolidated Net Income.
"CONSOLIDATED COVERAGE RATIO" means, with respect to any date of
determination, the ratio of (i) the aggregate amount of Consolidated Cash Flow
for the period of the most recent four consecutive fiscal quarters ended prior
to such date for which consolidated financial statements of the Company are
available, to (ii) Consolidated Interest Expense for such four fiscal quarters,
PROVIDED that:
(1) if since the beginning of such period the Company or any Restricted
Subsidiary has incurred any Indebtedness that remains outstanding on such date
of determination, or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio involves an incurrence of Indebtedness (including
without limitation any Acquired Debt), Consolidated Cash Flow and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness and the application of the proceeds thereof
(and, in the case of any Acquired Debt, the related acquisition) as if such
Indebtedness had been incurred (and any such acquisition had occurred) on the
first day of such period;
(2) if since the beginning of such period the Company or any Restricted
Subsidiary has repaid, repurchased, defeased, retired or otherwise discharged (a
"Discharge") any Indebtedness that is no longer outstanding on such date of
determination, or if the transaction giving rise to the need to calculate the
Consolidated Coverage Ratio involves a Discharge of Indebtedness, Consolidated
Cash Flow and Consolidated Interest Expense for such period shall be calculated
after giving effect to such Discharge of such Indebtedness, including with the
proceeds of any such new Indebtedness, as if such Discharge had occurred on the
first day of such period;
(3) if since the beginning of such period the Company or any Restricted
Subsidiary shall have disposed of any company, any business, any group of assets
constituting an operating unit, or any other assets out of the ordinary course
of business (a "Sale"), (x) Consolidated Cash Flow for such period shall be
reduced by an amount equal to the Consolidated Cash Flow (if positive) directly
attributable to the assets that are the subject of such Sale for such period or
increased by an amount equal to the Consolidated Cash Flow (if negative)
directly attributable thereto for such period and (y) Consolidated Interest
Expense for such period shall be reduced by an amount equal to the Consolidated
Interest Expense directly attributable to any Indebtedness of the Company or any
Restricted Subsidiary Discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Sale for such period (and, if
the Capital Stock of any Restricted Subsidiary is sold, transferred or otherwise
disposed of, the Consolidated Interest Expense for such period directly
attributable to the Indebtedness of such Restricted Subsidiary to the extent the
Company and its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale, transfer or disposition);
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(4) if since the beginning of such period the Company or any Restricted
Subsidiary shall have acquired (by merger or otherwise) any company, any
business, any group of assets constituting an operating unit, or any other
assets out of the ordinary course of business (a "Purchase"), Consolidated Cash
Flow and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the incurrence of any related
Indebtedness) as if such Purchase had occurred on the first day of such period;
and
(5) if since the beginning of such period any Person became a Restricted
Subsidiary or was merged or consolidated with or into the Company or any
Restricted Subsidiary, in each case in a Purchase, and since the beginning of
such period such Person shall have Discharged any Indebtedness or made any Sale
or Purchase that would have required an adjustment pursuant to clause (2), (3)
or (4) above if made by the Company or a Restricted Subsidiary during such
period, Consolidated Cash Flow and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto as if such Discharge,
Sale or Purchase occurred on the first day of such period.
If any Indebtedness bears a floating rate of interest and is being given pro
forma effect, the interest expense on such Indebtedness shall be calculated as
if the rate in effect on the date of determination had been the applicable rate
for the entire period (taking into account any Interest Rate Agreement
Obligation applicable to such Indebtedness if such Interest Rate Agreement
Obligation has a remaining term as at the date of determination in excess of 12
months). If any Indebtedness bears, at the option of the Company or a Restricted
Subsidiary, a fixed or floating rate of interest and is being given pro forma
effect, the interest expense on such Indebtedness shall be computed by applying,
at the option of the Company, either a fixed or floating rate. If any
Indebtedness that is being given pro forma effect was incurred under a revolving
credit facility, the interest expense on such Indebtedness shall be computed
based upon the average daily balance of such Indebtedness during the applicable
period. In making any calculation of the Consolidated Coverage Ratio for any
period prior to the date of the closing of the Recapitalization, the
Recapitalization shall be deemed to have taken place on the first day of such
period.
"CONSOLIDATED INTEREST EXPENSE" means, with respect to any period, the sum
(without duplication) of (i) the interest expense of the Company and its
Restricted Subsidiaries for such period determined on a consolidated basis in
accordance with GAAP consistently applied, including without limitation (a)
amortization of debt discount, (b) net payments, if any, made or received under
Interest Rate Agreement Obligations (including amortization of discounts), (c)
the interest portion of any deferred payment obligation, (d) accrued interest,
(e) the interest component of Capital Lease Obligations and rent expense
associated with Attributable Debt in respect of the relevant lease giving rise
thereto determined as if such lease were a capitalized lease, accrued by the
Company during such period, and all capitalized interest of the Company and its
Restricted Subsidiaries, and (e) all commissions, discounts and other fees and
charges owed with respect to letters of credit, bankers' acceptance financing or
similar facilities, plus (ii) all cash dividends paid during such period by the
Company and its Restricted Subsidiaries with respect to any Disqualified Stock
(other than to the Company or a Restricted Subsidiary), and minus (iii) to the
extent otherwise included in Consolidated Interest Expense, amortization or
write-off of financing costs, in each case under clauses (i) through (iii) as
determined on a consolidated basis in accordance with GAAP consistently applied.
"CONSOLIDATED NET INCOME" means, with respect to any period, the net income
(or loss) of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP consistently applied,
adjusted by excluding, to the extent included in calculating such net income (or
loss), without duplication, (i) any extraordinary gain or loss as recorded on
the statement of operations in accordance with GAAP, (ii) the portion of net
income (or loss) of the Company and its Restricted Subsidiaries allocable to the
Company's equity in the net income (or loss) of any unconsolidated Person or
Unrestricted Subsidiary, except (in the case of such net income) to the extent
of the amount of dividends or distributions actually paid or made to the Company
or any of its Restricted Subsidiaries by such other Person during such period,
(iii) net income (or loss) of any Person combined with the Company
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or any of its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) any gain or
loss realized upon any Asset Sale and any gain or loss realized upon the sale or
other disposition of any Capital Stock of any Person, (v) the net income of any
Restricted Subsidiary if the declaration of dividends or similar distributions
by that Restricted Subsidiary of that net income to the Company is at the time
restricted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders (other than pursuant to the Notes or the Indenture), except to the
extent that any dividend or distribution was or could have been made by the
Restricted Subsidiary to the Company or another Restricted Subsidiary during
such period in compliance with such restrictions, (vi) all deferred financing
costs written off and premiums paid in connection with any early extinguishment
of Indebtedness, (vii) any unrealized gains or losses in respect of Currency
Agreement Obligations, (viii) any unrealized foreign currency transaction gains
or losses in respect of Indebtedness of any Person denominated in a currency
other than the functional currency of such Person, (ix) any nonrecurring charges
related to the Recapitalization or to any acquisition by the Company or any
Restricted Subsidiary after the Issue Date, including without limitation (a) any
non-recurring compensation expense for the in-the-money value of stock options
that will be cashed out, converted, exchanged or otherwise retired in connection
with the Recapitalization, and (b) any charge or expenses incurred for
management transaction bonuses in connection with the Recapitalization, (x) any
non-cash, non-recurring charges, (xi) any charge relating to the closure of the
Discontinued Facilities, (xii) any non-recurring charges incurred in connection
with the Eastern Consolidation, (xiii) any charge or expense incurred during the
fiscal year ended March 31, 1997 (a) for severance, hiring and relocation
expenses in connection with a management reorganization, (b) in connection with
the preparation and filing of a registration statement with the Securities and
Exchange Commission and (c) for bonuses paid to the former owners of the
Company's Canadian subsidiary and (xiv) any non-cash compensation charge arising
from any grant of stock options.
"CONSOLIDATED TANGIBLE ASSETS" means, as of any date of determination, the
total assets, less goodwill and other intangibles (other than patents,
trademarks, copyrights, licenses and other intellectual property) shown on the
balance sheet of the Company and its Restricted Subsidiaries for the most
recently ended fiscal quarter for which financial statements are available,
determined on a consolidated basis in accordance with GAAP.
"CREDIT AGREEMENT" means the credit agreement dated as of June 30, 1997,
among the Company, Vita Health Company (1985) Ltd., a Canadian corporation, the
banks and other financial institutions party thereto from time to time, The Bank
of Nova Scotia, as administrative agent, Merrill Lynch Capital Corporation, as
documentation agent, and Salomon Brothers Holding Company Inc, as syndication
agent, as such agreement may be assumed by any successor in interest, and as
such agreement may be amended, supplemented, waived or otherwise modified from
time to time, or refunded, refinanced, restructured, replaced, renewed, repaid,
increased or extended from time to time (whether in whole or in part, whether
with the original agent and lenders or other agents and lenders or otherwise,
and whether provided under the original Credit Agreement or otherwise).
"CREDIT FACILITY" means the collective reference to the Credit Agreement,
any Loan Documents (as defined therein), any notes and letters of credit issued
pursuant thereto and any guarantee and collateral agreement, patent and
trademark security agreement, mortgages, letter of credit applications and other
guarantees, security agreements and collateral documents, and other instruments
and documents, executed and delivered pursuant to or in connection with any of
the foregoing, in each case as the same may be amended, supplemented, waived or
otherwise modified from time to time, or refunded, refinanced, restructured,
replaced, renewed, repaid, increased or extended from time to time (whether in
whole or in part, whether with the original agent and lenders or other agents
and lenders or otherwise, and whether provided under the original Credit
Agreement or otherwise). Without limiting the generality of the foregoing, the
term "Credit Facility" shall include any agreement (i) changing the maturity of
any
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Indebtedness incurred thereunder or contemplated thereby, (ii) adding
Subsidiaries of the Company as additional borrowers or guarantors thereunder,
(iii) increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder or (iv) otherwise altering the terms and conditions
thereof.
"CURRENCY AGREEMENT OBLIGATIONS" means the Obligations of any Person under a
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement to protect such Person against fluctuations in currency values.
"DEFAULT" means any event that is, or after the giving of notice or passage
of time or both would be, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) all Bank Debt, and (ii) if no Senior Debt
is outstanding under the Credit Agreement, or if the lenders under the Credit
Agreement shall have consented thereto, any other Senior Debt of the Company
permitted to be incurred under the Indenture the principal amount of which is
$10.0 million or more at the time of the designation of such Senior Debt as
"Designated Senior Debt" by the Company in a written instrument delivered to the
Trustee.
"DISCONTINUED FACILITIES" means the Company's Chicago, Illinois OTC
pharmaceutical facility and the Company's facilities to be closed in connection
with the Eastern Consolidation, including the West Unity, Ohio and Sherburne,
New York facilities.
"DISPOSITION" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"DISQUALIFIED STOCK" means (i) any Preferred Stock of any Restricted
Subsidiary and (ii) any Capital Stock that, by its terms (or by the terms of any
security into which it is convertible or for which it is exchangeable), or upon
the happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the option of the
holder thereof (other than upon a change of control of the Company in
circumstances where the holders of the Notes would have similar rights), in
whole or in part on or prior to the final stated maturity of the Notes.
"DOLLARS" and "$" mean lawful money of the United States of America.
"EASTERN CONSOLIDATION" means the consolidation of the Company's eastern
United States packaging and distribution operations into a new facility in South
Carolina, including the closure of Discontinued Facilities, and the incurrence
of moving and relocation expenses for equipment and personnel, severance
expenses in connection with the closure of Discontinued Facilities and training
expenses in connection with the opening of the new facility.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"FINANCING DISPOSITION" means any sale, transfer, conveyance or other
disposition of property or assets by the Company or any Subsidiary thereof to
any Receivables Entity, or by any Receivables Subsidiary, in each case in
connection with the incurrence by a Receivables Entity of Indebtedness, or
obligations to make payments to the obligor on Indebtedness, which may be
secured by a Lien in respect of such property or assets.
"FOREIGN SUBSIDIARY" means (a) any Restricted Subsidiary of the Company that
is (i) not organized under the laws of the United States of America or any state
thereof or the District of Columbia and (ii) conducts its principal operations
outside the United States and (b) any Restricted Subsidiary of the Company that
has no material assets other than securities of one or more Foreign
Subsidiaries, and other assets relating to an ownership interest in any such
securities or Subsidiaries.
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"GAAP" means generally accepted accounting principles in the United States
of America (i) as in effect on the Issue Date (for purposes of the definitions
of the terms "Borrowing Base," "Consolidated Cash Flow," "Consolidated Coverage
Ratio," "Consolidated Interest Expense," "Consolidated Net Income,"
"Consolidated Tangible Assets," all defined terms in the Indenture as and to the
extent used in or relating to any of the foregoing definitions, and all ratios
and computations based on any of the foregoing definitions) and (ii) as in
effect from time to time (for all other purposes of the Indenture), including
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statement by such other entity as approved by a significant segment of the
accounting profession.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"INDEBTEDNESS" means, with respect to any Person, without duplication, and
whether or not contingent, (i) all indebtedness of such Person for borrowed
money or which is evidenced by a note, bond, debenture or similar instrument,
(ii) all obligations of such Person to pay the deferred or unpaid purchase price
of property or services, which purchase price is due more than six months after
the date of placing such property in service or taking delivery and title
thereto or the completion of such service, (iii) all Capital Lease Obligations
and Attributable Debt of such Person, (iv) all obligations of such Person in
respect of letters of credit or bankers' acceptances issued or created for the
account of such Person, (v) to the extent not otherwise included in this
definition, all net obligations of such Person under all Interest Rate Agreement
Obligations or Currency Agreement Obligations of such Person, (vi) all
liabilities of others of the kind described in the preceding clause (i), (ii) or
(iii) secured by any Lien on any property owned by such Person even if such
Person has not assumed or otherwise become liable for the payment thereof to the
extent of the value of the property subject to such Lien, (vii) all Disqualified
Stock issued by such Person, and (viii) to the extent not otherwise included,
any Guarantee by such Person of any other Person's indebtedness or other
obligations described in clauses (i) through (vii) above. "Indebtedness" of the
Company and the Restricted Subsidiaries shall not include (i) current trade
payables incurred in the ordinary course of business and payable in accordance
with customary practices and (ii) non-interest bearing installment obligations
and accrued liabilities incurred in the ordinary course of business which are
not more than 90 days past due.
"INDEPENDENT DIRECTOR" means a member of the Board of Directors of the
Company who does not have any material direct or indirect financial interest in
or with respect to any transaction or series of related transactions.
"INTEREST RATE AGREEMENT OBLIGATIONS" means, with respect to any Person, the
Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"INVESTMENT" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement, but excluding advances, loans and other extension of credit
to customers, directors, officers and employees in the ordinary course of
business) to, capital contribution (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others) to, or any purchase or acquisition of Capital Stock, bonds,
notes, debentures or other similar instruments issued by, such Person and shall
include the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary. For purposes of the definition of "Unrestricted Subsidiary" and the
"Limitation on Restricted Payments" covenant described above, (i) "Investment"
shall include the portion (proportionate to the Company's equity interest in
such Subsidiary) of the Fair Market Value of the assets (net of liabilities) of
any Restricted Subsidiary at the
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time that such Restricted Subsidiary is designated an Unrestricted Subsidiary
and shall exclude the Fair Market Value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary and (ii) any property transferred to or from
an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time
of such transfer, in each case as determined by the Board of Directors in good
faith.
"ISSUE DATE" means the date on which the Notes are first issued under the
Indenture.
"LEINER GROUP" means Leiner Health Products Group Inc., a Delaware
corporation, or any successor thereto.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, or any option or other agreement to sell or give a security interest in
any asset).
"MANAGEMENT AGREEMENT" means the Consulting Agreement dated as of the Issue
Date, among the Company, Leiner Group and North Castle Partners, L.L.C., as in
effect on the Issue Date, and as the same may be amended from time to time in
accordance with the terms of the Indenture.
"MANAGEMENT INVESTORS" means the officers, directors, employees and other
members of the management of Leiner Group, PLI, the Company or any of their
respective Subsidiaries, or family members or relatives thereof, or trusts for
the benefit of any of the foregoing, or any of their heirs, executors,
successors and legal representatives, who at any date beneficially own or have
the right to acquire, directly or indirectly, Capital Stock of the Company,
Leiner Group or PLI.
"NET PROCEEDS" from an Asset Sale means cash payments received (including
any cash payments received by way of deferred payment of principal pursuant to a
note or installment receivable or otherwise, but only as and when received, but
excluding any other consideration received in the form of assumption by the
acquiring Person of Indebtedness or other obligations relating to the properties
or assets that are the subject of such Asset Sale or received in any other
noncash form) therefrom, in each case net of (i) all legal, title and recording
tax expenses, commissions and other fees and expenses incurred, and all federal,
state, provincial, foreign and local taxes required to be paid or accrued as a
liability under GAAP, as a consequence of such Asset Sale, (ii) all payments
made, and all installment payments required to be made, on any Indebtedness that
is secured by any assets subject to such Asset Sale, in accordance with the
terms of any Lien upon such assets, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Sale, or to any other Person (other than the
Company or a Restricted Subsidiary) owning a beneficial interest in the assets
disposed of in such Asset Sale and (iv) appropriate amounts to be provided as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets disposed of in such Asset Sale and retained by the Company or any
Restricted Subsidiary after such Asset Sale.
"NORTH CASTLE PARTNERS" means North Castle Partners I, L.L.C., a Delaware
limited liability company, or any legal successor thereto as a result of a
reorganization thereof that does not involve any change in control thereof.
"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursement obligations, damages and other liabilities
payable under the documentation governing any Indebtedness.
"PERMITTED HOLDERS" means collectively or individually (i) North Castle
Partners and AEA and each of their respective current, former and future
employees, members, stockholders, directors and officers, (ii) trusts for the
benefit of such Persons or the spouses, issue, parents or other relatives of
such Persons, (iii) Persons controlling or controlled by such Persons and (iv)
in the event of the death of any such individual Person, heirs or testamentary
legatees of such Person. For purposes of this definition, "control," as used
with respect to any Person, shall mean the possession, directly or indirectly,
of the power to direct
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or cause the direction of the management and policies of such Person, whether
through ownership of voting securities or by contract or otherwise.
"PERMITTED INVESTMENTS" means (i) any Investment in the Company or any
Restricted Subsidiary; (ii) any Investment in Cash Equivalents; (iii) any
Investment in a Person if, as a result of such Investment, (a) such Person
becomes a Restricted Subsidiary, or (b) such Person either (1) is merged,
consolidated or amalgamated with or into the Company or one of its Restricted
Subsidiaries and the Company or such Restricted Subsidiary is the Surviving
Person, or (2) transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or one of its Restricted Subsidiaries; (iv)
Investments in accounts and notes receivable acquired in the ordinary course of
business; (v) any securities or other Investments received in connection with
any sale or other disposition of property or assets, including any Asset Sale
that complies with the "Limitation on Asset Sales" covenant; (vi) Interest Rate
Agreement Obligations or Currency Agreement Obligations permitted pursuant to
the "Limitation on Incurrence of Indebtedness" covenant; (vii) securities or
other Investments received in settlement of debts created in the ordinary course
of business and owing to the Company or any Restricted Subsidiary, or as a
result of foreclosure, perfection or enforcement of any Lien, or in satisfaction
of judgments, including in connection with any bankruptcy proceeding or other
reorganization of another Person; (viii) Investments in existence or made
pursuant to legally binding written commitments in existence on the Issue Date;
(ix) pledges or deposits (a) with respect to leases or utilities, provided to
third parties in the ordinary course of business or (b) otherwise described in
the definition of "Permitted Liens"; (x) bonds secured by assets leased to and
operated by the Company or any Restricted Subsidiary that were issued in
connection with the financing of such assets so long as the Company or any
Restricted Subsidiary may obtain title to such assets at any time by paying a
nominal fee, cancelling such bonds and terminating the transaction; (xi) (1)
Investments in connection with a Financing Disposition by or to any Receivables
Entity, including Investments of funds held in accounts permitted or required by
the arrangements governing such Financing Disposition or any related
Indebtedness, or (2) any promissory note issued by Leiner Group or PLI, provided
that if Leiner Group or PLI, as applicable, receives cash from the relevant
Receivables Entity in exchange for such note, an equal cash amount is
contributed by Leiner Group or PLI to the Company; and (xii) any promissory note
of any Management Investor acquired in connection with the issuance of Capital
Stock of Leiner Group to such Management Investor.
"PERMITTED LIENS" means (i) Liens securing Indebtedness of a Person existing
at the time that such Person is merged into or consolidated with or into, or
becomes a Restricted Subsidiary of, the Company or a Restricted Subsidiary;
PROVIDED, HOWEVER, that such Liens were not incurred in connection with, or in
contemplation of, such merger, consolidation or other transaction, and do not
extend to any property or assets other than those of such Person; (ii) Liens on
property or assets acquired by the Company or a Restricted Subsidiary; PROVIDED,
HOWEVER, that such Liens were not incurred in connection with, or in
contemplation of such acquisition, and do not extend to any other property or
assets; (iii) Liens in respect of Interest Rate Agreement Obligations, Currency
Agreement Obligations, Purchase Money Obligations, Capital Lease Obligations and
Attributable Debt permitted under the Indenture; (iv) Liens to secure
Indebtedness or other obligations of any Receivables Entity; (v) Liens in favor
of the Company or any Restricted Subsidiary; and (vi) Liens incurred, or pledges
and deposits in connection with, (a) workers' compensation, unemployment
insurance and other social security benefits, and other similar legislation or
other insurance related obligations, (b) bids, tenders, trade, government or
other contracts (other than for borrowed money), obligations for utilities,
leases, licenses, statutory obligations, and surety, judgment, performance and
appeal bonds and other obligations of like nature incurred by the Company or any
Restricted Subsidiary in the ordinary course of business, (c) carriers',
warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like
Liens arising in the ordinary course of business, and (d) any extension,
renewal, refinancing, refunding or replacement of any Permitted Lien (or any
arrangement to which such Permitted Lien relates), provided that such new Lien,
pledge or deposit is limited to the property or assets that secured (or under
the arrangement under which the original Permitted Lien arose, could secure) the
obligations to which such Liens relate.
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"PERSON" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PLI" means PLI Holdings Inc., a Delaware corporation, or any successor
thereto.
"PREFERRED STOCK" as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over Capital Stock of any other class of such Person.
"PUBLIC DEBT" means any Indebtedness represented by debt securities
(including any Guarantee of such securities) issued by the Company or any
Restricted Subsidiary in connection with a public offering (whether or not
underwritten) or a private placement (provided such private placement is
underwritten for resale pursuant to Rule 144A, Regulation S or otherwise under
the Securities Act or sold on an agency basis by a broker-dealer or one of its
affiliates); it being understood that the term "Public Debt" shall not include
any evidence of Indebtedness under the Credit Facility or any other commercial
bank borrowings or similar borrowings, any Receivables Financing, recourse
transfers of financial assets, capital leases or other types of borrowings
incurred in a manner not customarily viewed as a "securities offering."
"PURCHASE MONEY OBLIGATION" means any Indebtedness secured by a Lien on
assets related to the business of the Company or the Restricted Subsidiaries,
and any additions and accessions thereto, which are purchased or constructed by
the Company or any Restricted Subsidiary at any time after the Issue Date;
PROVIDED that (i) any security agreement or conditional sales or other title
retention contract pursuant to which the Lien on such assets is created
(collectively a "Security Agreement") shall be entered into within 180 days
after the purchase or substantial completion of the construction of such assets
and shall at all times be confined solely to the assets so purchased or
acquired, any additions and accessions thereto and any proceeds therefrom, (ii)
at no time shall the aggregate principal amount of the outstanding Indebtedness
secured thereby be increased, except in connection with the purchase of
additions and accessions thereto and except in respect of fees and other
obligations in respect of such Indebtedness and (iii) (A) the aggregate
outstanding principal amount of Indebtedness secured thereby (determined on a
per asset basis in the case of any additions and accessions) shall not at the
time such Security Agreement is entered into exceed 100% of the purchase price
to the Company or any Restricted Subsidiary of the assets subject thereto or (B)
the Indebtedness secured thereby shall be with recourse solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom.
"RECAPITALIZATION" means the recapitalization of Leiner Group pursuant to
the Stock Purchase Agreement and Plan of Merger, dated as of May 31, 1997, among
Leiner Group, North Castle and LHP Acquisition Corp., whereby LHP Acquisition
Corp. was merged with and into Leiner Group, with Leiner Group continuing as the
surviving corporation.
"RECEIVABLE" means a right to receive payment arising from a sale or lease
of goods or services by a Person pursuant to an arrangement with another Person
pursuant to which such other Person is obligated to pay for goods or services
under terms that permit the purchase of such goods and services on credit, as
determined in accordance with GAAP.
"RECEIVABLES ENTITY" means (x) any Receivables Subsidiary or (y) any other
Person that is engaged in the business of acquiring, selling, collecting,
financing or refinancing Receivables, accounts (as defined in the Uniform
Commercial Code as in effect in any jurisdiction from time to time), other
accounts and/or other receivables, and/or related assets.
"RECEIVABLES FINANCING" means any financing of Receivables of the Company or
any Restricted Subsidiary that have been transferred to a Receivables Entity in
a Financing Disposition.
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"RECEIVABLES SUBSIDIARY" means a Subsidiary of the Company that (a) is
engaged solely in the business of acquiring, selling, collecting, financing or
refinancing Receivables, accounts (as defined in the Uniform Commercial Code as
in effect in any jurisdiction from time to time) and other accounts and
receivables (including any thereof constituting or evidenced by chattel paper,
instruments or general intangibles), all proceeds thereof and all rights
(contractual and other), collateral and other assets relating thereto, and any
business or activities incidental or related to such business, and (b) is
designated as a "Receivables Subsidiary" by the Board of Directors of the
Company.
"RELATED BUSINESS" means the business conducted (or proposed to be
conducted) by the Company and its Subsidiaries as of the Issue Date and any and
all businesses that in the good faith judgment of the Board of Directors of the
Company are related, ancillary or complementary to such business.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"RESTRICTED PAYMENT" means (i) any dividend or other distribution declared
or paid on any Capital Stock of the Company or any of its Restricted
Subsidiaries (other than dividends or distributions payable solely in Capital
Stock (other than Disqualified Stock) of the Company or such Restricted
Subsidiary or dividends or distributions payable to the Company or any
Restricted Subsidiary (and, if the Restricted Subsidiary making such dividend or
distributions has any stockholder other than the Company or another Restricted
Subsidiary, to such stockholder on no more than a PRO RATA basis, measured by
value)); (ii) any payment to purchase, redeem or otherwise acquire or retire for
value any Capital Stock of the Company or any Restricted Subsidiary (other than
any Capital Stock owned by the Company or any Restricted Subsidiary, except from
all holders of such Capital Stock of a Restricted Subsidiary on a pro rata
basis); (iii) any payment to purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is expressly subordinated in right of
payment to the Notes (other than a purchase, redemption, defeasance or other
acquisition or retirement for value (A) that is paid for with the proceeds of
Refinancing Indebtedness that is permitted under the covenant described under
"--Certain Covenants-- Limitation on Incurrence of Indebtedness," or (B) in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of such acquisition
or retirement, or (C) from Net Proceeds to the extent permitted by the covenant
described under "--Certain Covenants--Limitation on Asset Sales" or (D) upon a
Change of Control to the extent required by the agreement governing such
Indebtedness but only if the Company shall have complied with the covenant
described under "--Change of Control" and purchased all Notes tendered pursuant
to the offer to repurchase all of the Notes required thereby, prior to
purchasing or repaying such Indebtedness); or (iv) any Restricted Investment.
"RESTRICTED SUBSIDIARY" means each direct or indirect Subsidiary of the
Company other than an Unrestricted Subsidiary.
"REVOLVING CREDIT FACILITY" means the revolving credit facilities provided
under the Credit Facility (which may include any line or letter of credit
facility or subfacility thereunder).
"SALE/LEASEBACK TRANSACTION" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or such Restricted Subsidiary transfers such property to a Person
more than nine months after acquiring such property, and the Company or such
Restricted Subsidiary leases it from such Person, other than leases (x) between
the Company and a Restricted Subsidiary or between Restricted Subsidiaries, (y)
required to be classified and accounted for as capitalized leases for financial
reporting purposes in accordance with GAAP or (z) of any assets referred to in
clause (i)(E) of the definition of Asset Sale.
"SENIOR DEBT" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable state, federal
or foreign law) on and other amounts due on or in connection with (including any
fees, premiums, expenses,
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including costs of collection, and indemnities) any Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter created, incurred or
assumed, unless, in the case of any particular Indebtedness, the instrument
creating or evidencing the same or pursuant to which the same is outstanding
expressly provides that such Indebtedness shall not be senior in right of
payment to the Notes. Without limiting the generality of the foregoing, "Senior
Debt" shall also include the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable state, federal
or foreign law) on, and all other amounts owing in respect of, (i) Bank Debt of
the Company and any Receivables Financing and (ii) all Currency Agreement
Obligations and Interest Rate Agreement Obligations relating to Bank Debt of the
Company, in each case whether outstanding on the Issue Date or thereafter
created, incurred or assumed and including in respect of claims under
Guarantees, claims for indemnity, claims in relation to such Currency Agreement
Obligations and Interest Rate Agreement Obligations, expense reimbursement and
fees. Notwithstanding the foregoing, "Senior Debt" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is PARI PASSU with or
expressly subordinated in right of payment to any Senior Debt of the Company,
(c) Indebtedness which, when incurred and without respect to any election under
Section 1111(b) of Title 11, United States Code, is by its terms without
recourse to the Company, (d) any repurchase, redemption or other obligation in
respect of Disqualified Stock of the Company, (e) to the extent it might
constitute Indebtedness, amounts owing for goods, materials or service purchased
in the ordinary course of business or consisting of trade payables or other
current liabilities (other than any current liabilities owing under Bank Debt or
the current portion of any long-term Indebtedness which would constitute Senior
Debt but for the operation of this clause (e)), (f) to the extent it might
constitute Indebtedness, amounts owed by the Company for services rendered to
the Company, (g) to the extent it might constitute Indebtedness, any liability
for federal, state, local, foreign or other taxes owed or owing by the Company,
(h) Indebtedness of the Company to a Subsidiary of the Company and (i) that
portion of any Indebtedness of the Company which at the time of incurrence is
incurred in violation of the Indenture; PROVIDED, however, that such
Indebtedness shall be deemed not to have been incurred in violation of the
Indenture for purposes of this clause (i) if (x) the holder(s) of such
Indebtedness or their representative or the Company shall have furnished to the
Trustee an opinion of recognized independent legal counsel, unqualified in all
material respects, addressed to the Trustee (which legal counsel may, as to
matters of fact, rely upon an Officers' Certificate of the Company) to the
effect that the incurrence of such Indebtedness does not violate the provisions
of the Indenture or (y) such Indebtedness consists of Bank Debt, and the
holder(s) of such Indebtedness of their agent or representative (1) had no
actual knowledge at the time of incurrence that the incurrence of such
Indebtedness violated the Indenture and (2) shall have received a certificate
from an Officer of the Company to the effect that the incurrence of such
Indebtedness does not violate the provisions of the Indenture.
"SENIOR SUBORDINATED NOTE OBLIGATIONS" means any principal of, premium, if
any, and interest on, and any other amounts owing in respect of, the Notes
payable pursuant to the terms of the Notes or the Indenture or upon acceleration
of the Notes, including, without limitation, amounts received upon the exercise
of rights of rescission or other rights of action (including claims for damages)
or otherwise, to the extent relating to the purchase price of the Notes or
amounts corresponding to such principal of, premium, if any, or interest on, or
other amounts owing with respect to, the Notes.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary of the Company that
would be a "significant subsidiary" of the Company as defined in Rule 1-02 of
Regulation S-X under the Securities Act and the Exchange Act, as such Rule is in
effect on the Issue Date.
"STATED MATURITY" means, when used with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the purchase of
such
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security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"SUBSIDIARY" of a Person means (i) any corporation more than 50% of the
outstanding voting power of the Voting Stock of which is owned or controlled,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries thereof, or
(ii) any limited partnership of which such Person or any Subsidiary of such
Person is a general partner, or (iii) any other Person (other than a corporation
or limited partnership) in which such Person, or one or more other Subsidiaries
of such Person, or such Person and one or more other Subsidiaries thereof,
directly or indirectly, has more than 60% of the outstanding partnership or
similar interests or has the power, by contract or otherwise, to direct or cause
the direction of the policies, management and affairs thereof.
"SUBSIDIARY GUARANTEE" means any Guarantee of the Notes that may from time
to time be provided by a Restricted Subsidiary pursuant to the terms of the
Indenture.
"SUBSIDIARY GUARANTOR" means each of the Company's Restricted Subsidiaries
that issues a Subsidiary Guarantee.
"SURVIVING PERSON" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"TAX SHARING AGREEMENT" means the Tax Sharing Agreement dated as of the
Issue Date between Leiner Group, PLI and the Company, and as the same may be
amended from time to time in accordance with the terms of the indenture.
"TERM LOAN FACILITY" means the term loan facilities provided under the
Credit Facility.
"TREASURY RATE" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the Redemption Date to the Stated Maturity; PROVIDED, HOWEVER, that if the
period from the Redemption Date to the Stated Maturity is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of United States Treasury securities for which such yields are
given, except that if the period from the Redemption Date to the Stated Maturity
is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary of the Company (other than a
Guarantor) designated as such pursuant to and in compliance with the covenant
described under "Limitation on Designation of Unrestricted Subsidiaries." Any
such designation may be revoked by a resolution of the Board of Directors of the
Company delivered to the Trustee, subject to the provisions of such covenant.
"U.S. RESTRICTED SUBSIDIARY" means any Restricted Subsidiary that is not a
Foreign Subsidiary.
"VOTING STOCK" of a Person means Capital Stock of such Person of the class
or classes pursuant to which the holders thereof have the general voting power
under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not
at the time stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal,
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including payment at final maturity, in respect thereof, with (b) the number of
years (calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment, by (ii) the then outstanding aggregate principal
amount of such Indebtedness.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form, without coupons. Except as described below, the New Notes will
be deposited with, or on behalf of, DTC, and registered in the name of Cede &
Co. ("Cede") as DTC's nominee in the form of a global Note certificate (the
"Global Certificate") or will remain in the custody of the Trustee pursuant to
the FAST Balance Certificate Agreement between DTC and the Trustee.
Existing Notes originally purchased by or transferred to (i) institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not "qualified institutional buyers" (as defined in Rule
144A under the Securities Act) ("QIBs"), (ii) except as described below, persons
outside the United States pursuant to sales in accordance with Regulation S
under the Securities Act or (iii) any other persons who are not QIBs
(collectively, "Non-Global Purchasers") were issued in registered form without
coupons (the "Certificated Notes"). Upon the transfer to a QIB of Certificated
Existing Notes initially issued to a Non-Global Purchaser, such Certificated
Existing Notes will be exchanged for an interest in the Global Certificate
representing the Existing Notes in the custody of the Trustee representing the
principal amount of Notes being transferred. See "--Certificated Notes."
DTC has advised the Company that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a "banking organization"
within the meaning of the New York banking law, (iii) a member of the Federal
Reserve System, (iv) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (v) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates.
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Indirect access to DTC's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly.
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Global Certificate representing New Notes, DTC will credit the
account of Participants tendering Existing Notes in exchange for New Notes with
an interest in the Global Certificate and (ii) ownership of beneficial interests
therein will be effected only through records maintained by DTC (with respect to
interests of Participants), Participants and Indirect Participants. The laws of
some states require that certain persons take physical delivery in definitive
form of securities that they own and that security interests in negotiable
instruments can only be perfected by delivery of certificates representing the
instruments. Consequently, the ability to transfer the Notes or to pledge the
Notes as collateral to persons in such states will be limited to such extent.
So long as DTC or its nominee is the registered owner of a Global
Certificate, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by the Global Certificate for all
purposes under the Indenture and the Notes. Except as provided below, owners of
beneficial interests in a Global Certificate will not be entitled to have Notes
represented by such Global Certificate registered in their names, will not
receive or be entitled to receive physical delivery of Certificated Notes, and
will not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to the giving of any direction, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in Notes represented by a Global
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Certificate to pledge or transfer such interest to persons or entities that do
not participate in DTC's system or otherwise to take action with respect to such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Accordingly, each holder of New Notes owning a beneficial interest in a
Global Certificate must rely on the procedures of DTC and, if such holder of New
Notes is not a Participant or an Indirect Participant, on the procedures of the
Participant through which such holder of New Notes owns its interest, to
exercise any rights of a holder of Notes under the Indenture. The Company
understands that under existing industry practice, in the event the Company
requests any action of a holder of New Notes or a holder of New Notes that is an
owner of a beneficial interest in a Global Certificate desires to take any
action that DTC, as the holder of such Global Certificate, is entitled to take,
DTC would authorize the Participant to take such action or would otherwise act
upon the instruction of such holder of New Notes. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
relating to or payments made on account of the New Notes by DTC, or for
maintaining, supervising or reviewing any records of DTC relating to such New
Notes or for any other matter relating to the actions or procedures of DTC.
Payments with respect to the principal of, premium, if any, and interest on,
any Notes represented by a Global Certificate registered in the name of DTC or
its nominee on the applicable record date will be payable by the Trustee to or
at the direction of DTC or its nominee in its capacity as the registered holder
of the Global Certificate representing such Notes under the Indenture. Under the
terms of the Indenture, the Company and the Trustee may treat the persons in
whose names the Notes, including the Global Certificate, are registered as the
owners thereof for the purpose of receiving such payment and for any and all
other purposes whatsoever. Consequently, neither the Company nor the Trustee has
or will have any responsibility or liability for the payment of such amounts to
beneficial owners of interests in the Global Certificate (including principal,
premium, if any, and interest), or to immediately credit the accounts of the
relevant Participants with such payment, in an amount proportionate to their
respective holdings in principal amount of the Global Certificate as shown on
the records of DTC. The Company expects that payments by the Participant and the
Indirect Participant to the beneficial owners of interests in the Global
Certificate will be governed by standing instructions and customary practice and
will be the responsibility of the Participant or the Indirect Participant and
DTC.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from the sources the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
CERTIFICATED NOTES
If (i) the Company notifies the Trustee in writing that DTC is no longer
willing or able to act as a depository or DTC ceases to be registered as a
clearing agency under the Exchange Act and the Company is unable to locate a
qualified successor within 90 days, (ii) the Company, at its option, notifies
the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture or (iii) upon the occurrence of certain
other events, then, upon surrender by DTC of its Global Certificate, then
Certificated Notes will be issued to each person that DTC identifies as the
beneficial owner of the Notes represented by the Global Certificate. In
addition, subject to certain conditions, any person having a beneficial interest
in a Global Certificate may, upon request to the Trustee, exchange such
beneficial interest for Certificated Notes. Upon any such issuance, the Trustee
is required to register such Certificated Notes in the name of such person or
persons (or the nominee of any thereof), and cause the same to be delivered
thereto.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences to holders of the exchange of the Existing Notes for New Notes
pursuant to the Exchange Offer. The exchange of Existing Notes for New Notes
pursuant to the Exchange Offer will not constitute a taxable exchange for United
States federal income tax purposes. Accordingly, a holder who exchanges such
Notes in the Exchange Offer will not recognize gain or loss on the exchange,
such holder's tax basis in the New Notes received pursuant to the Exchange Offer
will be the same as such holder's tax basis in the Existing Notes surrendered
therefor and such holder's holding period for the New Notes received pursuant to
the Exchange Offer will include its holding period for the Existing Notes
surrendered therefor.
ALL HOLDERS OF EXISTING NOTES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE UNITED STATES FEDERAL, STATE AND LOCAL AND NON-UNITED STATES TAX
CONSEQUENCES OF THE EXCHANGE OF EXISTING NOTES FOR NEW NOTES AND OF THE
OWNERSHIP AND DISPOSITION OF NEW NOTES RECEIVED IN THE EXCHANGE OFFER IN LIGHT
OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used for a period of 180 days
after the Expiration Date by a broker-dealer in connection with resales of New
Notes received in exchange for Existing Notes where such Existing Notes were
acquired as a result of market-making activities or other trading activities.
LHP has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any such
broker-dealer for use in connection with any such resale. In addition, until
, 1997, all dealers effecting transactions in the New Notes may be
required to deliver a prospectus. LHP may require any such sellers of New Notes
to supply information reasonably requested in connection with these activities.
LHP may also require such sellers to discontinue disposition of the New Notes if
certain events identified in the Registration Rights Agreement that require
updating of the Prospectus occur.
LHP will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit or any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
LHP has agreed to pay all expenses incident to its performance in connection
with the Exchange Offer under the Registration Rights Agreement, which, among
other things, do not include commissions or concessions of any brokers-dealers,
and will indemnify the Holders of the Existing Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
Certain of the Initial Purchasers have in the past, and may in the future,
provide investment banking and other related services to LHP and its affiliates
in the ordinary course of business. Merrill Lynch
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Capital Corporation, an affiliate of Merrill Lynch, is the documentation agent
and a lender under the New Credit Facility for which it received usual and
customary fees. Salomon Brothers Holding Company Inc, an affiliate of Salomon
Brothers Inc, is the syndication agent and a lender under the New Credit
Facility, for which it received usual and customary fees. Scotiabank, an
affiliate of Scotia Capital, is the Administrative Agent and a lender under the
New Credit Facility, for which it received usual and customary fees. In
addition, in connection with the Recapitalization, Merrill Lynch & Co. acquired
$15 million in limited liability company interests of North Castle, and The Bank
of Nova Scotia acquired $3 million of such interests.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the Company
by Debevoise & Plimpton, New York, New York.
EXPERTS
The Consolidated Financial Statements as of March 31, 1996 and March 31,
1997, and for each of the three years in the period ended March 31, 1997,
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere in this Prospectus and in the Registration Statement, and
are included in reliance upon the reports of Ernst & Young LLP, independent
auditors, given upon the authority of such firm as experts in accounting and
auditing.
132
<PAGE>
LEINER HEALTH PRODUCTS INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Audited Consolidated Financial Statements:
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of March 31, 1996 and 1997.......................... F-3
Consolidated Statements of Income for the years ended March 31, 1995, 1996 and
1997............................................................................. F-4
Consolidated Statements of Shareholder's Equity for the years ended March 31, 1995,
1996 and 1997.................................................................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1995, 1996 and
1997............................................................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
Unaudited Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheet (Unaudited) at June 30, 1997.................. F-18
Condensed Consolidated Statements of Operations (Unaudited) for the three months
ended June 30, 1996 and 1997..................................................... F-19
Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months
ended June 30, 1996 and 1997..................................................... F-20
Notes to Unaudited Condensed Consolidated Financial Statements..................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder
Leiner Health Products Inc.
We have audited the accompanying consolidated balance sheets of Leiner
Health Products Inc. as of March 31, 1996 and 1997, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended March 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Leiner Health
Products Inc. at March 31, 1996 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Orange County, California
April 25, 1997
F-2
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 1,411 $ 2,066
Accounts receivable, net of allowances of $2,539 and $3,840 at March 31, 1996 and 1997,
respectively.......................................................................... 67,459 77,436
Inventories............................................................................. 71,744 86,823
Deferred income taxes................................................................... 3,826 3,838
Prepaid expenses and other current assets............................................... 862 2,639
---------- ----------
Total current assets................................................................ 145,302 172,802
Property, plant and equipment, less accumulated depreciation and amortization............. 41,864 42,367
Goodwill, less accumulated amortization of $5,608 and $7,131 at March 31, 1996 and 1997,
respectively............................................................................ 52,386 58,035
Other noncurrent assets................................................................... 11,762 11,360
---------- ----------
Total assets........................................................................ $ 251,314 $ 284,564
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank checks outstanding, less cash on deposit........................................... $ 2,291 $ 10,410
Current portion of long-term debt....................................................... 2,023 3,148
Accounts payable........................................................................ 53,710 61,623
Customer allowances payable............................................................. 5,471 6,632
Accrued compensation and benefits....................................................... 4,749 6,233
Income taxes payable.................................................................... 461 1,818
Other accrued expenses.................................................................. 4,326 3,535
---------- ----------
Total current liabilities........................................................... 73,031 93,399
Long-term debt............................................................................ 102,151 102,290
Deferred income taxes..................................................................... 2,202 2,582
Other noncurrent liabilities.............................................................. 1,245 1,425
Commitments and contingent liabilities
Minority interest in subsidiary........................................................... -- 4,718
Shareholder's equity:
Common stock, $1 par value: 1,000 shares authorized, issued and outstanding at March 31,
1996 and 1997......................................................................... 1 1
Capital in excess of par value.......................................................... 62,966 62,966
Cumulative translation adjustment....................................................... -- (173)
Retained earnings....................................................................... 9,718 17,356
---------- ----------
Total shareholder's equity.......................................................... 72,685 80,150
---------- ----------
Total liabilities and shareholder's equity.......................................... $ 251,314 $ 284,564
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
<S> <C> <C> <C>
1995 1996 1997
---------- ---------- ----------
Net sales.................................................................... $ 314,730 $ 338,417 $ 392,786
Cost of sales................................................................ 236,613 253,272 288,579
---------- ---------- ----------
Gross profit................................................................. 78,117 85,145 104,207
Marketing, selling and distribution expenses................................. 42,400 44,228 51,477
General and administrative expenses.......................................... 17,302 18,344 21,219
Impairment and closure of OTC facility....................................... -- 4,730 1,416
Management reorganization.................................................... -- -- 1,000
Amortization of goodwill..................................................... 1,586 1,585 1,514
Other charges................................................................ 482 482 878
---------- ---------- ----------
Operating income............................................................. 16,347 15,776 26,703
Interest expense, net........................................................ 9,010 9,924 8,281
---------- ---------- ----------
Income before income taxes and extraordinary item............................ 7,337 5,852 18,422
Provision for income taxes before extraordinary item......................... 3,524 4,686 8,028
---------- ---------- ----------
Income before extraordinary item............................................. 3,813 1,166 10,394
Extraordinary loss on the early extinguishment of debt, net of income taxes
of $1,833.................................................................. -- -- 2,756
---------- ---------- ----------
Net income................................................................... $ 3,813 $ 1,166 $ 7,638
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAPITAL
COMMON STOCK IN EXCESS CUMULATIVE TOTAL
------------ OF PAR TRANSLATION RETAINED SHAREHOLDER'S
SHARES AMOUNT VALUE ADJUSTMENT EARNINGS EQUITY
------ --- --------- ------ -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1994.................... 1,000 $1 $62,966 $-- $ 4,739 $67,706
Net income................................... -- -- -- -- 3,813 3,813
------ --- --------- ------ -------- -----------
Balance at March 31, 1995.................... 1,000 1 62,966 -- 8,552 71,519
Net income................................... -- -- -- -- 1,166 1,166
------ --- --------- ------ -------- -----------
Balance at March 31, 1996.................... 1,000 1 62,966 -- 9,718 72,685
Net income................................... -- -- -- -- 7,638 7,638
Translation adjustment....................... -- -- -- (173) -- (173)
------ --- --------- ------ -------- -----------
Balance at March 31, 1997.................... 1,000 $1 $62,966 $(173) $ 17,356 $80,150
------ --- --------- ------ -------- -----------
------ --- --------- ------ -------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net income....................................................................... $ 3,813 $ 1,166 $ 7,638
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 10,698 12,496 12,600
Stock option compensation expense.............................................. 132 132 99
Deferred income taxes.......................................................... 2,779 3,364 270
Charge for long-lived asset impairment......................................... -- 4,730 --
Extraordinary loss on the early extinguishment of debt......................... -- -- 4,589
Translation adjustment......................................................... -- -- 173
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable.......................................................... (4,600) 4,742 (7,371)
Inventories.................................................................. (99) (7,818) (8,694)
Bank checks outstanding, less cash on deposit................................ 12,191 (9,900) 7,979
Accounts payable............................................................. 1,120 4,756 5,418
Customer allowances payable.................................................. (7,330) 260 1,161
Accrued compensation and benefits............................................ (1,339) (925) 1,484
Other accrued expenses....................................................... (4,323) (1,252) (1,956)
Income taxes payable......................................................... 101 691 1,246
Other........................................................................ (56) 261 (1,469)
--------- --------- ---------
Net cash provided by operating activities........................................ 13,087 12,703 23,167
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net.................................. (16,722) (3,468) (3,540)
Acquisition of business, net of cash acquired.................................... -- -- (2,420)
Increase in other noncurrent assets.............................................. (5,128) (5,335) (4,263)
--------- --------- ---------
Net cash used in investing activities............................................ (21,850) (8,803) (10,223)
--------- --------- ---------
FINANCING ACTIVITIES
Net borrowings under bank line of credit......................................... 5,225 78 47,247
Repayment of senior notes, including prepayment penalty.......................... -- -- (49,097)
Increase in other long-term debt................................................. 5,662 1,305 2,270
Payments on other long-term debt................................................. (3,566) (3,872) (12,493)
--------- --------- ---------
Net cash provided by (used in) financing activities.............................. 7,321 (2,489) (12,073)
--------- --------- ---------
Effect of exchange rate changes.................................................. -- -- (216)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................. (1,442) 1,411 655
Cash and cash equivalents at beginning of period................................. 1,442 -- 1,411
--------- --------- ---------
Cash and cash equivalents at end of period....................................... $ -- $ 1,411 $ 2,066
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. FORMATION AND OPERATIONS
Leiner Health Products Inc. (the Company) is primarily involved in a single
business segment, the manufacture and distribution of vitamins, over-the-counter
drugs and other health and beauty aid products to mass market retailers and
through other channels, primarily in the United States and Canada. On May 4,
1992, with the support of the Company's Senior Management, the Company became a
wholly owned subsidiary of PLI Holdings Inc., which operates solely as a holding
company and which is itself a wholly owned subsidiary of Leiner Health Products
Group Inc. (the Parent), a corporation formed by AEA Investors Inc., a private
investment firm. These consolidated financial statements include the accounts of
the Company and its subsidiaries, including VH Holdings Inc., a holding company
which owns Vita Health Company (1985) Ltd. ("Vita Health"). See Note 3.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Leiner Health Products Inc. and its direct and indirect subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the consolidated
financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
F-7
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method, at rates designed to distribute the cost of assets
over their estimated service lives or, for leasehold improvements, the shorter
of their estimated service lives or their remaining lease terms.
OTHER ASSETS
Goodwill, representing the excess of the purchase price over the fair values
of the net assets of acquired entities, is being amortized over the period of
expected benefit ranging from 35 to 40 years. Deferred financing charges are
being amortized based on the principal balance outstanding using the effective
interest method. Other intangible assets are being amortized over the period of
expected benefit of 15 years. Incentives provided to customers to secure
long-term sales agreements (primarily cash advances and credit memos to be
applied against purchases under the contract) are amortized over the terms of
the agreements or as related sales are recognized. Amounts deferred under such
agreements totaled $9.5 million and $6.3 million as of March 31, 1996 and 1997,
respectively.
LONG-LIVED ASSETS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS No. 121), in March 1995. SFAS
No. 121 requires long-lived assets and certain intangibles held and used by the
Company to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The recoverability test is to be performed at the lowest level at
which undiscounted net cash flows can be directly attributable to long-lived
assets. Goodwill that is not associated with specific assets that are impaired
is assessed for impairment when impairment indicators are present and reduced to
its estimated fair value if less than its carrying value. The Company adopted
SFAS No. 121 during the fiscal year ended March 31, 1996; see Note 4 for
disclosure regarding the effect of adoption on the Company's consolidated
financial statements.
FOREIGN CURRENCY TRANSLATION
The Company translates the foreign currency financial statements of its
Canadian subsidiary by translating balance sheet accounts at the year-end
exchange rate and income statement accounts at the weighted monthly average
exchange rate for the year. Translation gains and losses are recorded in common
shareholder's equity, and realized gains and losses are reflected in income.
Transaction gains and losses were immaterial.
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns.
F-8
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company has elected to account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees" and related interpretations. Under the provisions
of APB 25, compensation expense is measured at the grant date for the difference
between the fair value of the stock, less the exercise price.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the
years ended March 31, 1995, 1996 and 1997 was $8.3 million, $8.7 million and
$11.3 million, respectively.
3. ACQUISITION
On January 30, 1997, the Company acquired all of the outstanding capital
stock of G. S. Investments Ltd. which owned, among other companies, Vita Health
Company (1985) Ltd. (Vita Health). Vita Health is headquartered in Winnipeg,
Manitoba, Canada and primarily manufactures and distributes vitamins and
over-the-counter drugs. The results of operations of Vita Health are included in
the accompanying consolidated statements of income since the date of
acquisition. The total cost of the acquisition, including direct acquisition
costs of $1.1 million, was approximately $16.0 million, represented by $2.4
million of cash, $4.7 million of preferred stock of a subsidiary and $8.9
million of liabilities assumed. The acquisition has been accounted for as a
purchase and, accordingly, the excess of cost over the fair value of net assets
acquired of $7.1 million has been included in goodwill, and is being amortized
over its expected benefit period of 35 years.
As part of the acquisition purchase price, the Company issued approximately
46,037 shares of class A preferred stock and approximately 17,511 shares of
class B preferred stock in VH Holdings Inc., a subsidiary of the Company. The
class A preferred stock has an aggregate redemption value of approximately $3.4
million and the class B preferred stock has an aggregate redemption value of
approximately $1.3 million. The preferred stock does not accrue dividends and
has no voting rights. It is redeemable at the option of the Company until
January 2003, or at the option of the holders beginning in January 1998 through
January 2003 at the redemption value. Redemption is mandatory in January 2004.
This stock has been classified as minority interest in subsidiary in the
accompanying consolidated balance sheet as of March 31, 1997.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition of Vita Health had occurred at the beginning
of the period presented and does not purport to be indicative of the results
that would have occurred had the acquisition of Vita Health been made as of such
date or of results which may occur in the future.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Net sales............................................................. $ 366,430 $ 416,917
Net income before extraordinary item.................................. 3,089 10,455
Net income............................................................ 2,639 7,586
</TABLE>
F-9
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997
3. ACQUISITION (CONTINUED)
Adjustments made in arriving at pro forma unaudited results of operations
include amortization of debt issuance fees related to the new Credit Agreement,
(see Note 7), increased interest expense on the new Credit Agreement,
amortization of goodwill and related tax adjustments.
4. MANAGEMENT REORGANIZATION, LONG-LIVED ASSET IMPAIRMENT AND FACILITY CLOSURE
During the year ended March 31, 1997, the Company reorganized the management
team. Expenses of $1.0 million include severance expense for the previous Chief
Financial Officer, Vice President of Product Development and Vice President of
Corporate Development and include the hiring and relocation expenses for the new
Chief Financial Officer and other corporate officers.
Because of declining sales and continued operating losses during the year
ended March 31, 1996, the Company decided to significantly reduce the size of
its over-the-counter (OTC) liquids pharmaceutical manufacturing business.
Accordingly, the Company evaluated, based on the criteria prescribed by SFAS No.
121, the ongoing value of the plant, equipment and related goodwill that arose
as part of the XCEL acquisition in May 1992. Goodwill of $7.8 million was
allocated based on the relative estimated fair value of the long-lived assets at
the date of acquisition. Based on its evaluation, the Company determined that
assets with a carrying amount of $8.3 million were impaired and wrote them down
by $4.7 million to their fair value. Fair value was based on independent
appraisals of the plant and equipment. This asset impairment charge is reflected
in the consolidated balance sheet as a reduction in the carrying amount of
goodwill.
During the year ended March 31, 1997, the Company closed its OTC liquids
pharmaceutical manufacturing facility and out sourced this production to a third
party. The costs incurred of $1.4 million included the write-off of fixed assets
($0.8 million) and closure costs ($0.6 million). In addition, an inventory
write-down of $0.5 million was made and is included in cost of sales.
F-10
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMPOSITION OF CERTAIN BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials, bulk vitamins and packaging materials...................................... $ 40,950 $ 51,488
Work-in-process........................................................................... 3,573 5,849
Finished products......................................................................... 27,221 29,486
--------- ---------
$ 71,744 $ 86,823
--------- ---------
--------- ---------
</TABLE>
Property, plant and equipment:
<TABLE>
<CAPTION>
DEPRECIABLE LIVES
-----------------
<S> <C> <C> <C>
(YEARS)
Land.................................................................. -- $ 537 $ 734
Buildings and improvements............................................ 31-40 3,012 5,206
Leasehold improvements................................................ 7-40 9,761 10,549
Machinery and equipment............................................... 3-20 37,781 42,194
Furniture and fixtures................................................ 3-10 2,790 3,425
---------- ----------
53,881 62,108
Less accumulated depreciation and amortization........................ (12,017) (19,741)
---------- ----------
$ 41,864 $ 42,367
---------- ----------
---------- ----------
</TABLE>
6. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest.......................................................................... $ 8,759 $ 9,532 $ 11,248
Income taxes, net of refunds received............................................. 555 616 5,603
</TABLE>
F-11
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Credit agreement, banks................................................................. $ 42,803 $ 100,378
Capital lease obligations............................................................... 6,077 5,060
Senior note agreements (Series A and B)................................................. 45,000 --
Revolving loan agreement, vendor........................................................ 8,271 --
Term loan, bank......................................................................... 1,898 --
Industrial revenue bonds................................................................ 125 --
---------- ----------
104,174 105,438
Less current portion.................................................................... (2,023) (3,148)
---------- ----------
Total long-term debt.................................................................. $ 102,151 $ 102,290
---------- ----------
---------- ----------
</TABLE>
CREDIT AGREEMENT, BANKS
On January 30, 1997, the Company entered into a Credit Agreement that
expires on April 1, 2003 and permits the Company to borrow up to $165 million
subject to borrowing limitations, as defined. Borrowings under this agreement
bear interest at either the bank's base rate (8.5% at March 31, 1997) or
Canadian prime rate (4.75% at March 31, 1997) plus up to 0.5% or LIBOR (5.72% at
March 31, 1997) plus up to 1.5% or banker's acceptance rate (3.2% at March 31,
1997) plus up to 1%, at the option of the Company. As of March 31, 1997, the
Company's interest rates were 6.4% for U.S. borrowings of $90.1 million and 4.1%
for Canadian borrowings of $10.3 million. In addition to certain agent and
up-front fees, as defined, this agreement requires a commitment fee of up to
0.5% of the average daily unused portion of the revolving loan commitment
amount, as defined. Borrowings under this agreement are secured by a pledge of
all the common stock of the Company.
CAPITAL LEASE OBLIGATIONS
The capital lease obligations are payable in variable monthly installments
through January 2002, bear interest at effective rates ranging from 6.8% to 9.3%
and are secured by equipment with a net book value of approximately $5.1 million
at March 31, 1997.
COVENANTS AND MINIMUM PAYMENTS
Provisions of certain of the Company's debt agreements include terms, among
others, that require the Company to maintain certain financial ratios.
Furthermore, the agreements restrict indebtedness and expenditures for dividend
distributions, certain capital expenditures and investments. A change of
control, as defined, will constitute a default under the Credit Agreement. As of
March 31, 1997, the Company was in compliance with the covenants and conditions
of the new Credit Agreement. Due to restrictions in the Credit Agreement, none
of the retained earnings are available for dividends.
F-12
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT (CONTINUED)
Principal payments on long-term debt through fiscal 2002 and thereafter are:
<TABLE>
<CAPTION>
(IN
FISCAL YEAR THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998......................................................................... $ 3,148
1999......................................................................... 3,417
2000......................................................................... 9,493
2001......................................................................... 13,625
2002......................................................................... 15,405
Thereafter................................................................... 60,350
-------------
Total $ 105,438
-------------
-------------
</TABLE>
RETIREMENT OF DEBT
As of March 31, 1996, Series A notes aggregated $35 million and bore
interest at 9.44% and Series B notes aggregated $10 million and bore interest at
9.60%. In connection with the new Credit Agreement, these senior notes were
prepaid in full on January 30, 1997, along with accrued interest and a
prepayment charge of $4.1 million which is included in the consolidated
statement of income as an extraordinary loss on the early extinguishment of debt
in the year ended March 31, 1997.
On December 10, 1993, the Company entered into a Credit Agreement that was
to expire on June 30, 1998 and had permitted the Company to borrow up to
$55,000,000, subject to borrowing base limitations, as defined. In connection
with the new credit agreement described above, borrowings under this agreement
were refinanced and the unamortized debt issuance costs of $492,000 were written
off and included in the consolidated statement of income as an extraordinary
loss on the early extinguishment of debt in the year ended March 31, 1997.
8. INCOME TAXES
The Company is included in the consolidated Federal income tax return of the
Parent. Under a tax sharing agreement, the Federal income tax provision is
computed on a consolidated return basis and provides that the Company by
participating in the consolidated filing shall be liable and make payment to the
Parent for its proportionate share of the total tax liability. The agreement
also provides that the Company shall receive benefit to the extent that its
losses and other credits result in a reduction of the consolidated tax
liability. In the event that a combined or consolidated state, local or foreign
tax return is filed, the tax sharing arrangement for the Federal provision shall
apply in a similar manner in computing the state, local and foreign tax
liability or benefit.
Deferred income taxes are computed using the liability method and reflect
the effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to estimated realizable amounts. The provision for income
taxes reflects the taxes to be paid for the period and the change during the
period in the deferred tax assets and liabilities.
F-13
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities are:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1996 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Acquisition related accruals............................................................... $ 485 $ 81
Inventory capitalization................................................................... 759 634
Compensation accruals...................................................................... 442 405
Inventory obsolescence reserves............................................................ 1,033 863
Allowances for doubtful accounts and sales returns......................................... 1,031 1,392
Other...................................................................................... 76 463
--------- ---------
Total deferred tax assets.................................................................... 3,826 3,838
--------- ---------
Deferred tax liabilities:
Fixed assets book versus tax basis difference.............................................. (2,202) (2,582)
--------- ---------
Deferred tax assets, net of deferred tax liabilities......................................... $ 1,624 $ 1,256
--------- ---------
--------- ---------
</TABLE>
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate before extraordinary item:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------
<S> <C> <C> <C>
1995 1996 1997
---- ---- ----
Tax at U.S. statutory rates................................................... 35% 35% 35%
Charge for long-lived asset impairment........................................ -- 28 --
Goodwill amortization......................................................... 7 9 3
State income taxes, net of federal tax benefit................................ 6 8 6
---- ---- ----
48% 80% 44%
---- ---- ----
---- ---- ----
</TABLE>
Significant components of the provision for income taxes are:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................................ $ 539 $ 1,176 $ 6,622
State.......................................................... 206 146 954
Foreign........................................................ -- -- 182
--------- --------- ---------
Total current.................................................... 745 1,322 7,758
--------- --------- ---------
Deferred:
Federal........................................................ 2,251 2,846 (131)
State.......................................................... 528 518 401
--------- --------- ---------
Total deferred................................................. 2,779 3,364 270
--------- --------- ---------
Provision for income taxes before extraordinary item........... 3,524 4,686 8,028
Tax benefit from extraordinary loss............................ -- -- (1,833)
--------- --------- ---------
Provision for income taxes, net................................ $ 3,524 $ 4,686 $ 6,195
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS
STOCK OPTION PLAN
The Parent's Stock Option Plan, as amended in 1996, provides for the
issuance of nonqualified stock options to certain key employees and directors to
purchase up to 175,000 shares of the Parent's Class A common stock. Options
granted are at exercise prices as determined by the Parent's Board of Directors,
but not less than $100 per share. Options generally vest on a pro rata basis at
a rate of 25% per year, with 25% immediate vesting on the date of grant, and
expire no later than ten years from the date of grant.
Pro forma information regarding net income is required by FASB Statement No.
123, "Accounting for Stock-Based Compensation," which also requires that the
information be determined as if the Parent has accounted for its employee stock
options granted subsequent to March 31, 1995 under the fair value method for
that Statement. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Parent's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
In calculating pro forma information regarding net income, the fair value
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions for the options on the Parent's
common stock: a risk-free interest rate of 6%; a dividend yield of 0%; a
volatility of the expected market price of the Parent's Class A common stock of
0; and a weighted-average expected life of the options of 6 years. The pro forma
net income for the years ended March 31, 1996 and 1997 was $1.1 million and $7.4
million, respectively.
There was no activity under the Stock Option Plan during the year ended
March 31, 1995. Activity under the Stock Option Plan for the years ended March
31, 1996 and 1997 is set forth below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
SHARES PRICE WEIGHTED
AVAILABLE FOR NUMBER OF PER AVERAGE
GRANT SHARES SHARE EXERCISE PRICE
------------- --------- -------- --------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995................................... -- 81,552 $ 100 $100
Additional shares reserved.................................. 18,448 -- -- --
Options granted............................................. (18,448) 18,448 125-145 137
Options canceled............................................ -- -- -- --
------------- --------- -------- -----
Balance at March 31, 1996................................... -- 100,000 100-145 107
Additional shares reserved.................................. 75,000 -- -- --
Options granted............................................. (6,074) 6,074 175 175
Options canceled............................................ 6,074 (6,074) 100-145 107
------------- --------- -------- -----
Balance at March 31, 1997................................... 75,000 100,000 $100-175 $111
------------- --------- -------- -----
------------- --------- -------- -----
</TABLE>
F-15
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFITS (CONTINUED)
No options were exercised during the three year period ended March 31, 1997.
Options exercisable at March 31, 1995, 1996 and 1997 were 58,157, 83,147 and
86,721, respectively. The weighted-average fair value of options granted during
the years ended March 31, 1996 and 1997 were $40 and $52, respectively.
The weighted average remaining contractual life and weighted average
exercise price of options outstanding and of options exercisable as of March 31,
1997 were as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER OF CONTRACTUAL LIFE AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- --------------- --------- ---------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$100-$175 100,000 6.9 $111 86,721 $105
</TABLE>
The Parent has reserved a total of 188,238 shares of its Class A common
stock for issuance under stock option plans as of March 31, 1997.
CONTRIBUTORY RETIREMENT PLANS
The Company has contributory retirement plans that cover substantially all
of the Company's employees who meet minimum service requirements. The Company's
contributions to the plans are discretionary and are determined and funded
annually by the Parent's Board of Directors. The Company's contributions totaled
$969,000, $1,011,000 and $1,109,000 for the plan years ended March 31, 1995,
1996 and 1997, respectively.
10. RELATED PARTY TRANSACTIONS
The Company leased certain facilities under an operating lease with a
partnership which included two officers of the Company's operating subsidiary.
The lease was terminated as of March 31, 1995. Rents paid to the partnership
totaled $477,000 during the year ended March 31, 1995.
Under a Management Agreement dated as of May 4, 1992 by and between the
Company and AEA Investors Inc., one of the Company's shareholders, the Company
paid AEA Investors Inc. management fees of $350,000 during each of the three
years ended March 31, 1997 in exchange for advisory and consulting services
rendered in connection with certain financial, management and other matters
relating to the business and operations of the Company. The annual management
fees of $350,000 were included in other charges in the accompanying consolidated
statements of income.
11. COMMITMENTS
The Company leases certain real estate for its manufacturing facilities,
warehouses, corporate and sales offices, as well as certain equipment under
operating leases (noncancelable) that expire at various dates through March 2004
and contain renewal options. Total rents charged to operations were $5,558,000,
$4,679,000 and $4,755,000 for the years ended March 31, 1995, 1996 and 1997,
respectively.
F-16
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS (CONTINUED)
Minimum future obligations on noncancelable operating leases in effect at
March 31, 1997 are:
<TABLE>
<CAPTION>
(IN
FISCAL YEAR THOUSANDS)
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 4,379
1999........................................................................... 3,512
2000........................................................................... 2,446
2001........................................................................... 2,093
2002........................................................................... 1,473
Thereafter..................................................................... 1,922
-------------
Total minimum lease payments................................................... $ 15,825
-------------
-------------
</TABLE>
12. CONTINGENT LIABILITIES
L-TRYPTOPHAN
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of April 24, 1997, the Company and/or certain of its customers,
many of whom have tendered their defense to the Company, had been named in 660
lawsuits of which 647 have been settled.
The Company has entered into an agreement (the Agreement) with the Company's
supplier of bulk L-Tryptophan, under which the supplier has agreed to assume the
defense of all claims and to pay all settlements and judgments, other than for
certain punitive damages, against the Company arising out of the ingestion of
L-Tryptophan products. To date, the Supplier has funded all settlements and paid
all legal fees and expenses incurred by the Company related to these matters.
Of the remaining 13 cases, management does not expect that the Company will
be required to make any material payments in connection with their resolution by
virtue of the Agreement, or, in the event that the supplier ceases to honor the
Agreement, by virtue of the Company's product liability insurance, subject to
deductibles not to exceed $1.4 million in the aggregate. Accordingly, no
provision has been made in the Company's consolidated financial statements for
any loss that may result from these remaining actions.
OTHER
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.
13. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to a geographically diverse customer base in the
drugstore, supermarket and discount chain industries. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
losses. For the years ended March 31, 1995, 1996 and 1997, two customers
represented approximately 19% and 14%, 21% and 13%, and 27% and 12%,
respectively, of net sales.
F-17
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
JUNE 30,
1997
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................................................... $ 3,117
Accounts receivable, net........................................................................... 56,012
Income taxes receivable............................................................................ 4,678
Inventories........................................................................................ 96,177
Deferred income taxes.............................................................................. 3,838
Prepaid expenses and other current assets.......................................................... 3,117
-----------
Total current assets............................................................................. 166,939
-----------
Property, plant and equipment, net................................................................... 42,034
Goodwill, net........................................................................................ 57,675
Deferred income taxes................................................................................ 3,321
Deferred financing charges........................................................................... 11,853
Other noncurrent assets.............................................................................. 11,544
-----------
Total assets..................................................................................... $ 293,366
-----------
-----------
LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Bank checks outstanding, less cash on deposit...................................................... $ 10,222
Current portion of long-term debt.................................................................. 2,062
Accounts payable................................................................................... 53,525
Customer allowances payable........................................................................ 6,645
Accrued compensation and benefits.................................................................. 17,343
Income taxes payable............................................................................... --
Other accrued expenses............................................................................. 2,606
-----------
Total current liabilities........................................................................ 92,403
-----------
Long-term debt....................................................................................... 237,489
Deferred income taxes................................................................................ 2,582
Other noncurrent liabilities......................................................................... 1,196
Commitments and contingent liabilities
Minority interest in subsidiary...................................................................... 4,718
Shareholder's equity:
Common stock....................................................................................... 1
Cumulative translation adjustment.................................................................. 33
Retained earnings, net of $50,225 charge from Recapitalization of Parent........................... (45,056)
-----------
Total shareholder's deficit...................................................................... (45,022)
-----------
Total liabilities and shareholder's equity (deficit)............................................. $ 293,366
-----------
-----------
</TABLE>
See accompanying notes to unaudited condensed financial statements.
F-18
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
---------------------
<S> <C> <C>
1996 1997
--------- ----------
Net sales.................................................................................. $ 70,634 $ 94,076
Cost of sales.............................................................................. 52,070 71,860
--------- ----------
Gross profit............................................................................. 18,564 22,216
Marketing, selling and distribution expenses............................................... 10,960 11,956
General and administrative expenses........................................................ 4,569 5,593
Management reorganization.................................................................. 187 --
Compensation related to stock options...................................................... -- 15,431
Management transaction bonuses............................................................. -- 5,125
Amortization of goodwill................................................................... 364 402
Other charges.............................................................................. 121 88
--------- ----------
Operating income (loss).................................................................. 2,363 (16,379)
Interest expense, net...................................................................... 2,152 1,800
--------- ----------
Income (loss) before income taxes and extraordinary item................................. 211 (18,179)
Provision (benefit) for income taxes before extraordinary item............................. 92 (7,105)
--------- ----------
Income (loss) before extraordinary item.................................................. 119 (11,074)
Extraordinary loss on the early extinguishment of debt, net of income taxes of $761........ -- 1,109
--------- ----------
Net income (loss)...................................................................... $ 119 ($ 12,183)
--------- ----------
--------- ----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-19
<PAGE>
LEINER HEALTH PRODUCTS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
-----------------------
1996 1997
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)........................................................................ $ 119 $ (12,183)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization.......................................................... 2,921 3,098
Stock option compensation expense...................................................... 33 8,300
Deferred income taxes.................................................................. -- (3,321)
Extraordinary loss on the early extinguishment of debt................................. -- 1,870
Translation adjustment................................................................. -- (206)
Changes in operating assets and liabilities:
Accounts receivable.................................................................. 16,320 21,430
Inventories.......................................................................... (8,445) (9,335)
Bank checks outstanding, less cash on deposit........................................ 3,953 (192)
Accounts payable..................................................................... (10,581) (8,103)
Customer allowances payable.......................................................... 242 13
Accrued compensation and benefits.................................................... (1,873) 11,110
Other accrued expenses............................................................... (1,418) (931)
Income taxes payable/receivable...................................................... (178) (6,496)
Other................................................................................ (635) (478)
---------- -----------
Net cash provided by operating activities........................................ 458 4,576
---------- -----------
INVESTING ACTIVITIES:
Additions to property, plant, and equipment, net......................................... (572) (1,301)
Increase in other noncurrent assets...................................................... (325) (3,069)
---------- -----------
Net cash used in investing activities................................................ (897) (4,370)
---------- -----------
FINANCING ACTIVITIES:
Net borrowings (payments) under former bank revolving credit facility.................... 937 (100,405)
Net borrowings under new bank revolving credit facility.................................. -- 37,247
Borrowings under new bank term credit facility........................................... -- 85,000
Expenses paid on behalf of parent in connection with its recapitalization................ -- (11,783)
Increase in deferred financing charges................................................... -- (9,366)
Payments on other long-term debt......................................................... (449) (245)
---------- -----------
Net cash provided by financing activities............................................ 488 448
---------- -----------
Effect of exchange rate changes.......................................................... -- 397
---------- -----------
Net increase in cash and cash equivalents................................................ 49 1,051
Cash and cash equivalents at beginning of period......................................... 1,411 2,066
---------- -----------
Cash and cash equivalents at end of period............................................... $ 1,460 $ 3,117
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-20
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements for
the three months ended June 30, 1997 include the accounts of Leiner Health
Products Inc. (the "Company") and its subsidiaries, including Vita Health
Company (1985) Ltd. ("Vita Health") which was acquired January 30, 1997 in a
transaction accounted for as a purchase, and have been prepared by the Company
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the rules of the Securities and
Exchange Commission ("SEC"). Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements.
In the opinion of management, all adjustments necessary for a fair
presentation of such financial statements have been included. Such adjustments
consisted only of normal recurring items except for adjustments recorded in
connection with the Recapitalization as discussed in Note 3. This report should
be read in conjunction with the Company's March 31, 1997 consolidated financial
statements and notes thereto in the registration statement. The results of
operations for the periods indicated should not be considered as indicative of
operations for the full year.
2. INVENTORIES
Inventories consist of the following as of June 30, 1997 (in thousands):
<TABLE>
<S> <C>
Raw materials, bulk vitamins and packaging materials.......... $ 57,139
Work-in-process............................................... 7,980
Finished products............................................. 31,058
-----------
$ 96,177
-----------
-----------
</TABLE>
3. THE RECAPITALIZATION
On June 30, 1997, the Company's ultimate parent, Leiner Health Products
Group Inc. ("Leiner Group") completed a leveraged recapitalization transaction
("Recapitalization"). This transaction was effected through receipt of an equity
investment from North Castle Partners I, L.L.C. ("North Castle"), an investment
fund formed by Mr. Charles F. Baird, Jr. to effect the Recapitalization.
Pursuant to the Recapitalization, Leiner Group repurchased common stock from its
existing shareholders in an amount totaling (together with equity retained by
such shareholders) $205.0 million, issued $80.4 million of new shares of the
recapitalized Leiner Group to North Castle, issued $85 million of Senior
Subordinated Notes (the "Notes"), and established a $210 million senior secured
credit facility (the "New Credit Facility") that provides for both term and
revolving credit borrowings. Immediately upon consummation of the
Recapitalization, the obligations of Leiner Group under the Notes and the New
Credit Facility were assigned to and assumed by the Company. The
Recapitalization was accounted for as a recapitalization of Leiner Group which
had no impact on the historical basis of assets and liabilities as reflected in
the Company's consolidated financial statements.
In connection with the Recapitalization, the Company deducted $1.1 million
of deferred financing charges, net of income taxes of $0.8 million, from net
income (loss) as an extraordinary loss in the three months ended June 30, 1997.
Additionally in connection with the Recapitalization, the Company granted
F-21
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. THE RECAPITALIZATION (CONTINUED)
transaction bonuses to certain management personnel in the aggregate amount of
approximately $5.1 million and recorded compensation expense related to the
in-the-money value of stock options of approximately $15.4 million. The
compensation expense represented the excess of the fair market value of the
underlying common stock over the exercise price of the options canceled in
connection with the Recapitalization.
The assumption of the debt from Leiner Group and the payment of certain
other expenses related to the Recapitalization paid by the Company on behalf of
Leiner Group total $121.5 million and consist of the following (in thousands):
<TABLE>
<S> <C> <C>
- Assumption of debt from Leiner Group
Senior Credit Facility.......................... $(149,736)
Subordinated Debt............................... (85,000) $(234,736)
---------
---------
- Funds contributed or transferred from Leiner Group
Excess funds transferred........................ $ 125,028
Expenses paid by Company on behalf of Leiner
Group......................................... (11,783) 113,245
--------- ---------
Recapitalization of Parent.................... $(121,491)
---------
---------
</TABLE>
The net amount above has been first applied against capital in excess of par
value until that was exhausted and then against retained earnings.
4. LONG-TERM DEBT
The New Credit Facility consists of two term loans ("Term Facility") due
December 30, 2004 and December 30, 2005 in the amounts of $45 million and $40
million, respectively, and a revolving credit facility in the amount of $125
million (the "Revolving Facility"), made available in U.S. dollars to the
Company (such portion, the "U.S. Revolving Facility") with a portion denominated
in Canadian dollars made available to Vita Health (such portion, the "Canadian
Revolving Facility"). The unpaid principal amount outstanding on the Revolving
Facility is due and payable on June 30, 2003. The Term Facility requires
quarterly amortization payments of approximately 1% per annum over the next six
years. Amortization payments scheduled during the period July 1, 1997 through
June 30, 1998 total $0.85 million. Borrowings under the New Credit Facility bear
interest at floating rates that are based on the lender's base rate (8.5% at
June 30, 1997), the lender's Canadian prime rate (4.75% at June 30, 1997), LIBOR
(5.9% at June 30, 1997) or the lender's banker's acceptance rate (3.44% at June
30, 1997), as the case may be, plus an "applicable margin" that is itself based
on the Company's leverage ratio. The leverage ratio is defined generally as the
ratio of total funded indebtedness to the consolidated EBITDA and varies as
follows: (a) for revolving credit borrowings, from 0.75% 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, and (b) for loans under the Term
Facility, from 2.375% to 2.875% or 2.5% to 3.0% for LIBOR-based loans and from
1.375% to 1.875% or 1.5% to 2.0% for alternate base rate-based loans. As of June
30, 1997, the Company's interest rates were 10.02% for U.S. borrowings and 5.69%
for Canadian borrowings under the New Credit Facility. In addition to certain
agent and up-front fees, the New Credit
F-22
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM DEBT (CONTINUED)
Facility requires a commitment fee of up to 0.5% of the average daily unused
portion of the revolving credit facility based on the Company's leverage ratio.
The obligations of the Company under the U.S. Revolving Facility and the
Term Facilities are guaranteed by the direct parent of the Company, PLI Holdings
Inc. ("PLI Holdings") and by any direct or indirect U.S. subsidiaries of the
Company. The obligations of Vita Health under the Canadian Revolving Facility
are guaranteed by the Company, PLI Holdings, the Company's direct or indirect
U.S. subsidiaries, Vita Health and its direct or indirect subsidiaries. The New
Credit Facility also is secured by substantially all the assets of the Company
and any of its direct or indirect U.S. subsidiaries, all of the capital stock of
the Company and any such direct or indirect U.S. subsidiaries, and 65% of the
capital stock of any direct non-U.S. subsidiaries of the Company and its U.S.
subsidiaries. The Canadian Revolving Facility is also secured by substantially
all assets of Vita Health, its direct and indirect Canadian parents and any
direct or indirect non-U.S. subsidiaries of LHP, and all of the capital stock of
any such direct or indirect non-U.S. subsidiaries. The New Credit Facility
contains financial covenants that require, among other things, the Company to
comply with certain financial ratios and tests, including those that relate to
the maintenance of specified levels of cash flow and stockholder's equity. The
Company was in compliance with all such covenants as of June 30, 1997. As of
September 30, 1997, the Company had $59.2 million available under its New
Revolving Facility.
Principal payments on long-term debt as of June 30, 1997 through fiscal 2002
and thereafter are (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
1998........................................................... $ 1,595
<S> <C>
1999........................................................... 1,674
2000........................................................... 2,402
2001........................................................... 2,321
2002........................................................... 861
Thereafter..................................................... 230,698
---------
Total.......................................................... $ 239,551
---------
---------
</TABLE>
5. RELATED PARTY TRANSACTION
Upon consummation of the recapitalization, Leiner Group's management
agreement with AEA was terminated, and Leiner Group and the Company entered into
a consulting agreement with North Castle Partners, L.L.C. (the "Sponsor"), an
affiliate of North Castle, to provide the Company with certain business,
financial and managerial advisory services. Mr. Baird acts as the managing
member of the Sponsor through Baird Investment Group, L.L.C. In exchange for
such services, Leiner Group and the Company have agreed to pay the Sponsor an
annual fee of $1.5 million, payable semi-annually in advance, plus the Sponsor's
reasonable out-of-pocket expenses. This fee may be reduced upon completion of an
initial public offering of Leiner Group's shares. The agreement also terminates
on June 30, 2007, unless Baird Investment Group ceases to be the managing member
of North Castle, or upon the earliest of June 30, 2007 or the date that North
Castle terminates before that date. Leiner Group and the Company have also paid
the Sponsor a transaction fee of $3.5 million for services relating to
arranging, structuring and financing the Recapitalization, and reimbursed the
Sponsor's related out-of-pocket expenses.
F-23
<PAGE>
LEINER HEALTH PRODUCTS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. CONTINGENT LIABILITIES
LITIGATION AND CLAIMS
The Company has been named in numerous actions brought in federal or state
courts seeking compensatory and, in some cases, punitive damages for alleged
personal injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of August 14, 1997, the Company and/or certain of its
customers, many of whom have tendered their defense to the Company, had been
named in 668 lawsuits of which 658 have been settled.
The Company has entered into an agreement (the "Agreement") with the
Company's supplier of bulk L-Tryptophan, under which the supplier has agreed to
assume the defense of all claims and to pay all settlements and judgments, other
than certain punitive damages, against the Company arising out of the ingestion
of these L-Tryptophan products. To date, the supplier has funded all settlements
and paid all legal fees and expenses incurred by the Company related to these
matters. No punitive damages have been awarded in the 658 cases that have been
settled.
Of the remaining 10 cases, management does not expect that the Company will
be required to make any material payments in connection with their resolution by
virtue of the Agreement, or, in the event that the supplier ceases to honor the
Agreement, by virtue of the Company's product liability insurance, subject to
deductibles with respect to the 10 currently pending claims not to exceed $1.6
million in the aggregate. Accordingly, no provision has been made in the
Company's consolidated financial statements for any loss that may result from
these remaining actions.
The Company is subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
OTHER
In August 1997, the FDA announced a proposal to ban the use of phenolthalein
in laxatives. The FDA reportedly took this action in response to certain studies
which concluded that the administration of very high doses of yellow
phenolthalein could cause cancer in laboratory animals. The reports concerning
these studies state that the dosages administered substantially exceeded the
dosages commonly used by human beings. In response, the Company voluntarily
discontinued production of its laxative product containing yellow phenolthalein
and notified its customers that they may return this product. Accordingly, the
Company has provided approximately $0.8 million for estimated returns and
inventory valuation reserves related to this action. The Company has
reformulated this product and expects to be shipping the reformulated version in
November 1997.
7. SUBSEQUENT EVENT
On July 30, 1997, the Company entered into an interest protection
arrangement covering $29.5 million of its borrowings under the New Credit
Facility. Under this arrangement, the Company obtained a fixed interest rate of
6.17% on LIBOR, plus applicable margin (2.25%) instead of the fluctuating rate
as described in Note 4 and pays a fee of approximately $15.8 thousand per annum.
That fee is charged to interest expense as incurred and payments received as a
result of the cap are accrued as a reduction of interest expense on the
floating-rate borrowings under the New Credit Facility. The agreement expires
July 30, 2000.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL IN CONNECTION WITH THE OFFER MADE BY THIS
PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL,
OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITY OTHER THAN THE NEW NOTES TO WHICH IT RELATES OR AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY THE NEW NOTES, IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE
ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN A CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF
LEINER GROUP OR THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. iii
Prospectus Summary.................... 1
Risk Factors.......................... 15
The Company........................... 23
Use of Proceeds....................... 24
Capitalization........................ 25
Unaudited Pro Forma Financial
Information.......................... 26
Selected Historical and Pro Forma
Financial Information................ 35
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 39
Industry.............................. 49
Business.............................. 52
Management............................ 71
Ownership of Capital Stock............ 76
The Recapitalization.................. 77
Certain Transactions.................. 80
Description of New Credit Facility.... 82
The Exchange Offer.................... 84
Registration Rights................... 91
Description of the New Notes.......... 93
Certain Federal Income Tax
Considerations....................... 131
Plan of Distribution.................. 131
Legal Matters......................... 132
Experts............................... 132
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
LEINER HEALTH PRODUCTS INC.
OFFER TO EXCHANGE
9 5/8% SENIOR SUBORDINATED NOTES,
DUE 2007, WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933
AS AMENDED, FOR ANY AND ALL
OUTSTANDING 9 5/8% SENIOR
SUBORDINATED NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Certificate of Incorporation and Article V, Section
5 of the By-Laws of the Company authorize indemnification of officers and
directors to the full extent permitted under Delaware law, including a provision
eliminating (except under certain enumerated circumstances) the liability of
directors for duty of care violations.
The indemnification provided for in the Delaware General Corporation Law is
not exclusive of any other rights of indemnification, and a corporation may
maintain insurance against liabilities for which indemnification is not
expressly provided by the Delaware General Corporation Law.
Section 145 of the Delaware Corporation Law, as amended, provides in regards
to indemnification of directors and officers as follows:
"145 INDEMNIFICATION OF OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS;
INSURANCE.-- (a) A corporation shall have power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not,
of itself, create a presumption that the person did not act in good faith
and in a manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) A corporation shall have power to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged
to be liable to the corporation unless and only to the extent that the Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of any claim, issue or matter therein, he shall be
indemnified
II-1
<PAGE>
against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made
(1) by a majority vote of the directors who are not parties to such action,
suit or proceeding, even though less than a quorum, or (2) if there are no
such directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be
indemnified by the corporation as authorized in this section. Such expenses
(including attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of directors deems
appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other subsections of this section shall not be
deemed exclusive of any other rights to which those seeking indemnification
or advancement of expenses may be entitled under any by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect
to the resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include
any excise taxes assessed on a person with respect to any employee benefit
plan; and references to "serving at the request of the corporation" shall
include any service as a director, officer, employee or agent of the
corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the corporation" as referred to
in this section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has
II-2
<PAGE>
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
(k) The Court of Chancery is hereby vested with exclusive jurisdiction
to hear and determine all actions for advancement of expenses or
indemnification brought under this section or under any by-law, agreement,
vote of stockholders or disinterested directors, or otherwise. The Court of
Chancery may summarily determine a corporation's obligation to advance
expenses (including attorneys' fees)."
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
2.1 -- Stock Purchase Agreement and Agreement and Plan of Merger, dated as of May 31, 1997, by and among
Leiner Group, North Castle Partners I, L.L.C. and LHP Acquisition Corp.+
2.2 -- Amendment No. 1 to Stock Purchase Agreement and Agreement and Plan of Merger, dated as of June 30,
1997, by and among Leiner Group, North Castle Partners I, L.L.C. and LHP Acquisition Corp.+
3.1 -- Amended and Restated Certificate of Incorporation of Leiner Health Products Inc. ("LHP").+
3.2 -- Amended and Restated By-Laws of LHP.+
4.1 -- Indenture, dated as of June 30, 1997, between Leiner Group and United States Trust Company of New
York (the "Trustee").+
4.2 -- First Supplemental Indenture, dated as of June 30, 1997, among Leiner Group, LHP and the Trustee.+
4.3 -- Purchase Agreement, dated as of June 19, 1997, among Leiner Group, LHP, Merrill Lynch & Co., Salomon
Brothers Inc and Scotia Capital Markets (USA) Inc. (the "Initial Purchasers").+
4.4 -- Registration Rights Agreement, dated as of June 30, 1997, among Leiner Group, LHP and the Initial
Purchasers.+
4.5 -- Credit Agreement, dated as of June 30, 1997 (the "Credit Agreement"), among Leiner Group, Vita Health
Company (1985) Ltd., a Canadian corporation ("Vita Health"), the banks and other financial
institutions party thereto, as lenders, The Bank of Nova Scotia, as U.S. Agent and Canadian Agent (the
"Agents"), Merrill Lynch Capital Corporation, as documentation agent, and Salomon Brothers Holding
Company Inc, as syndication agent.+
4.6 -- First Amendment to the Credit Agreement, dated as of September 29, 1997.+
4.7 -- Assumption Agreement, dated as of June 30, 1997, between Leiner Group and LHP and accepted and
acknowledged by the Agents on behalf of the lenders that are party to the Credit Agreement.+
4.8 -- U.S. Borrower Security Agreement, dated as of June 30, 1997, between LHP and The Bank of Nova Scotia,
as collateral agent.+
4.9 -- U.S. Borrower Pledge Agreement, dated as of June 30, 1997, made by LHP in favor of the Agents for the
secured parties, as defined therein.+
4.10 -- Parent Pledge Agreement, dated as of June 30, 1997, made by PLI Holdings Inc. in favor of the Agents
for the secured parties, as defined therein.+
4.11 -- Canadian Holdings Pledge Agreement, dated as of June 30, 1997, made by VH Holdings Inc. in favor of
The Bank of Nova Scotia, as agent for each of the secured portions, as defined therein.+
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
4.12 -- Canadian Borrower Pledge Agreement, dated as of June 30, 1997, made by Vita Health in favor of The
Bank of Nova Scotia, as agent for each of the secured portions, as defined therein.+
4.13 -- U.S. Borrower Guaranty, dated as of June 30, 1997, made by LHP in favor of the Agents for the secured
portions, as defined therein.+
4.14 -- Parent Guaranty, dated as of June 30, 1997, made by PLI Holdings in favor of the Agents for the
secured portions, as defined therein.+
4.15 -- Canadian Holdings Guaranty, dated as of June 30, 1997, made by VH Holdings Inc. in favor of The Bank
of Nova Scotia as agent for the secured portions, as defined therein.+
4.16 -- Canadian Subsidiary Guaranties, each dated as of June 30, 1997, made by each of 64804 Manitoba Ltd.
and Westcan Pharmaceuticals Ltd. in favor of The Bank of Nova Scotia as agent for the secured
portions, as defined therein.+
4.17 -- Canadian Borrower Debenture, each dated as of June 30, 1997, made by Vita Health in favor of The Bank
of Nova Scotia on its own behalf and as agent for the Canadian secured portions as defined therein in
the amount of $75,000,000.+
4.18 -- Canadian Holdings Debenture, dated as of June 30, 1997, made by VH Holdings Inc. in favor of the The
Bank of Nova Scotia, on its own behalf and as agent for the Canadian secured portions, as defined
therein in the amount of $75,000,000.+
4.19 -- Canadian Subsidiary Debenture, dated as of June 30, 1997, made by 64804 Manitoba Ltd. in favor of the
The Bank of Nova Scotia, on its own behalf and as agent for the Canadian secured portions, as defined
therein in the amount of $75,000,000.+
4.20 -- Canadian Subsidiary Debenture, dated as of June 30, 1997, made by Westcan Pharmaceuticals Ltd. in
favor of the The Bank of Nova Scotia, on its own behalf and as agent for the Canadian secured
portions, as defined therein in the amount of $75,000,000.+
4.21 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of June 30,
1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property located at
3532 West 47th Place, Chicago, Illinois, as amended by the First Amendment to the Mortgage, Assignment
of Leases and Rents, Security Agreement and Fixture Filing dated as of July 31, 1997.+
4.22 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of August
20, 1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property
located at 3308 Covington, Kalamazoo, Michigan.+
4.23 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated as of June 30,
1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent, relating to the property located at
2300 Badger Lane, Madison, Wisconsin.+
4.24 -- Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
June 30, 1997 from LHP, as Trustor, in favor of Lawyers Title Company of California as Trustee, for
the benefit of The Bank of Nova Scotia, as agent, relating to the property located at 7366 Orangewood
Avenue, Garden Grove, California.+
4.25 -- Trademark Security Agreement, dated as of June 30, 1997, between LHP and The Bank of Nova Scotia as
collateral agent for the secured parties.+
5 -- Opinion of Debevoise & Plimpton regarding the legality of the New Notes being registered.
10.1 -- Consulting Agreement, dated as of June 30, 1997, among Leiner Group, LHP and North Castle.+
10.2 -- Restated Standard Indemnity Agreement, dated September 1, 1992 between Showa Denko America Inc. and
LHP Holdings Corp. (now LHP).+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
10.3 -- Guaranty Agreement, dated September 1, 1992, between Showa Denko K.K. and LHP Holdings Corp. (now
LHP).+
10.4 -- Leiner Group Stock Option Plan (formerly known as PLI Investors Inc. Stock Option Plan).+
10.5 -- First Amendment to the Leiner Group Stock Option Plan, effective as of June 30, 1997.+
10.6 -- Leiner Group Stock Incentive Plan, adopted and effective as of June 30, 1997.+
10.7 -- Lease, dated as of March 12, 1984, by and between R&R Properties ("R&R") and Trupak, Inc. ("Trupak"),
as amended by the First Amendment, dated as of August 1, 1986 between R&R and Trupak, the Second
Amendment, dated as of June 19, 1989 between R&R and Trupak, the Third Amendment, dated as of August
3, 1992 between R&R and P. Leiner Nutritional Products Inc. (successor to merger to Trupak, Inc. ("P.
Leiner"), the Fourth Amendment, dated as of August 2, 1994 between R&R and LHP (successor to P.
Leiner), and the Fifth Amendment, dated May 20, 1996 between R&R and LHP, related to a premise located
in West Unity, Ohio.+
10.8 -- Lease Agreement, dated August 2, 1994, between Square Feet Unlimited ("Square Feet Unlimited") and
LHP, relating to a premise in West Unity, Ohio, as amended by the First Amendment of Lease, dated May
20, 1996, between Square Feet Unlimited and LHP.+
10.9 -- Lease, dated as of October 4, 1993, by and between Watson Land Company ("Watson") and LHP, related to
a premise located at 810 East 233rd Street, Carson, California.+
10.10 -- Lease, dated as of October 4, 1993, by and between Watson and LHP, related to a premise located at
901 East 233rd Street, Carson, California.+
10.11 -- Sublease, dated as of October 8, 1993 by and between Teledyne, Inc. and LHP, related to a premise
located at 901 East 233rd Street, Carson, California.+
10.12 -- Standard Industrial Lease, dated February 19, 1988 between Richard F. Burns, J. Grant Monahan and
Lawrence W. Doyle, as Trustees of AEW #113 Trust established under Declaration of Trust dated January
19, 1988 and Vita-Fresh Vitamin Co. Inc. and Vital Industries, Inc., as amended by the First Lease
Amendment, dated as of June 12, 1997, between Sierra Pacific California--LP and LHP, related to a
premise located in Garden Grove, California.+
10.13 -- Lease, dated May 1, 1997 between Crescent Resources, Inc. and LHP, related to a premise located in
York County, South Carolina.+
10.14 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Robert M.
Kaminski.+
10.15 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Gale K.
Bensussen.+
10.16 -- Severance Benefit Agreement, dated as of May 30, 1997, by and between LHP and William B. Towne.+
10.17 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Kevin J. Lanigan.+
10.18 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Stanley J. Kahn.+
10.19 -- Net Lease, dated as of October 14, 1997, by and between MIT Unsecured, L.P. and LHP, related to a
premise located in York County, South Carolina.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
12.2 -- Computation of EBITDA to Interest Expense.
21 -- List of Subsidiaries of the Registrant.+
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- --------------------------------------------------------------------------------------------------------
<C> <S>
23.2 -- Consent of Debevoise & Plimpton (included in Exhibit 5).
24 -- Powers of Attorney (included on signature pages to this Registration Statement on Form S-4).+
25 -- Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 (Form T-1) of United
States Trust Company of New York.+
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.+
</TABLE>
- ------------------------
+ Previously filed.
(B) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
Report of Independent Auditors on Financial Statement Schedule................. S-1
Schedule II--Valuation and Qualifying Accounts................................. S-2
</TABLE>
All supporting schedules other than the above have been omitted because they
are not required or the information required to be set forth therein is included
in the consolidated financial statements or in the notes thereto.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include
any prospectus required by section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement by any person or party who is deemed to be an underwriter within
the meaning of Rule 145 (c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-6
<PAGE>
(5) That every prospectus (i) that is filed pursuant to paragraph (4)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offering
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(6) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers, and controlling
persons of the Registrants pursuant to the foregoing provisions or
otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrants of expenses incurred or paid by a
director, officer or controlling person of the Registrants in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Leiner Health
Products Inc. has caused this Amendment No. 2 to the Company's Registration
Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Carson, State of California, on the 5th day of
November, 1997.
LEINER HEALTH PRODUCTS INC.
By: /s/ WILLIAM B. TOWNE
-----------------------------------------
Name: William B. Towne
Title: Executive Vice President,
Chief Financial Officer, Director,
Treasurer and Secretary
Pursuant to the requirements of this Securities Act of 1933, this Amendment
No. 2 has been signed by the following persons in the capacities and on the
dates indicated.
PRINCIPAL EXECUTIVE OFFICER:
/s/ ROBERT M. KAMINSKI* Chief Executive Officer and
- ------------------------------ Director November 5, 1997
Robert M. Kaminski
DIRECTOR:
/s/ GALE K. BENSUSSEN* President and Director
- ------------------------------ November 5, 1997
Gale K. Bensussen
PRINCIPAL ACCOUNTING OFFICER:
Executive Vice President,
/s/ WILLIAM B. TOWNE Chief Financial Officer,
- ------------------------------ Director, Treasurer and November 5, 1997
William B. Towne Secretary
PRINCIPAL FINANCIAL OFFICER:
Executive Vice President,
/s/ WILLIAM B. TOWNE Chief Financial Officer,
- ------------------------------ Director, Treasurer and November 5, 1997
William B. Towne Secretary
/s/ WILLIAM B. TOWNE
---------------------------
William B. Towne
*By: Attorney-in-Fact
II-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
Board of Directors and Shareholder
Leiner Health Products Inc.
We have audited the consolidated financial statements of Leiner Health
Products Inc. as of March 31, 1996 and 1997, and for each of the three years in
the period ended March 31, 1997, and have issued our report thereon dated April
25, 1997 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 21(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
April 25, 1997
S-1
<PAGE>
SCHEDULE II
LEINER HEALTH PRODUCTS INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO COST BALANCE AT END
BEGINNING OF PERIOD AND EXPENSES DEDUCTIONS OF PERIOD
------------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Year ended March 31, 1995:
Accounts receivable allowance................ $ 2,147 $ 4,903 $ 3,734 $ 3,316
Inventory valuation reserve.................. 5,306 2,640 3,537 4,409
Year ended March 31, 1996:
Accounts receivable allowance................ $ 3,316 $ 4,443 $ 5,220 $ 2,539
Inventory valuation reserve.................. 4,409 2,320 2,828 3,901
Year ended March 31, 1997:
Accounts receivable allowance................ $ 2,539 $ 6,761 $ 5,460 $ 3,840
Inventory valuation reserve.................. 3,901 4,687 3,837 4,751
Quarter ended June 30, 1997 (unaudited):
Accounts receivable allowance................ $ 3,840 $ 2,011 $ 1,827 $ 4,024
Inventory valuation reserve.................. 4,751 1,900 244 6,427
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
2.1 -- Stock Purchase Agreement and Agreement and Plan of Merger, dated as of May 31, 1997, by
and among Leiner Group, North Castle Partners I, L.L.C. and LHP Acquisition Corp.+
2.2 -- Amendment No. 1 to Stock Purchase Agreement and Agreement and Plan of Merger, dated as
of June 30, 1997, by and among Leiner Group, North Castle Partners I, L.L.C. and LHP
Acquisition Corp.+
3.1 -- Amended and Restated Certificate of Incorporation of Leiner Health Products Inc.
("LHP").+
3.2 -- Amended and Restated By-Laws of LHP.+
4.1 -- Indenture, dated as of June 30, 1997, between Leiner Group and United States Trust
Company of New York (the "Trustee").+
4.2 -- First Supplemental Indenture, dated as of June 30, 1997, among Leiner Group, LHP and the
Trustee.+
4.3 -- Purchase Agreement, dated as of June 19, 1997, among Leiner Group, LHP, Merrill Lynch &
Co., Salomon Brothers Inc and Scotia Capital Markets (USA) Inc. (the "Initial
Purchasers").+
4.4 -- Registration Rights Agreement, dated as of June 30, 1997, among Leiner Group, LHP and
the Initial Purchasers.+
4.5 -- Credit Agreement, dated as of June 30, 1997 (the "Credit Agreement"), among Leiner
Group, Vita Health Company (1985) Ltd., a Canadian corporation ("Vita Health"), the banks
and other financial institutions party thereto, as lenders, The Bank of Nova Scotia, as
U.S. Agent and Canadian Agent (the "Agents"), Merrill Lynch Capital Corporation, as
documentation agent, and Salomon Brothers Holding Company Inc, as syndication agent.+
4.6 -- First Amendment to the Credit Agreement, dated as of September 29, 1997.+
4.7 -- Assumption Agreement, dated as of June 30, 1997, between Leiner Group and LHP and
accepted and acknowledged by the Agents on behalf of the lenders that are party to the
Credit Agreement.+
4.8 -- U.S. Borrower Security Agreement, dated as of June 30, 1997, between LHP and The Bank of
Nova Scotia, as collateral agent.+
4.9 -- U.S. Borrower Pledge Agreement, dated as of June 30, 1997, made by LHP in favor of the
Agents for the secured parties, as defined therein.+
4.10 -- Parent Pledge Agreement, dated as of June 30, 1997, made by PLI Holdings Inc. in favor
of the Agents for the secured parties, as defined therein.+
4.11 -- Canadian Holdings Pledge Agreement, dated as of June 30, 1997, made by VH Holdings Inc.
in favor of The Bank of Nova Scotia, as agent for each of the secured portions, as
defined therein.+
4.12 -- Canadian Borrower Pledge Agreement, dated as of June 30, 1997, made by Vita Health in
favor of The Bank of Nova Scotia, as agent for each of the secured portions, as defined
therein.+
4.13 -- U.S. Borrower Guaranty, dated as of June 30, 1997, made by LHP in favor of the Agents
for the secured portions, as defined therein.+
4.14 -- Parent Guaranty, dated as of June 30, 1997, made by PLI Holdings in favor of the Agents
for the secured portions, as defined therein.+
4.15 -- Canadian Holdings Guaranty, dated as of June 30, 1997, made by VH Holdings Inc. in favor
of The Bank of Nova Scotia as agent for the secured portions, as defined therein.+
4.16 -- Canadian Subsidiary Guaranties, each dated as of June 30, 1997, made by each of 64804
Manitoba Ltd. and Westcan Pharmaceuticals Ltd. in favor of The Bank of Nova Scotia as
agent for the secured portions, as defined therein.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
4.17 -- Canadian Borrower Debenture, each dated as of June 30, 1997, made by Vita Health in
favor of The Bank of Nova Scotia on its own behalf and as agent for the Canadian secured
portions as defined therein in the amount of $75,000,000.+
4.18 -- Canadian Holdings Debenture, dated as of June 30, 1997, made by VH Holdings Inc. in
favor of the The Bank of Nova Scotia, on its own behalf and as agent for the Canadian
secured portions, as defined therein in the amount of $75,000,000.+
4.19 -- Canadian Subsidiary Debenture, dated as of June 30, 1997, made by 64804 Manitoba Ltd. in
favor of the The Bank of Nova Scotia, on its own behalf and as agent for the Canadian
secured portions, as defined therein in the amount of $75,000,000.+
4.20 -- Canadian Subsidiary Debenture, dated as of June 30, 1997, made by Westcan
Pharmaceuticals Ltd. in favor of the The Bank of Nova Scotia, on its own behalf and as
agent for the Canadian secured portions, as defined therein in the amount of
$75,000,000.+
4.21 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
as of June 30, 1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent,
relating to the property located at 3532 West 47th Place, Chicago, Illinois, as amended
by the First Amendment to the Mortgage, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated as of July 31, 1997.+
4.22 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
as of August 20, 1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent,
relating to the property located at 3308 Covington, Kalamazoo, Michigan.+
4.23 -- Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated
as of June 30, 1997 from LHP, as Mortgagor, to The Bank of Nova Scotia, as agent,
relating to the property located at 2300 Badger Lane, Madison, Wisconsin.+
4.24 -- Leasehold Deed of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
Filing, dated June 30, 1997 from LHP, as Trustor, in favor of Lawyers Title Company of
California as Trustee, for the benefit of The Bank of Nova Scotia, as agent, relating to
the property located at 7366 Orangewood Avenue, Garden Grove, California.+
4.25 -- Trademark Security Agreement, dated as of June 30, 1997, between LHP and The Bank of
Nova Scotia as collateral agent for the secured parties.+
5 -- Opinion of Debevoise & Plimpton regarding the legality of the New Notes being
registered.
10.1 -- Consulting Agreement, dated as of June 30, 1997, among Leiner Group, LHP and North
Castle.+
10.2 -- Restated Standard Indemnity Agreement, dated September 1, 1992 between Showa Denko
America Inc. and LHP Holdings Corp. (now LHP).+
10.3 -- Guaranty Agreement, dated September 1, 1992, between Showa Denko K.K. and LHP Holdings
Corp. (now LHP).+
10.4 -- Leiner Group Stock Option Plan (formerly known as PLI Investors Inc. Stock Option
Plan).+
10.5 -- First Amendment to the Leiner Group Stock Option Plan, effective as of June 30, 1997.+
10.6 -- Leiner Group Stock Incentive Plan, adopted and effective as of June 30, 1997.+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
10.7 -- Lease, dated as of March 12, 1984, by and between R&R Properties ("R&R") and Trupak,
Inc. ("Trupak"), as amended by the First Amendment, dated as of August 1, 1986 between
R&R and Trupak, the Second Amendment, dated as of June 19, 1989 between R&R and Trupak,
the Third Amendment, dated as of August 3, 1992 between R&R and P. Leiner Nutritional
Products Inc. (successor to merger to Trupak, Inc. ("P. Leiner"), the Fourth Amendment,
dated as of August 2, 1994 between R&R and LHP (successor to P. Leiner), and the Fifth
Amendment, dated May 20, 1996 between R&R and LHP, related to a premise located in West
Unity, Ohio.+
10.8 -- Lease Agreement, dated August 2, 1994, between Square Feet Unlimited ("Square Feet
Unlimited") and LHP, relating to a premise in West Unity, Ohio, as amended by the First
Amendment of Lease, dated May 20, 1996, between Square Feet Unlimited and LHP.+
10.9 -- Lease, dated as of October 4, 1993, by and between Watson Land Company ("Watson") and
LHP, related to a premise located at 810 East 233rd Street, Carson, California.+
10.10 -- Lease, dated as of October 4, 1993, by and between Watson and LHP, related to a premise
located at 901 East 233rd Street, Carson, California.+
10.11 -- Sublease, dated as of October 8, 1993 by and between Teledyne, Inc. and LHP, related to
a premise located at 901 East 233rd Street, Carson, California.+
10.12 -- Standard Industrial Lease, dated February 19, 1988 between Richard F. Burns, J. Grant
Monahan and Lawrence W. Doyle, as Trustees of AEW #113 Trust established under
Declaration of Trust dated January 19, 1988 and Vita-Fresh Vitamin Co. Inc. and Vital
Industries, Inc., as amended by the First Lease Amendment, dated as of June 12, 1997,
between Sierra Pacific California--LP and LHP, related to a premise located in Garden
Grove, California.+
10.13 -- Lease, dated May 1, 1997 between Crescent Resources, Inc. and LHP, related to a premise
located in York County, South Carolina.+
10.14 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and
Robert M. Kaminski.+
10.15 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Gale
K. Bensussen.+
10.16 -- Severance Benefit Agreement, dated as of May 30, 1997, by and between LHP and William B.
Towne.+
10.17 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and Kevin
J. Lanigan.+
10.18 -- Severance Benefit Agreement, dated as of November 21, 1991, by and between LHP and
Stanley J. Kahn.+
10.19 -- Net Lease, dated as of October 14, 1997, by and between MIT Unsecured, L.P. and LHP,
related to a premise located in York County, South Carolina.
12.1 -- Computation of Ratio of Earnings to Fixed Charges.
12.2 -- Computation of EBITDA to Interest Expense.
21 -- List of Subsidiaries of the Registrant.+
23.1 -- Consent of Ernst & Young LLP, Independent Auditors.
23.2 -- Consent of Debevoise & Plimpton (included in Exhibit 5).
24 -- Powers of Attorney (included on signature pages to this Registration Statement on Form
S-4).+
25 -- Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 (Form
T-1) of United States Trust Company of New York.+
99.1 -- Form of Letter of Transmittal.
99.2 -- Form of Notice of Guaranteed Delivery.+
</TABLE>
- ------------------------
+ Previously filed.
<PAGE>
EXHIBIT 5
November 4, 1997
Leiner Health Products Inc.
901 E. 233rd Street
Carson, CA 90745
REGISTRATION STATEMENT ON FORM S-4
OF LEINER HEALTH PRODUCTS INC.
(REGISTRATION NO. 333-33121)
Ladies and Gentlemen:
We have acted as special counsel to Leiner Health Products Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"), of a Registration Statement on
Form S-4 (as amended, the "Registration Statement"), which includes a form of
prospectus (the "Prospectus") relating to the proposed exchange by the Company
of $85,000,000 aggregate principal amount of its 95/8% Senior Subordinated Notes
due 2007, (the "Existing Notes") for $85,000,000 aggregate principal amount of
its 95/8% Senior Subordinated Notes due 2007 (the "New Notes"), which are to be
registered under the Act.
<PAGE>
Leiner Health Products Inc. 2 November 4, 1997
In so acting, we have examined and relied upon the originals, or
copies certified or otherwise identified to our satisfaction, of such records,
documents, certificates and other instruments as in our judgment are necessary
or appropriate to enable us to render the opinion expressed below.
We are of the opinion that the New Notes to be offered pursuant to the
Registration Statement will be validly issued and will be legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general principles of equity (regardless of whether such
enforceability is considered in an action at law or in equity).
We express no opinion as to the effect of any Federal or state laws
regarding fraudulent transfers or conveyances.
We express no opinion as to the laws of any jurisdiction other than
the Federal laws of the United States, the laws of the State of New York and the
General Corporation Law of the State of Delaware.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the headings "Legal
Matters" in the Prospectus. In giving such consent, we do not hereby concede
that we are within the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
/s/ Debevoise & Plimpton
<PAGE>
Exhibit 10.19
BASIC LEASE INFORMATION
LEASE DATE: October 14, 1997
TENANT AND ITS ADDRESS: Prior to the Term Commencement Date:
LEINER HEALTH PRODUCTS INC.
Real Estate Department
587 Greenway Industrial Drive
Fort Mill, South Carolina 29715
Attention: Bob Chichester
Fax No.: 704-583-3170
After the Term Commencement Date:
LEINER HEALTH PRODUCTS INC.
Real Estate Department
Fort Mill, South Carolina 29715
Attention: Bob Chichester
Fax No.: [To be supplied by Tenant]
WITH A COPY TO: LEINER HEALTH PRODUCTS INC.
Real Estate Department
901 E. 233rd Street
Carson, California 90745
Attention: Giffen Ott, Senior Vice President of
Operations
Fax No.: 310-952-7766
AND TO: Allen, Matkins, Leck, Gamble & Mallory, LLP
88 Kearny Street, Suite 1850
San Francisco, California 94108
Attention: Richard C. Mallory, Esq.
Fax No.: 415/837-1516
LANDLORD AND ITS
ADDRESS: MIT UNSECURED, L.P.
455 Market Street
17th Floor
San Francisco, California 94105
Attention: Robert A. Dobbin, Esq.
Fax No.: 415/284-2840
WITH A COPY TO: MIT UNSECURED, L.P.
1445 Ross Avenue, 49th Floor
Dallas, Texas 75202
Attention: Timothy B. Keith
Fax No.: 214/855-6792
LAND: Approximately 27.101 acre tract of land in the Park in
York County, South Carolina, as more particularly
described in EXHIBIT A attached hereto and incorporated
herein, together with
<PAGE>
Landlord's rights under the EASEMENTS (herein so
called) described on such EXHIBIT A
PROJECT: The Land, the Building and all other improvements, if
any, located on the Land including, without limitation,
all parking areas, driveways and sidewalks thereon
BUILDING: A building containing approximately 558,900 square feet
of space and all other improvements contained therein
PARK: Lakemont Business Park in York County, South Carolina
CORE USE: Manufacture and distribution of Consumer Goods;
unloading and loading of shipping containers for
Consumer Goods; warehousing of Consumer Goods; order
fulfillment for specific Consumer Goods
requirements/orders; preparation of Consumer Goods for
shipment; special labeling of Consumer Goods;
palletizing Consumer Goods for shipment; quality
control/inspection of incoming Consumer Goods; rework
of finished Consumer Goods; light manufacturing and
assembly operations for Consumer Goods; and maintenance
of support equipment and supporting office distribution
activities and parking therefor. Notwithstanding the
foregoing, the Core Use shall not in any event include
any activities or use (i) in violation of Governmental
Requirements, the Rules and Regulations, or the CCR's,
or (ii) which adversely affects the structure, building
systems or value of the Project
CONSUMER GOODS: Pharmaceuticals, dietary and nutritional supplements,
health and beauty aids, and cosmetics
PERMITTED USE: General warehouse, storage, packaging, distribution,
assembly and any Other Approved Use, and related office
uses and parking therefor (and including, in any event,
the Core Use). Notwithstanding the foregoing, the
Permitted Use shall not in any event include any
activities or use (i) in violation of Governmental
Requirements, the Rules and Regulations or the CCR's,
(ii) which adversely affects the structure, building
systems or value of the Project, or (iii) which
involves the use of any Hazardous Materials on the
Project, except the use and storage for Tenant's own
use of ordinary and customary materials reasonably
required to be used in the normal course of such
Permitted Use, so long as such use and storage is in
compliance with all Governmental Requirements and does
not expose the Project or any neighboring property to
any material risk of contamination or damage or expose
Landlord to any liability therefor.
OTHER APPROVED USE: With respect to any Tenant (and which shall not be
binding with respect to any successor, assignee or
subtenant of such Tenant),
<PAGE>
any use approved in writing by Landlord (which approval
may be withheld by Landlord in its sole and absolute
discretion)
CCR'S: Declaration of Restrictions dated April 1, 1975, filed
of record in Deed Book 510, Page 54 of the records of
York County, South Carolina; as amended by the
Agreement dated July 13, 1977, filed of record in Deed
Book 552, Page 596 of the records of York County, South
Carolina, Amendment to and Restatement of Declaration
of Restrictive Covenants for Lakemont Business Park
dated July 31, 1990, filed of record in Deed Book 107,
Page 220 in the records of York County, South Carolina,
Supplemental Declarations to Restrictive Covenants for
Lakemont Business Park dated on or about the Term
Commencement Date, recorded with the Office of the
Clerk of Court or the Register of Deeds, as applicable,
for York County, South Carolina, and as such
Declaration may from time to time be further amended,
supplemented or restated
TERM COMMENCEMENT DATE: __________________________
INITIAL TERM: Fifteen (15) years
EXTENSION TERMS: Two (2) five (5) year options
RENT:
BASE RENT: Scheduled Base Rent PLUS Amortized Improvement
Repayment
SCHEDULED
BASE RENT: 142,520 per month, in months 1 through 60
$156,770 per month, in months 61 through 120
$172,450 per month, in months 121 through 180
AMORTIZED
IMPROVEMENT
REPAYMENT: $49,857 per month
SECURITY DEPOSIT: $192,377 Cash Security Deposit, PLUS
$1,154,262 Second Letter of Credit, PLUS
$4,825,000 First Letter of Credit, all as described in
ARTICLE 11
RIGHT OF FIRST OFFER: Article 17
EXPANSION RIGHTS: Article 18
THIS AGREEMENT IS SUBJECT TO BINDING
ARBITRATION PURSUANT TO S. C. CODE Section 15-48-10 ET SEQ.,
AS AMENDED FROM TIME TO TIME.
The foregoing Basic Lease Information is incorporated into and made a part of
this Lease. Each reference in this Lease to any of the Basic Lease Information
shall mean the respective information above and shall be construed to
incorporate all of the terms provided under the particular Lease paragraph
pertaining to
<PAGE>
such information. In the event of any conflict between the Basic Lease
Information and the Lease, the latter shall control.
<PAGE>
SCHEDULE OF DEFINED TERMS
Action - Section 3.4(f)
Adjacent Land - Section 18.1
Amortized Improvement Repayment - Basic Lease Information
Approved Sublease - Section 12.1
Bankruptcy Event - Section 16.6
Base Rent - Basic Lease Information
Brokers - Section 21.19
Building - Basic Lease Information
Capital Costs - Section 5.1(h)
Cash Security Deposit - Article 11
CCR's - Basic Lease Information
Code - Section 12.6
Consumer Goods - Basic Lease Information
County - Section 20.1
Crescent - Article 1
Debtor - Section 16.6(a)
Demolition Memo - Section 8.1(b)
Easements - Basic Lease Information
Environmental Laws - Section 3.4(b)
Environmental Requirements - Section 3.4(e)
Environmental Taxes - Section 3.4(j)
Event of Default - Section 16.1
Expansion Amendment - Section 18.4
Expansion Lease - Section 18.4
Expansion Option Period - Section 18.1
Expansion Project - Section 18.1
Expansion Proposal - Section 18.2
Expansion Right - Section 18.1
Extension Terms - Basic Lease Information
FDA - Section 3.4(i)(ii)
FDA Requirements - Section 3.4(i)(ii)
Fee-in-Lieu Transaction - Article 20
First Letter of Credit - Section 11.1(b)
Governmental Authorities - Section 3.4(a)
Governmental Requirements - Section 3.3
Hazardous Materials - Section 3.4(a)
Hazardous Materials Report - Section 3.4(e)
Hazardous Use - Section 3.4(e)
Initial Base Rent - Section 18.4(a)
Initial Term - Basic Lease Information
Land - Basic Lease Information
Landlord - Introduction and Basic Lease Information
Landlord Acceptance - Section 18.3
Landlord Decision Notice - Article 18
Landlord Encumbrance - Article 17
Landlord Indemnified Parties - Section 3.6
Landlord Rejection - Section 18.3
<PAGE>
Lease - Introduction
Lease Date - Basic Lease Information
Letters of Credit - Article 11
Losses - Section 3.6
Material Adverse Change - Section 11.5
Material Default - Section 2.1(b)
Material Event of Default - Section 2.1(b)
Material Potential Default - Section 2.1(b)
Non-Significant Alterations - Section 8.1
Offer Right - Article 17
Option - Section 18.1
Option Agreement - Section 18.1
Other Approved Use - Basic Lease Information
Park - Basic Lease Information
Permitted Use - Basic Lease Information
Potential Default - Section 2.1(b)
Project - Basic Lease Information
Reimbursable Costs - Section 16.2(b)(ii)
Release - Section 3.4(d)
Removal Payment - Section 8.1(b)
Rent - Basic Lease Information
Report - Section 3.4(f)
Rules and Regulations - Section 3.1
Scheduled Base Rent - Basic Lease Information
Second Letter of Credit - Section 11.1(c)
Secured Agreements - Section 11.1
Security Deposit - Basic Lease Information
Selling Notice - Article 17
Stepped Base Rent - Section 18.4(a)
Subject Alterations - Section 8.1(b)
Taxes - Section 5.5
Tenant - Introduction and Basic Lease Information
Tenant Decision Notice - Section 18.3(a)
Tenant Expansion Notice - Section 18.2
Tenant Offer Notice - Article 17
Tenant's Parties - Section 3.4(f)
Tenant's Renewal Notice - Section 2.1(b)
Ten-Year Mortgage Money Rate - Section 18.4(a)
Term - Section 2.1(d)
Term Commencement Date - Basic Lease Information
Total Expansion Costs - Section 18.4(a)
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE 1: PROJECT..........................................................1
ARTICLE 2: TERM, POSSESSION AND LEASE COMMENCEMENT..........................1
2.1 Term Commencement Date..............................................1
(a) Initial Term...................................................1
(b) Extension Option...............................................1
(c) Determination of Fair Market Rental............................2
(d) Term...........................................................3
2.2 Acceptance of the Project...........................................3
ARTICLE 3: USE..............................................................3
3.1 Permitted Use.......................................................3
3.2 Objectionable Actions...............................................3
3.3 Compliance with Law.................................................4
3.4 Hazardous Materials.................................................4
(a) Hazardous Materials Defined....................................4
(b) Environmental Laws Defined.....................................4
(c) Environmental Requirements Defined.............................5
(d) Release Defined................................................5
(e) Hazardous Materials Reports....................................5
(f) Use of Hazardous Materials.....................................5
(g) Hazardous Materials Report; When Required......................6
(h) Hazardous Materials Report; Contents...........................6
(i) Release of Hazardous Materials: Notification and Cleanup......7
(j) Inspection and Testing by Landlord.............................8
(k) Environmental Taxes............................................8
3.5 Compliance with Rules...............................................8
3.6 Indemnity Regarding Specified Issues................................8
ARTICLE 4: RENT.............................................................9
4.1 Payment.............................................................9
4.2 Late Payments.......................................................9
(a) Quarterly Payments in Advance..................................9
(b) Late Charge....................................................9
4.3 Amortized Improvement Repayment....................................10
4.4 Adjustment of Base Rent............................................10
ARTICLE 5: PAYMENT OF COSTS AND EXPENSES....................................10
5.1 Payment of Taxes...................................................10
5.2 [Intentionally Deleted]............................................10
5.3 [Intentionally Deleted]............................................10
5.4 [Intentionally Deleted]............................................10
5.5 Direct Payment of Taxes............................................11
5.6 Direct Payment of Other Costs......................................11
5.7 Net Lease..........................................................11
i
<PAGE>
5.8 [Intentionally Deleted]............................................11
5.9 [Intentionally Deleted]............................................11
5.10 Tenant's Personal Property Taxes...................................11
ARTICLE 6: INSURANCE AND INDEMNIFICATION...................................12
6.1 Property Insurance.................................................12
6.2 Liability and Special Form Insurance...............................12
6.3 Indemnification....................................................13
6.4 Waiver of Subrogation..............................................13
ARTICLE 7: REPAIRS, SERVICES & MAINTENANCE.................................14
7.1 Tenant's Obligations...............................................14
7.2 Landlord's Option..................................................15
7.3 Government Assistance..............................................15
7.4 Utilities..........................................................15
7.5 Liens..............................................................16
ARTICLE 8: ALTERATIONS AND SIGNS...........................................16
8.1 Alterations........................................................16
(a) Performance...................................................17
(b) Removal.......................................................17
(c) Costs.........................................................18
(d) Plans.........................................................18
8.2 Signs..............................................................18
ARTICLE 9: INSPECTION AND NOTICES..........................................18
9.1 Inspection.........................................................18
ARTICLE 10: LENDER AND FINANCING PROVISIONS................................19
10.1 Subordination......................................................19
10.2 Financial Statements...............................................19
10.3 Estoppel Certificates..............................................19
ARTICLE 11: SECURITY DEPOSIT...............................................20
11.1 Deposit of Cash and Letters of Credit..............................20
11.2 Special Provisions Regarding Letters of Credit.....................20
11.3 Rights Upon Default................................................21
11.4 Reduction of First Letter of Credit................................21
11.5 Return of Second Letter of Credit..................................21
11.6 Obligation to Maintain the First Letter of Credit..................22
ARTICLE 12: ASSIGNMENT AND SUBLETTING......................................22
12.1 Consent Required...................................................22
12.2 Bonus Rent.........................................................23
12.3 Market Rent........................................................23
12.4 Other Transfers....................................................23
12.5 No Release.........................................................24
12.6 Effect of Assignment or Sublease...................................24
ARTICLE 13: CONDEMNATION...................................................24
ii
<PAGE>
13.1 Substantial Taking.................................................24
13.2 Partial Taking.....................................................24
13.3 Award..............................................................24
13.4 Payment of Amortized Improvement Repayment.........................24
ARTICLE 14: CASUALTY DAMAGE................................................25
14.1 Casualty...........................................................25
14.2 Minor Damage.......................................................25
14.3 Partial Damage.....................................................26
14.4 Major Damage.......................................................26
14.5 Lender Requirements................................................26
14.6 Uninsured Loss.....................................................26
14.7 End of Term........................................................26
14.8 Amortized Improvement Repayment....................................27
14.9 Repair Costs.......................................................27
14.10 Tenant's Option to Avoid Termination..............................27
ARTICLE 15: HOLDING OVER...................................................27
ARTICLE 16: DEFAULT........................................................28
16.1 Events of Default..................................................28
(a) Abandonment...................................................28
(b) Nonpayment of Rent............................................29
(c) Other Obligations.............................................29
(d) General Assignment............................................29
(e) Receivership..................................................29
(f) Attachment....................................................29
(g) Letters of Credit - Issuer....................................29
(h) Letter of Credit..............................................29
16.2 Rights and Remedies Upon Default...................................29
(a) Remedies Upon Default.........................................29
(b) Tenant Payments...............................................30
(c) Payments......................................................30
(d) Measure of Certain Damages....................................31
(e) Payment of Amortized Improvement Repayment....................31
(f) No Election of Remedies.......................................31
(g) Lien For Rent.................................................31
16.3 [Intentionally Deleted]............................................32
16.4 Interest...........................................................32
16.5 Remedies Cumulative................................................32
16.6 Bankruptcy.........................................................32
16.7 Sublessees of Tenant...............................................33
16.8 Waiver of Default..................................................33
ARTICLE 17: RIGHT OF FIRST OFFER...........................................33
ARTICLE 18: EXPANSION......................................................34
18.1 Tenant's Expansion Right...........................................34
18.2 Exercise of Tenant's Expansion Right...............................34
18.3 Landlord's Response to Tenant Expansion Notice.....................35
iii
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18.4 Expansion Amendment................................................35
18.5 Sale to Tenant.....................................................36
18.6 Tenant's Additional Rights With Respect to the Adjacent Land.......37
18.7 Indemnity..........................................................37
18.8 Assignment by Tenant...............................................37
ARTICLE 19: TRANSFERS BY LANDLORD..........................................37
ARTICLE 20: FEE-IN-LIEU TRANSACTION........................................38
20.1 Fee-In-Lieu Transaction............................................38
20.2 Conditions of Conveyance to County.................................38
20.3 Indemnity for Fee-In-Lieu Transactions.............................39
20.4 Landlord's Right to Repurchase.....................................39
ARTICLE 21: MISCELLANEOUS..................................................39
21.1 Limitation.........................................................39
21.2 Quiet Enjoyment....................................................39
21.3 Waiver.............................................................40
21.4 Notices............................................................40
21.5 Attorneys' Fees....................................................40
21.6 Successors and Assigns.............................................40
21.7 Force Majeure......................................................41
21.8 Reference..........................................................41
21.9 Time of the Essence................................................41
21.10 Governing Law.....................................................41
21.11 Integration.......................................................41
21.12 Modifications.....................................................41
21.13 Severability......................................................41
21.14 Counterparts......................................................41
21.15 Waiver of Certain Damages.........................................41
21.16 Days..............................................................41
21.17 Lease Effective Date..............................................41
21.18 Memorandum of Lease...............................................41
21.19 Captions..........................................................42
21.20 Joint and Several.................................................42
21.21 Submission of Lease...............................................42
21.22 Brokers...........................................................42
21.23 Confidentiality...................................................42
21.24 Alternate Dispute Regulation......................................42
iv
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EXHIBITS: A - Legal Description of the Land
B - General Outline of the Building and Project
C - Legal Description of the Adjacent Land
D - Rules and Regulations
E - Form of Tenant's Estoppel Certificate
F - Form of Memorandum of Lease
G - [Intentionally Deleted]
H - Special Improvements Amortization Schedule
I - Non-Office Mezzanines
v
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NET LEASE
THIS NET LEASE (this "LEASE") is made as of October 14, 1997, by and
between MIT UNSECURED, L.P., a California limited partnership, a Maryland
corporation ("LANDLORD") and LEINER HEALTH PRODUCTS INC., a Delaware corporation
("TENANT").
ARTICLE 1: PROJECT
-------------------
Landlord leases to Tenant and Tenant leases from Landlord, upon the terms
and conditions hereafter set forth, the Project. The approximate size and
location of the Building and Project are highlighted on EXHIBIT B (subject,
however, to the expansion rights described in ARTICLE 18 hereof). Landlord
hereby assigns to Tenant, without recourse, representation or warranty, but only
to the extent assignable, for the Lease Term and on a non-exclusive basis with
Landlord, all warranties and guaranties acquired by Landlord from Crescent
Resources, Inc. ("CRESCENT") in connection with Landlord's acquisition of the
Project, for repair of the Project during the Lease Term, and all rights of
Landlord under the CCR's to use the driveways, roads, parking areas and other
common facilities furnished for the common use of all other owners and tenants
within the Park.
ARTICLE 2: TERM, POSSESSION AND LEASE COMMENCEMENT
---------------------------------------------------
2.1 TERM COMMENCEMENT DATE.
(a) INITIAL TERM. The Initial Term of this Lease shall commence on
the Term Commencement Date and continue in full force and effect for the
number of months specified as the Initial Term in the Basic Lease Information
or until this Lease is terminated as otherwise provided herein. If the Term
Commencement Date is a date other than the first day of a calendar month, the
Term shall be the number of months of the Initial Term in addition to the
remainder of the calendar month following the Term Commencement Date and the
first month shall include the remainder of the calendar month in which the
Commencement Date occurs plus the first full calendar month thereafter.
(b) EXTENSION OPTIONS. So long as (i) this Lease is in full force
and effect, (ii) no Material Event of Default has occurred hereunder and
remains uncured, and (iii) Tenant has not assigned any of its rights hereunder,
Tenant shall have the right and option to extend the Initial Term of this Lease
for the Extension Terms. Each such extension of the Initial Term shall be on
the same terms, covenants and conditions as provided for in this Lease for the
Initial Term, except that the Scheduled Base Rent during each Extension Term
shall be at the Fair Market Rental then in effect, and Tenant shall pay no
Amortized Improvement Repayment for any Extension Term. Notice of Tenant's
intention to exercise this option must be given to Landlord in writing not less
than fifteen (15) months prior to the expiration of the Initial Term or the
immediately preceding Extension Term, as applicable, of this Lease, and shall
THIS AGREEMENT IS SUBJECT TO BINDING
ARBITRATION PURSUANT TO S. C. CODE Section 15-48-10 ET SEQ.,
AS AMENDED FROM TIME TO TIME.
include Tenant's determination of Fair Market Rental as of such date (such
Tenant notice to be referred to herein as "TENANT'S RENEWAL NOTICE"). Once
given with respect to any Extension Term, Tenant's Renewal Notice shall be
irrevocable and binding on Tenant, except that Fair Market Rental shall be
determined as provided herein. In the event the Tenant fails to deliver
Tenant's Renewal Notice within
<PAGE>
the time period set forth above, Tenant's right to so extend the Term hereof for
such Extension Term and each succeeding Extension Term shall expire and be of no
further force and effect.
For purposes of this Lease, (i) the term "MATERIAL EVENT OF DEFAULT" means any
Event of Default which involves the nonpayment of money or which, in Landlord's
reasonable judgment, threatens or impairs the safety, security, structural
integrity, operating systems or value of the Building, (ii) the term "MATERIAL
POTENTIAL DEFAULT" means any Potential Default which involves the nonpayment of
money or which, in Landlord's reasonable judgment, threatens or impairs the
safety, security, structural integrity, operating systems or value of the
Operating Project, (iii) "MATERIAL DEFAULT" means any Material Event of Default
or Material Potential Default, and (iv) "POTENTIAL DEFAULT" means an event with
respect to which a cure period under SECTION 16.1 has commenced and such event
remains uncured.
(c) DETERMINATION OF FAIR MARKET RENTAL. For purposes hereof, the
term "FAIR MARKET RENTAL" means, for any Extension Term, the rental then in
effect for comparable space (which shall mean industrial buildings comparable in
size, age and quality of construction in the "Charlotte-Rock Hill Metropolitan
Statistical Area") between arm's length parties and without contribution by
Landlord for additional alterations or finishout. Within ten (10) business days
following Landlord's receipt of Tenant's Renewal Notice, Landlord shall notify
Tenant of its agreement or disagreement with Tenant's determination of the Fair
Market Rental as set forth in Tenant's Renewal Notice. If Landlord disagrees
with Tenant's determination of Fair Market Rental, Landlord and Tenant shall
negotiate in good faith to resolve the dispute prior to the date which is
fourteen (14) months prior to the expiration of the then existing Initial Term
or Extension Term, as applicable. If Landlord and Tenant are unable to resolve
the dispute by the date which is fourteen (14) months prior to the end of the
then-current Initial Term or Extension Term, as applicable, Landlord and Tenant
shall submit the determination of Fair Market Rental to arbitration, and
Landlord and Tenant shall each appoint one (1) arbitrator who shall be an MAI
appraiser who shall have been active over the three (3) year period ending on
the date of such appointment in the leasing of industrial properties in the
"Charlotte-Rock Hill Metropolitan Statistical Area" (a "QUALIFIED APPRAISER"),
and such Qualified Appraisers shall appoint a third MAI appraiser meeting the
foregoing criteria (the "THIRD APPRAISER"). If either Landlord or Tenant fails
to appoint its Qualified Appraiser by such date, the other party hereto shall be
authorized to appoint the Qualified Appraiser for such party. Each of the two
(2) Qualified Appraisers shall separately determine whether Landlord's or
Tenant's submitted Fair Market Rental is the closest to such appraiser's
judgment as to the actual Fair Market Rental consistent with the requirements of
this SECTION 2.1(c) on or before the date thirteen (13) months prior to the
expiration of the then current Initial Term or Renewal Term, as applicable. If
the determination of the Qualified Appraisers is the same, such determination
shall, subject to the last sentence of this Section 2.1(c), constitute Fair
Market Rental under this Lease. If the determination of Fair Market Rental by
the two (2) Qualified Appraisers differs, the Third Appraiser shall choose
whether the Fair Market Rental submitted by Landlord or by Tenant is the proper
determination of Fair Market Rental, which determination shall, subject to the
last sentence of this SECTION 2.1(c), constitute Fair Market Rental under this
Lease. The cost of such determinations by the Qualified Appraisers and the
Third Appraiser shall be paid by the party whose submitted Fair Market Rental
was not selected. Notwithstanding the foregoing, Fair Market Rental for any
Extension Term shall not in any event be less than Scheduled Base Rent for the
immediately preceding Initial Term or Extension Term, as applicable.
(d) TERM. The "TERM" (herein so called) shall refer to the Initial
Term and, if all conditions thereto as set forth herein are timely satisfied,
each Extension Term, subject, however, to the rights of Landlord and Tenant
hereunder to terminate the Initial Term or any Extension Term as expressly
provided herein, and, following exercise of any such early termination right,
the Term of the Lease shall end on the date of such termination.
2
<PAGE>
2.2 ACCEPTANCE OF THE PROJECT. Effective as of the Term Commencement
Date, Tenant acknowledges that it has inspected and accepts the Project in its
present condition as suitable for the purpose for which the Project is leased.
Tenant agrees that the Project is in good and satisfactory condition as of the
Term Commencement Date. Tenant further acknowledges that no representations or
warranties as to the condition or repair of the Project, nor promises to alter,
remodel, or improve the Project have been made by Landlord except as and to the
extent provided in ARTICLE 18 hereof. This SECTION 2.2 shall not be construed
to impair any right or remedy of Tenant against Crescent pursuant to the
Build-to-Suit Purchase Agreement of even date with this Lease between Tenant and
Crescent.
ARTICLE 3: USE
---------------
3.1 PERMITTED USE. Tenant shall use the Project for the Permitted Use and
for no other use or purpose without the prior written consent of Landlord. The
use of the Project shall at all times comply with applicable Governmental
Requirements and the CCR's. Tenant and its employees, customers, visitors, and
licensees shall have the right to use the Project subject to the rules and
regulations attached hereto as EXHIBIT D (the "RULES AND REGULATIONS").
3.2 OBJECTIONABLE ACTIONS. Tenant shall not permit any odors, smoke,
dust, gas, substances, noise or vibrations to emanate from the Project in
violation of Governmental Requirements, Rules and Regulations or the CCR's, nor
take any action which would constitute a nuisance or would disturb, obstruct or
endanger any owner, tenant, invitee or licensee of any adjacent property or
unreasonably interfere with their use of their respective premises. Tenant
shall not use or allow the Project to be used for any improper, immoral,
unlawful or objectionable purpose, nor shall Tenant cause or maintain or permit
any nuisance in, on or about the Project. Tenant shall not commit or suffer the
commission of any waste in, on or about the Project. Tenant shall not allow as a
regular or frequent business activity at the Project any sale by auction, or
place any loads upon the floors, walls or ceilings which endanger the structure,
or place any harmful liquids in the drainage system of, the Building or Project,
except in accordance with Governmental Requirements, the Rules and Regulations
and the CCR's. No waste, materials or refuse shall be dumped upon or permitted
to remain on the Project except in trash containers placed inside or outside the
Building designed for that purpose and with prompt pickup of waste, materials
and refuse and disposal off-site, all in accordance with Governmental
Requirements, the Rules and Regulations and the CCR's. Tenant shall not do or
permit anything to be done in, on or about the Project or bring or keep anything
which will in any way cause a cancellation of the insurance upon the Building or
Project or otherwise materially adversely affect said insurance upon the
Building or Project in any manner (but excluding any increase in insurance
premiums so long as such increase is paid by Tenant).
3.3 COMPLIANCE WITH LAW. Tenant, shall, at no cost or expense to
Landlord, cause Tenant's use (and the use of any assignee or subtenant
hereunder) to comply in all material respects with all local, state and federal
statutes, laws, rules, regulations, ordinances, mandates and requirements now in
force, or which may hereafter be in force, whether foreseeable or unforeseeable,
pertaining to the occupancy or use of the Project (collectively, the
"GOVERNMENTAL REQUIREMENTS"), and shall faithfully observe in the use or
occupancy of the Project all Governmental Requirements including, without
limitation, the Environmental Laws (as hereinafter defined), and the Americans
with Disabilities Act, 42 U.S.C. Sections 12101-12213 (and any rules,
regulations, restrictions, guidelines or requirements now or hereafter
promulgated or published pursuant thereto), whether or not any of the foregoing
were foreseeable or unforeseeable at the time of the execution of this Lease.
Tenant's obligation to comply with and observe the Governmental Requirements
shall apply regardless of whether such Governmental Requirements regulate or
relate to Tenant's particular use of the Project or regulate or relate to the
use of premises in general, and regardless of the cost thereof. The judgment of
any court of competent jurisdiction, or the admission of Tenant in any action or
proceeding against Tenant, whether Landlord be a party thereto or
3
<PAGE>
not, that any such Governmental Requirement pertaining to the Project has been
violated, shall be conclusive of that fact as between Landlord and Tenant.
3.4 HAZARDOUS MATERIALS.
(a) HAZARDOUS MATERIALS DEFINED. As used herein, the term "HAZARDOUS
MATERIALS" means any waste, material or substance (whether in the form of
liquids, solids or gases, and whether or not air-borne) (i) the presence or
Release of which requires reporting, investigation or remediation under any
Environmental Requirement, (ii) which is defined or listed as a "hazardous
waste", "hazardous substance", "extremely hazardous waste", "restricted
hazardous waste"' "hazardous material", "toxic substance", or other similar or
related term under any Environmental Law, (iii) which is toxic, radioactive, or
otherwise classified as hazardous or toxic and is or becomes regulated by any
governmental authority, the United States of America, or any subdivision of the
foregoing, or any agency, department, commission, board, authority or
instrumentality, bureau or court having jurisdiction over the Property or any
occupant or user of the Property (collectively, the "GOVERNMENTAL AUTHORITIES")
as a threat to human health or the environment, (iv) the presence of which on
the Project causes or threatens to cause a nuisance upon the Project or to
adjacent property, (v) the presence of which on adjacent properties could
constitute a trespass by Landlord or Tenant, (vi) which is asbestos, (vii) which
is polychlorinated biphenyls, or (viii) which contains petroleum or any
petroleum-derived product.
(b) ENVIRONMENTAL LAWS DEFINED. As used herein, the term
"ENVIRONMENTAL LAWS" means all statutes and ordinances of any Governmental
Authority and relating to the protection of human health and the environment,
whether now existing or hereafter adopted, including without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. Section 9601, ET SEQ.), the Solid Waste Disposal Act, as
amended (42 U.S.C. Section 6901 ET SEQ.), the Hazardous Materials Transportation
Act, as amended (49 U.S.C. Section 1801, ET SEQ.), the Clean Air Act, as amended
(42 U.S.C. Section 7401, ET SEQ.), the Federal Water Pollution Control Act, as
amended (33 U.S.C. Section 1251, ET SEQ.), the Toxic Substances Control Act, as
amended (15 U.S.C. Section 2601 ET SEQ.), the Safe Drinking Water Act, as
amended (42 U.S.C. Section 300f ET SEQ.), the Atomic Energy Act, as amended
(42 U.S.C. Section 2014 ET SEQ.), the Federal Insecticide, Fungicide and
Rodenticide Act, as amended (7 U.S.C. Section 136, ET SEQ.), the Oil Pollution
Act of 1990, as amended (33 U.S.C. Section 2701, ET SEQ.), the Emergency
Planning and Community Right-to-Know Act of 1986, as amended (42 U.S.C.
Section 11001, ET SEQ.), and the regulations adopted and publications
promulgated pursuant thereto, but excluding FDA Requirements.
(c) ENVIRONMENTAL REQUIREMENTS DEFINED. As used herein, the term
"ENVIRONMENTAL REQUIREMENTS" means all applicable present and future
Environmental Laws and all rules, regulations, orders, decrees, permits,
licenses, concessions, franchises, or other restrictions or requirements of any
Governmental Authority relating to protection of human health or the environment
and all applicable judicial, regulatory, or administrative decisions, decrees,
judgments, or orders thereunder, but excluding
FDA Requirements.
(d) RELEASE DEFINED. As used herein, the term "RELEASE" means any
spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting,
escaping, leaching, dumping, or disposing into the environment (including the
abandonment or discarding of barrels, containers or other closed receptacles
containing any Hazardous Substance).
(e) [Intentionally Deleted]
4
<PAGE>
(f) USE OF HAZARDOUS MATERIALS. Tenant agrees that during the Term
of this Lease, there shall be no ACTION (which, as used in this SECTION 3.4(f),
shall mean and refer to any use, disposal, storage, removal, treatment, import,
handling or processing of Hazardous Materials on, from or under the Building or
Project), and no generation, leakage, manufacture, Release or threatened Release
of Hazardous Materials on, from or under the Building or Project (individually
and collectively, "HAZARDOUS USE") by Tenant or any of its directors, officers,
members, managers, partners, employees, shareholders, invitees, guests, agents,
contractors, subtenants, assignees, licensees, vendors, customers or occupants
(collectively, "TENANT'S PARTIES"), except to the extent that, and in accordance
with such conditions as, Landlord may have previously approved in writing in its
sole and absolute discretion. It is further agreed that Tenant shall be
entitled to undertake an Action only with respect to those Hazardous Materials
which are (i) set forth in a list prepared by Tenant and approved in writing by
Landlord, (ii) necessary for Tenant's business, but then only in the amounts and
for the purposes previously disclosed in writing to and approved in writing by
Landlord, and (iii) in full compliance with Environmental Requirements, and all
judicial and administrative decisions pertaining thereto. Tenant shall not be
entitled to install any tanks under, on or about the Building or Project for the
storage of Hazardous Materials without the express written consent of Landlord,
which consent may be given or withheld in Landlord's sole discretion.
Notwithstanding the foregoing, Tenant shall be entitled to undertake an Action
with respect to any ordinary and customary materials reasonably required in the
normal course of the Permitted Use, so long as such Action is in compliance with
all Governmental Requirements and does not expose the Project or neighboring
property to any material risk of contamination or damage or expose Landlord to
any liability therefor. For the purposes of this SECTION 3.4(f), the term
"HAZARDOUS USE" shall include Hazardous Use(s) on, from or under the Building or
Project by Tenant or any of Tenant's Parties, whether known or unknown to
Tenant.
(g) HAZARDOUS MATERIALS REPORT; WHEN REQUIRED. Tenant shall submit to
Landlord a written report with respect to Hazardous Materials ("REPORT") in the
form prescribed in SUBSECTION (h) below on the following dates:
(i) At any time within fifteen (15) business days after
written request by Landlord, which request shall not be made more frequently
than annually unless Landlord in good faith believes a violation of SECTION
3.4(f) has occurred since the date of the last report submitted under this
SECTION 3.4(g) or Landlord is required to deliver same to a third party in
connection with a sale or financing of the Project or a public offering with
respect to Landlord's equity securities, and
(ii) At any time when there has been a violation of any
Environmental Requirement, or in connection with any proposed request for
Landlord's consent to any change in the list of materials previously approved in
writing by Landlord or for an increase in the intensity of usage or storage of
such previously approved materials.
(h) HAZARDOUS MATERIALS REPORT; CONTENTS. The Report shall contain,
without limitation, the following information (but in any event excluding any
requirement to report on normal vehicular traffic and normal equipment
lubrication):
(i) Whether on the date of the Report and (if applicable)
during the period since the last Report there has been any Hazardous Use on,
from or under the Project.
(ii) If there was such Hazardous Use, and to the extent such
information is available to Tenant, the exact identity of the Hazardous
Materials, the dates upon which such materials were brought upon the Project,
the dates upon which the Hazardous Materials were removed therefrom, and the
quantity, location, use and purpose thereof.
5
<PAGE>
(iii) If there was such Hazardous Use, any governmental
permits maintained by Tenant with respect to such Hazardous Materials, the
issuing agency, original date of issue, renewal dates (if any) and expiration
date. Copies of any such permits and applications therefor shall be attached.
(iv) If there was such Hazardous Use, any governmental
reporting or inspection requirements with respect to such Hazardous Materials,
the governmental agency to which reports are made and/or which conducts
inspections, and the dates of all such reports and/or inspections (if
applicable) since the last Report. Copies of any such Reports shall be
attached.
(v) If there was such Hazardous Use, identification of any
operation or business plan prepared for any government agency with respect to
Hazardous Use.
(vi) Any liability insurance carried by Tenant with respect
to Hazardous Materials, the insurer, policy number, date of issue, coverage
amounts, and date of expiration. Copies of any such policies or certificates of
coverage shall be attached.
(vii) Any notices of violation of Environmental Requirements,
written or oral, received by Tenant from any governmental agency since the last
Report, the date, name of agency, and description of violation. Copies of any
such written notices shall be attached.
(viii) Any knowledge, information or communication which
Tenant has acquired or received relating to (1) any enforcement, cleanup,
removal or other governmental or regulatory action threatened or commenced
against Tenant or with respect to the Project pursuant to any Environmental
Requirements; (2) any claim made or threatened by any person or entity against
Tenant or the Project on account of any alleged loss or injury claimed to result
from any alleged Hazardous Use on or about the Project; or (3) any report,
notice or complaint made to or filed with any governmental agency concerning any
Hazardous Use on or about the Project. The Report shall be accompanied by
copies of any such claim, report, complaint, notice, warning or other
communication that is in the possession of or is available to Tenant.
(ix) Such other pertinent information or documents as are
reasonably requested by Landlord in writing.
(i) RELEASE OF HAZARDOUS MATERIALS: NOTIFICATION AND CLEANUP.
(i) At any time during the Term, if Tenant knows or
believes that any Release of any Hazardous Materials has come or will come to be
located upon, about, beneath or from the Building or Project in violation of
SECTION 3.4(F) hereof, then Tenant shall immediately, either prior to the
Release or following the discovery thereof by Tenant, give verbal and follow-up
written notice of that condition to Landlord.
(ii) At its sole cost and expense, Tenant covenants to
investigate, clean up and otherwise remediate any Release of Hazardous Materials
which were caused or created by Tenant or any of Tenant's Parties. Such
investigation, clean-up and remediation shall be performed only after Tenant has
obtained Landlord's written consent, which may be exercised by Landlord in its
discretion; provided, however, that Tenant shall be entitled to respond
immediately to an emergency without first obtaining Landlord's written consent.
For purposes of this SUBSECTION 3.4(I)(II), the word "emergency" shall be deemed
to include any situation which applicable Governmental Requirements or the Food
and Drug Administration or any local or state governmental authority with
similar functions regarding rules and regulations applicable to Consumer Goods
(collectively, the "FDA") require be cleaned up immediately
6
<PAGE>
and without delay for third party approvals. All clean-up and remediation shall
be done in strict compliance with Environmental Requirements, and all present
and future statutes, ordinances, rules, regulations, orders, decrees, permits,
licenses, concessions, franchises, restrictions and requirements of the FDA and
other state or local authorities with similar jurisdiction with respect to the
production, packaging and distribution of drugs or other consumer goods relating
to the Project or the activities thereon (collectively, "FDA REQUIREMENTS"), and
to the satisfaction of Landlord in its discretion.
(iii) Notwithstanding the foregoing, if Tenant fails to
perform its obligations under SECTION 3.4(I)(II) as required hereby and such
failure continues for ten (10) days following the date Landlord furnishes Tenant
written notice of such matters (or such longer period as may be required to cure
such matters so long as Tenant commences such cure within such ten (10) day
period and diligently prosecutes such cure to completion, unless such failure is
a failure to pay money (for which only the original ten (10) day cure period
shall apply), Landlord shall have the right, but not the obligation, in
Landlord's discretion, exercisable by written notice to Tenant at any time, to
undertake within or outside the Project all or any portion of any investigation,
clean-up or remediation with respect to the release of Hazardous Materials
caused or created by Tenant or any of Tenant's Parties (or, once having
undertaken any of such work, to cease same, in which case Tenant shall perform
the work), all at Tenant's cost and expense, which shall be paid by Tenant as
additional rent within ten (10) days after receipt of written request therefor
by Landlord (and which Landlord may require to be paid prior to commencement of
any work by Landlord). No such work by Landlord shall create any liability on
the part of Landlord to Tenant or any other party in connection with such
Hazardous Materials or constitute an admission by Landlord of any responsibility
with respect to such Hazardous Materials.
(iv) It is the express intention of the parties hereto that
Tenant shall be liable under this SECTION 3.4(I) for any and all conditions
covered hereby which were caused or created by Tenant or any of Tenant's
Parties. Tenant shall not enter into any settlement agreement, consent decree
or other compromise with respect to any claims relating to any Hazardous
Materials in any way connected to the Project without first (1) notifying
Landlord of Tenant's intention to do so and affording Landlord the opportunity
to participate in any such proceedings and (2) obtaining Landlord's written
consent.
(j) INSPECTION AND TESTING BY LANDLORD. Landlord shall have the
right at all times during the Term of this Lease to (i) inspect the Project, as
well as Tenant's books and records, and to (ii) conduct tests and investigations
to determine whether Tenant is in compliance with the provisions of this
SECTION 3.4. Except in case of emergency, Landlord shall give reasonable notice
to Tenant before conducting any inspections, tests, or investigations. The cost
of all such inspections, tests and investigations shall be borne by Tenant, if
such inspections, tests or investigations disclose a violation of this SECTION
3.4. Neither any action nor inaction on the part of Landlord pursuant to this
SECTION 3.4(J) shall be deemed in any way to release Tenant from, or in any way
modify or alter, Tenant's responsibilities, obligations, and/or liabilities
incurred pursuant to SECTION 3.4 hereof.
(k) ENVIRONMENTAL TAXES. Tenant shall also pay prior to delinquency
all Environmental Taxes (hereinafter defined) and other taxes in connection with
any testing, investigation, abatement, Release, remediation, removal,
transportation and/or disposal of any Hazardous Materials by Tenant or any of
Tenant's Parties (or by Landlord, pursuant to any provision of this Lease
granting to Landlord the right to do any of the foregoing and to bill Tenant
therefor). For purposes of this SUBSECTION (K) only, the terms "ENVIRONMENTAL
TAXES" and "ENVIRONMENTAL TAXES" shall include, without limitation, any fees,
charges, fines, penalties and costs (including, without limitation, permit,
approval or licensing fees, charges or costs) imposed, charged or otherwise
assessed upon or as a result of such act or omission by Tenant or any of
Tenant's Parties.
7
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3.5 COMPLIANCE WITH RULES. Tenant and Tenant's agents, employees, and
invitees shall faithfully observe and comply with the Rules and Regulations.
Landlord shall not be responsible to Tenant for the non-compliance by any person
or entity with any of such Rules and Regulations.
3.6 INDEMNITY REGARDING SPECIFIED ISSUES. Tenant shall indemnify, hold
harmless, and, at Landlord's option (with such attorneys as Landlord may approve
in advance and in writing), defend Landlord and Landlord's officers, directors,
trustees, members, managers, shareholders, partners, employees, contractors,
property managers, agents and mortgagees and other lien holders, and their
respective heirs, successors and assigns (collectively, the "LANDLORD
INDEMNIFIED PARTIES") from and against any and all Losses (hereinafter defined)
arising from or related to: (a) any violation or alleged violation by Tenant or
any of Tenant's Parties of any of the requirements, ordinances, statutes,
regulations or other laws referred to in this ARTICLE 3, including, without
limitation, the Environmental Requirements; (b) any breach of the provisions of
this ARTICLE 3 by Tenant or any of Tenant's Parties; or (c) any Hazardous Use
on, about or from the Building or Project by Tenant or any of Tenant's Parties,
whether or not approved by Landlord. The term "LOSSES" shall mean all costs and
expenses suffered or incurred in connection with or arising from claims,
demands, actions, judgments, damages (whether consequential, direct or indirect,
known or unknown, foreseen or unforeseen), penalties, fines, liabilities
(including strict liability), encumbrances, liens, actual losses of every kind
and nature (including, without limitation, property damage, diminution in value
of Landlord's interest in the Building or Project, damages for the loss or
restriction on use of any space or amenity within the Building or Project,
actual damages arising from any adverse impact on marketing space in the
Building or Project, sums paid in settlement of claims and any costs and
expenses associated with injury, illness or death to or of any person), suits,
administrative proceedings and fees, including, but not limited to, attorneys'
and consultants' fees and expenses, damages for personal injury or injury to
property or natural resources occurring upon or off the Project, and the costs
of cleanup, remediation, removal and restoration, that are in any way related to
any matter covered by the foregoing indemnity. Landlord shall not enter any
settlement agreement, consent decree or other compromise for which Landlord will
hold Tenant responsible for indemnification under this SECTION 3.6 without first
(x) notifying Tenant of Landlord's intention to do so and affording Tenant the
opportunity to participate in any such proceedings, and (y) obtaining Tenant's
written consent thereto, which consent shall not be unreasonably withheld,
conditioned or delayed. Tenant's indemnification under this SECTION 3.6 shall
not be deemed to be a direct or indirect admission by Tenant of its culpability
with respect to any of the matters so indemnified. The provisions of this
SECTION 3.6 shall survive the expiration or termination of this Lease.
ARTICLE 4: RENT
----------------
4.1 PAYMENT. Tenant shall pay to Landlord, without demand throughout the
Term, Rent as specified in the Basic Lease Information, payable in monthly
installments in advance on or before the first day of each calendar month,
commencing upon the date one (1) month following the Term Commencement Date.
All payments of Rent and all other sums under this Lease shall be in lawful
money of the United States, without deduction, offset or recoupment whatsoever,
to Landlord at the address specified in the Basic Lease Information or to such
bank account and/or other firm or to such other place as Landlord may from time
to time designate in writing; provided, however, that following any change by
Landlord of the account, firm or place for payment, the next rental payment
shall be deemed to be timely paid if it is made to the requested account, firm
or place within fifteen (15) days after the date of such notification. Landlord
will provide to Tenant and maintain during the Lease Term wire transfer
instructions for payment of Rent under this Lease. Rent in the amount of
$192,377 for the second full month of the Term shall be paid by Tenant upon
Tenant's execution of this Lease. If the Term Commencement Date is a date other
than the first day of a calendar month, the monthly Base Rent for
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such partial month shall be prorated on a daily basis at the monthly rent
provided for the first calendar month.
4.2 LATE PAYMENTS.
(a) QUARTERLY PAYMENTS IN ADVANCE. Notwithstanding the provisions of
SECTION 4.1 to the contrary, if either (i) during any twelve (12) month period
Tenant fails on more than three (3) occasions to make any payment of monthly
Rent to Landlord on the date when it is due, or (ii) during any four (4) month
period Tenant fails on more than two (2) occasions to make any payment of
monthly Rent to Landlord on the date when it is due, then Landlord, in addition
to all other rights and remedies available to Landlord, may by giving written
notice to Tenant require that Tenant pay the monthly Rent to Landlord quarterly
in advance. Nothing contained herein shall be deemed or construed as a waiver
of Tenant's obligation to make all payments under this Lease as and when due.
If after notice from Landlord requiring same, Tenant pays Rent quarterly in
advance on or before the first (1st) day of each of six (6) successive quarterly
periods, and if as of the end of such period Tenant is rated by Standard and
Poor as "BBB-" or better, Tenant shall not be required to continue to make
payments quarterly in advance unless and until the requirements of SUBSECTIONS
4.2(A)(i) or (ii) are again met.
(b) LATE CHARGE. In addition to its other remedies, Landlord shall
have the right to add to the amount of any payment required to be made by Tenant
hereunder, and which is not paid on or before the date five (5) business days
following the date the same is due, an amount equal to three percent (3%) of the
delinquency for each month or portion thereof that the delinquency remains
outstanding to compensate Landlord for the loss of the use of the amount not
paid and the administrative costs caused by the delinquency, the parties
agreeing that Landlord's damage by virtue of such delinquencies would be
difficult to compute and the amount stated herein represents a reasonable
estimate thereof. The three percent (3%) late charge under this SECTION 4.2(b)
shall be due and payable by Tenant on or before the date thirty (30) days
following receipt by Tenant of an invoice with respect to such amount sent by or
on behalf of Landlord, which invoice shall be sent by Landlord within sixty (60)
days following the date such late payment was due or it shall be deemed waived.
4.3 AMORTIZED IMPROVEMENT REPAYMENT. The Amortized Improvement Repayment
represents repayment of the cost of $4,825,000 of special improvements made to
the Project at the special request of Tenant, which amounts are amortized over
the Initial Term, as a hypothetical fifteen (15) year fully amortizing loan, at
an annual interest rate equal to 9.5%. In the event that this Lease is
terminated, voluntarily or involuntarily, for any reason, or if an Event of
Default or Bankruptcy Event occurs, Tenant shall, upon demand, pay to Landlord
the aggregate unpaid Amortized Improvement Repayment as of the date of
termination (calculated in accordance with EXHIBIT H attached hereto, subject to
adjustments in accordance with SECTION 4.4 below), without deduction, offset or
recoupment whatsoever to Landlord at the address specified in the Basic Lease
Information or to such other firm or to such other place as Landlord may from
time-to-time designate in writing.
4.4 ADJUSTMENT OF BASE RENT. If Landlord's Purchase Price (as defined in
the Agreement Regarding Closing dated October 14, 1997, between Landlord, Tenant
and Crescent) is reduced below $21,577,160, as provided in such Agreement
Regarding Closing, Landlord and Tenant shall enter into an amendment to this
Lease to reduce the Base Rent hereunder as provided in this SECTION 4.4. If the
reduction in Purchase Price is attributable to the exterior walls, floor or roof
of, or structural steel for, the Building, the Scheduled Base Rent shall be
reduced by an annual amount equal to 10.21% of such reduction. If the reduction
in the purchase price is not attributable to the exterior walls, floor or roof
of, or structural steel for, the Building, the Amortized Improvement Repayment
shall be recalculated using a principal amount for the loan amount as described
in SECTION 4.3 equal to $4,825,000 less such reduction
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in the purchase price. If the Scheduled Base Rent is reduced as provided in
this SECTION 4.4, the annual Scheduled Base Rent for months 61-120 shall be
reduced to an amount equal to 110% of the annual Scheduled Base Rent for months
1-60, and the annual Scheduled Base Rent for months 121-180 shall be reduced to
an amount equal to 110% of the annual Scheduled Base Rent for months 61-120.
ARTICLE 5: PAYMENT OF COSTS AND EXPENSES
----------------------------------------
5.1 PAYMENT OF TAXES. Tenant shall pay to Landlord on demand Taxes not
required to be paid directly by Tenant pursuant to SECTION 5.5 hereof.
5.2 [Intentionally Deleted]
5.3 [Intentionally Deleted]
5.4 [Intentionally Deleted]
5.5 DIRECT PAYMENT OF TAXES. For purposes hereof, the term "TAXES" means
all real estate taxes, possessory interest taxes, business or license taxes or
fees, gross rents taxes, payment in lieu of such taxes or fees, annual or
periodic license or use fees, excises, transit charges, housing fund
assessments, open space charge, assessments, levies, fees or charges, general
and special, ordinary and extraordinary, unforeseen as well as foreseen, of any
kind (including fees "in-lieu" of any such tax or assessment) which are
assessed, levied, charged, confirmed, or imposed by any public or governmental
authority or agency upon the Project, its operations or the rent (or any portion
or component thereof) and the costs to Landlord of contesting the amount,
validity, or applicability of any such taxes, except (i) inheritance or estate
taxes imposed upon or assessed against the Project, or any part thereof or
interest therein, and (ii) taxes computed on the basis of the net income of
Landlord or the owner of any interest therein. Tenant shall pay prior to
delinquency all Taxes assessed against the Project, and shall furnish to
Landlord evidence of timely payment not more than five (5) days after such
delinquency date. Refunds (including interest thereon) or adjustments to Taxes
for any year shall be applied to the year to which such refund or adjustment
relates. If Taxes for any period during the Lease Term are increased after
payment thereof for any reason, Tenant shall pay upon demand such increased
Taxes (which obligation shall survive termination of this Lease). With respect
to any assessment otherwise includable within Taxes that may be levied against
or upon the Project and which are evidenced by improvement or other bonds, or
may be paid in annual installments, there shall be included within the
definition of Taxes with respect to any year only the amount currently payable
on such bonds, including interest, for such year, or the current annual
installment for such year. Landlord shall promptly furnish to Tenant copies of
notices for Taxes which are payable directly by Tenant under this SECTION 5.5
and which notices are sent directly to and received by Landlord by the
applicable taxing authority. If Landlord's delay in providing Tenant copies of
notices promptly following Landlord's receipt of same as required by the
immediately preceding sentence prevents Tenant from timely paying such Taxes,
Landlord shall reimburse Tenant for any interest or penalties incurred and
arising from Landlord's delay.
5.6 DIRECT PAYMENT OF OTHER COSTS. Tenant shall pay prior to delinquency
all fees, amounts, costs and expenses of every kind and nature incurred or
payable by Landlord under or pursuant to the CCR's, the Fee-in-Lieu Transaction,
the Easements or the Option Agreement, and shall furnish to Landlord evidence of
timely payment not more than five (5) days following the delinquency date for
such payments.
5.7 NET LEASE. This shall be a triple net Lease and Base Rent shall be
paid to Landlord absolutely net of all costs and expenses (including capital
expenditures, but subject to allocation as
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provided in SECTION 7.1 hereof). This Lease is intended to pass on to Tenant
all costs and expenses (including capital expenditures, but subject to
allocation as provided in SECTION 7.1 hereof) in connection with the ownership
and operation of the Building or Project.
5.8 [Intentionally Deleted]
5.9 [Intentionally Deleted]
5.10 TENANT'S PERSONAL PROPERTY TAXES. Tenant shall pay prior to
delinquency all Taxes assessed against and levied upon trade fixtures,
furnishings, equipment and all other personal property of Tenant contained in
the Project or elsewhere. When possible, Tenant shall cause such trade
fixtures, furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Landlord. If any of Tenant's
personal property shall be assessed with Landlord's real property, or if any
other Taxes or taxes which are payable by Tenant pursuant to this Lease or
otherwise are assessed against Landlord with respect to this Lease or any
amounts paid hereunder or with respect to Landlord's interest in the Project,
Tenant shall pay the Taxes and other taxes attributable to Tenant prior to
delinquency and shall furnish to Landlord evidence of such timely payment not
more than five (5) days after such delinquency date; provided, however, that if
Governmental Requirements require that Landlord pay such amounts directly,
Tenant shall reimburse Landlord on demand for any such Taxes so paid.
ARTICLE 6: INSURANCE AND INDEMNIFICATION
-----------------------------------------
6.1 PROPERTY INSURANCE. Tenant agrees at all times during the continuance
of this Lease, at its own cost and expense, to insure the Building and all
improvements, betterments and equipment, against the perils included in the
"Special Causes of Loss Form" with the elimination of any exclusions for water
damage other than that caused by flood and which may, at Tenant's option and
subject to the immediately succeeding two (2) sentences, include earthquake and
flood loss coverage. If Tenant elects to not include earthquake and/or flood
loss coverage in the insurance maintained by Tenant on the Project, and if
Landlord's lender requires such coverage, Tenant shall, at Tenant's cost and
expense, purchase such earthquake and/or flood loss coverage, except that if the
premium for such earthquake and flood loss coverage as mandated by Landlord's
lender exceeds five (5) cents per $100 of value insured, Tenant will not be
required to purchase such earthquake and/or flood loss coverage to the extent
the premium therefor exceeds five (5) cents per $100 of value insured, unless
Landlord reimburses Tenant for the amount the insurance premium is so increased
above five (5) cents per $100 of value insured. Additionally, if Tenant elects
not to carry earthquake and/or flood loss insurance with a deductible less than
five percent (5%), and Landlord's lender requires such coverage, Tenant will not
be required to carry such earthquake and/or flood loss insurance with a
deductible less than five percent (5%) unless Landlord reimburses Tenant for the
additional premium which will arise by so reducing the deductible. Coverage
shall be in the name of Tenant, Landlord, and Landlord's mortgagee(s), as their
respective interests may appear. Tenant may maintain this coverage under a
blanket policy insuring other operations of Tenant. Coverage shall be provided
in an amount equal to 100% of the replacement cost of the Building and
improvements and shall include an agreed amount endorsement. Tenant shall also
provide coverage for loss of rental income (including the amounts payable by
Tenant for Base Rent, Taxes and insurance premiums and pursuant to SECTIONS 5.1
and 5.6 hereof) for a twenty-four (24) month period following the date of loss.
Coverage for the loss of rental income may be included in Tenant's Loss of
Income Insurance coverage. All insurance shall be placed with insurers approved
to do business in the state where the Project is located and with insurers
having a Best's rating of A-VI or better. All insurance proceeds for losses
with respect to the Project shall be payable to Landlord's mortgagee if required
to be paid to such lienholder as provided in SECTION 14.5 hereof. In all other
cases, all insurance proceeds for losses with respect to the Project shall be
payable, at Landlord's election, either to Landlord mortgagee(s), to Landlord or
to an
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insurance trustee reasonably selected by Landlord and Tenant to maintain and
disburse such funds to assure completion of all restoration required hereunder
or permitted by SECTIONS 14.1 or 14.10 hereof, and otherwise as the interests of
the parties appear.
6.2 LIABILITY AND SPECIAL FORM INSURANCE. Tenant shall purchase at its
own expense and keep in force during this Lease a policy or policies of
commercial general liability insurance, including bodily injury, property damage
and personal injury, in the amount of not less than Two Million Dollars
($2,000,000.00) per occurrence and Five Million Dollars ($5,000,000) in the
annual aggregate. The aggregate limit shall apply separately to the Project.
Said policies shall (a) name Landlord and, if applicable, its agent, and any
other party holding an interest in the Project as may from time to time be
requested by Landlord, (b) be issued by an insurance company with a Best's
rating of A-VI or better, or which is otherwise approved in writing by Landlord,
(c) provide that said insurance shall not be canceled unless thirty (30) days
prior written notice shall have been given to Landlord, (d) provide coverage on
an occurrence basis; (e) provide coverage for the indemnity obligations of
Tenant under this Lease; (f) contain cross liability endorsement; and (g) shall
be primary, not contributing with, and not in excess of coverage which Landlord
may carry. In the event that Tenant's General Liability Insurance policy is
written on a claims-made basis it shall be written to cover all claims incurred
during the term of this Lease or out of any work performed pursuant to the
Lease, regardless of when such claim shall be first made against Landlord and/or
Tenant. After the Term of this Lease is completed, Tenant shall maintain such
coverage for the length of any applicable statute of limitations period for the
purpose of protecting Tenant and Landlord. Tenant shall also purchase at its
own expense and keep in force during this Lease Special Causes of Loss Insurance
covering all industrial furniture, trade fixtures, industrial equipment,
machinery, merchandise, and all other items of Tenant's property on the Project.
Said policy or policies or certificates thereof shall be delivered to Landlord
by Tenant upon commencement of the Lease and at least thirty (30) days prior to
the expiration of said insurance.
6.3 INDEMNIFICATION. Landlord shall not be liable to Tenant for any loss
or damage to person or property caused by theft, fire, act of God, acts of a
public enemy, riot, strike, insurrection, war, court order, requisition or order
of governmental body or authority or for any damage or inconvenience which may
arise through repair or alteration of any part of the Building or Project or
failure to make any such repair or alteration. Tenant shall indemnify Landlord
and hold Landlord harmless from any and all loss, cost, damage, injury or
expense arising out of or related to (a) claims of injury to or death of persons
or damage to property (other than as may be governed by the provisions of
SECTION 3.6) occurring or resulting directly or indirectly from the use or
occupancy of the Project or from activities of Tenant or any of Tenant's Parties
or anyone in or about the Project or from any cause whatsoever with respect to
the Project, other than claims arising primarily from the gross negligence or
willful misconduct of Landlord, (b) claims for work or labor performed or for
materials or supplies furnished to or at the request of Tenant or in connection
with performance of any work done for the account of Tenant within the Project,
(c) claims arising from any breach or default on the part of Tenant in the
performance of any covenant contained in this Lease, and (d) any suit in which
Landlord is named as a defendant and which is brought by Tenant against any
other party or against Tenant in connection with or arising out of Tenant's
occupancy of the Project. Such indemnity shall include without limitation the
obligation to provide all costs of defense against any such claims including any
action or proceeding brought against Landlord, unless such actions are covered
by Tenant's insurance. The provisions of this SECTION 6.3 shall survive the
expiration or termination of this Lease with respect to any claims or liability
occurring prior to such expiration or termination.
6.4 WAIVER OF SUBROGATION. To the extent permitted by law and without
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
(a) damages for injury to or death of persons, (b) damages to property,
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(c) damages to the Project or any part thereof, or (d) claims arising by reason
of the foregoing, to the extent such damages and claims are insured against or
required to be insured against by Landlord or Tenant under this Lease. This
provision is intended to waive fully, and for the benefit of each party, any
rights and/or claims which might give rise to a right of subrogation by any
insurance carrier. The coverage obtained by each party pursuant to this Lease
shall include, without limitation, a waiver of subrogation by the carrier which
conforms to the revisions of this paragraph.
ARTICLE 7: REPAIRS, SERVICES & MAINTENANCE
---------------------------------------=---
7.1 TENANT'S OBLIGATIONS. Tenant shall, at Tenant's expense, preserve and
maintain the Project at all times as a high quality, first class
office/industrial facility and in accordance with all Governmental Requirements
in existence from time-to-time, the Rules and Regulations and the CCR's. Tenant
shall, at Tenant's expense, maintain all parts of the Project in a good, clean
and secure condition promptly making all necessary repairs and replacements,
structural and nonstructural (whether or not such portion of the Project
requiring repairs or the means of repairing the same, are reasonably or readily
accessible to Tenant, and whether or not the need for such repairs occurs as a
result of Tenant's use, any prior use, the elements or the age of such portion
of the Project or by defects in the Project or changes in Governmental
Requirements or the CCR's occurring prior to or after the date hereof),
including without limiting the generality of the foregoing, all equipment or
facilities serving the Project, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing system, including fire alarm and/or smoke detection systems and
equipment, fire hydrants, fixtures, walls (interior and exterior), foundations,
ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping,
driveways, parking lots, fences, retaining walls, signs, sidewalks and parkways
located in, on, about, or adjacent to the Project. Notwithstanding the
foregoing, if any change in any Governmental Requirement after the Term
Commencement Date applicable to the Project generally and unrelated to Tenant's
use or occupancy thereof requires any capital expenditure for the Project, the
cost of such capital expenditure shall be amortized over the useful life of such
capital expenditure (as reasonably determined by Landlord), and Landlord shall
pay the portion of such capital expenditure applicable to the portion of the
useful life, if any, which is not within the Initial Term or any Extension Term
(whether or not exercised). Tenant, in keeping the Project in good order,
condition and repair, shall exercise and perform good maintenance practices.
Tenant's obligations shall include restorations, replacements or renewals when
necessary to keep the Project and all improvements thereon or a part thereof in
good order, condition and state of repair. Tenant shall, during the term of
this Lease, keep the exterior appearance of the Building in a first class
condition consistent with the exterior appearance of other similar facilities
constructed on property affected by the CCR's, including, when necessary, the
exterior repainting of the Building. Tenant shall, at Tenant's sole cost and
expense, perform necessary pest extermination and regular removal of trash and
debris. Tenant shall, at Tenant's sole cost and expense, procure and maintain
contracts reasonably approved by Landlord and with contractors reasonably
approved by Landlord and specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located or to be located on the Project: (i) heating, air conditioning and
ventilation equipment, (ii) boiler, fired or unfired pressure vessels,
(iii) fire sprinkler and/or standpipe and hose or other automatic fire
extinguishing systems, including fire alarm and/or smoke detection,
(iv) landscaping and irrigation systems, (v) roof covering and drain maintenance
and (vi) asphalt and parking lot maintenance; provided, however, that Tenant
shall not be required to procure and maintain a contract with respect to the
maintenance requirements of subclauses (v) and (vi), if Tenant desires to be
directly responsible for such inspection, maintenance and service. Each such
service contract must include all services suggested by the equipment
manufacturer within the operation/maintenance manual (or providing for a scope
of services which is otherwise commercially reasonable) and must become
effective and a copy thereof delivered to Landlord within thirty (30) days of
the Term Commencement Date. Tenant shall not damage the roof, foundation
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or any demising wall or disturb the integrity and support provided by the roof,
foundation or any demising wall and shall, at its sole expense, immediately
repair any damage to the roof, foundation or any demising wall. Upon
termination of this Lease, Tenant shall return the Project broom clean, and in
high quality, first class condition, ordinary wear and tear excepted and, at
Landlord's option, shall remove the Subject Alterations, all as provided in
SECTION 8.1(b) hereof. All such removals and restoration shall be accomplished
in a good and workmanlike manner so as not to cause any damage to the Project
whatsoever.
7.2 LANDLORD'S OPTION. If Tenant fails to perform its obligations under
this Lease to preserve and maintain the Project as required hereby and such
failure continues for ten (10) days following the date Landlord furnishes Tenant
written notice of such matters (or such longer period as may be required to cure
such matters so long as Tenant commences such cure within such ten (10)-day
period and diligently prosecutes such cure to completion, unless such failure is
a failure to pay money (for which only the original ten (10) day cure period
shall apply) or an emergency or otherwise involves a material risk to the
Project or health or safety (for which no cure period shall be required)),
Landlord may (without being liable for any damages, whether caused by the
negligence of Landlord or otherwise, except with respect to Landlord's gross
negligence or willful misconduct), but shall not be obligated to, pay such
unpaid amounts and/or perform such activities on behalf of Tenant, and any and
all costs and expenses (including capital expenditures) incurred by Landlord in
performing same shall be paid by Tenant upon demand, together with interest
thereon from the date advanced at the rate of interest provided in SECTION 16.4
hereof.
7.3 GOVERNMENT ASSISTANCE. So long as (a) in Landlord's judgment, such
matters will not adversely affect Landlord or the Project, and (b) Tenant shall
have made provision for the payment of all costs, fees and expenses incurred or
to be incurred by Landlord in connection therewith (including, without
limitation, legal fees and expenses), Landlord shall cooperate with all
reasonable requests or attempts of Tenant to obtain any governmental,
quasi-governmental or utility company financial assistance, grants, credits,
rebates or other benefits which may be sought by Tenant in connection with
rehabilitation or improvement of the Project in connection with Tenant's
occupancy of the Project or any other matter relating to Tenant's operation or
occupancy of the Premises. Landlord agrees that all such assistance, grants,
credits, rebates or like benefits related to Tenant's occupancy of the Project,
the improvement or alteration of the Project for Tenant's occupancy or Tenant's
operations at the Project shall be the property of Tenant and shall inure to the
benefit of Tenant during the Lease Term; provided, however, that to the extent
any of such matters survive the Lease Term, Landlord shall have the option, but
not the obligation, to continue such benefits for the account of Landlord and
its successors and assigns. The provisions of this SECTION 7.3 shall not be
applicable with respect to any Fee-In-Lieu Transaction, which shall be governed
by ARTICLE 20 hereof. Tenant shall indemnify, hold harmless, and, at Landlord's
option (with such attorneys as Landlord may approve in advance and in writing),
defend the Landlord Indemnified Parties from and against any and all Losses
arising from or related to such financial assistance, grants, credits, rebates
or other benefits which may be sought by or on behalf of Tenant. The provisions
of this indemnity and hold harmless shall survive the expiration or termination
of this Lease.
7.4 UTILITIES. Tenant shall pay for all water, gas, heat, air
conditioning, light, power, telephone, sewer, sprinkler charges and other
utilities and services used on or from the Project, together with any taxes,
penalties, surcharges or the like pertaining thereto, and maintenance charges
for utilities, and shall furnish all electric light bulbs, ballasts and tubes.
Landlord shall not be liable for any damages directly or indirectly resulting
from nor shall the Rent or any monies owed Landlord under this Lease herein
reserved be abated by reason of (a) the installation, use or interruption of use
of any equipment used in connection with the furnishing of any of the foregoing
utilities and services, (b) failure to furnish or delay in furnishing any such
utilities or services when such failure or delay is caused by acts of God
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or the elements, labor disturbances of any character or any other accidents or
other conditions beyond the reasonable control of Landlord, or (c) the
limitation, curtailment, rationing or restriction on use of water, electricity,
gas or any other form of energy or any other service or utility whatsoever
serving the Project. Tenant shall use its commercially reasonable best efforts
to cooperate voluntarily and in a reasonable manner in the efforts of national,
state or local governmental agencies or utility suppliers in reducing energy or
other resource consumption.
7.5 LIENS. Tenant shall keep the Project free from liens arising out of
or related to work performed, materials or supplies furnished or obligations
incurred by Tenant or in connection with work made, suffered or done by Tenant
in or on the Project. In the event that Tenant shall not, within thirty (30)
days following the imposition of any such lien, cause the same to be released of
record by payment or posting of a proper bond, Landlord shall have, in addition
to all other remedies provided herein and by law, the right, but not the
obligation, to cause the same to be released by such means as it shall deem
proper, including payment of the claim giving rise to such lien. All sums paid
by Landlord on behalf of Tenant and all expenses incurred by Landlord in
connection therewith shall be payable to Landlord by Tenant on demand with
interest at the maximum rate allowable by law. Landlord shall have the right at
all necessary times to post and keep posted on the Project any notices permitted
or required by law, or which Landlord shall deem proper, for the protection of
Landlord, the Project and any other party having an interest herein, from
mechanics' and materialmen's liens, and Tenant shall give Landlord not less than
ten (10) business days prior written notice of the commencement of any work in
the Project which could lawfully give rise to a claim for mechanics' or
materialmen's lien.
ARTICLE 8: ALTERATIONS AND SIGNS
---------------------------------
8.1 ALTERATIONS. Except for (a) furniture, trade fixtures and processing
equipment which are not located on or attached to the roof and do not involve
any impact on the structure or operating systems of the Project, and
(b) alterations (which are not located on or attached to the roof) with a cost
of less than $100,000 in any twelve (12)-month period, and which are not
structural or adversely affect the structure, operating systems or value of the
Building (any such furniture, trade fixtures, processing equipment and
alterations to be referred to herein as "NON-SIGNIFICANT ALTERATIONS"), Tenant
shall not make, or allow to be made, any alternations or physical additions in,
about or to the Project, without obtaining the prior written consent of
Landlord, which consent shall not be unreasonably withheld with respect to
proposed alterations and additions which (i) comply with all Governmental
Requirements, (ii) are compatible with the Project and its mechanical, plumbing,
electrical, and heating/ventilation/air conditioning systems, and (iii) will not
adversely affect or impair the roof, foundations or exterior walls or other
structural components of the Building. Specifically, but without limiting the
generality of the foregoing, Landlord hereby consents to the expansion of the
mezzanines within the Building where the column footings are located on the
areas designated on the Approved Plans and Specifications for such column
footings, so long as such work of expansion of the mezzanine complies with
SUBCLAUSES (i), (ii) and (iii) of SECTION 8.1, above, and, in addition,
Landlord shall have the right of consent for all plans and specifications for
the proposed alterations or additions, construction means and methods, any
contractor to be employed on the work of alterations or additions other than
Non-Significant Alterations, and the time for performance of such work
(provided, however, that Landlord shall not unreasonably withhold its consent to
any of the foregoing). Tenant shall also supply to Landlord any documents and
information reasonably requested by Landlord in connection with its
consideration of a request for approval hereunder and Landlord shall notify
Tenant of Landlord's approval or disapproval within twenty (20) business days
following Landlord's receipt of all requested documents and information, and
Landlord's failure to respond prior to the expiration of such twenty (20)
business day period shall be deemed Landlord's consent to such matters. Tenant
must have Landlord's written approval (or deemed approval) and all appropriate
permits and licenses prior to the commencement of said alterations and
additions. Prior to commencement of
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construction of any alterations, Tenant shall deliver a copy of all permits to
Landlord. Tenant shall in any event be required to reimburse Landlord on demand
for all reasonable costs and expenses incurred by Landlord in reviewing requests
for alterations and related documentation and information and in inspecting the
construction of same.
(a) PERFORMANCE. All alternations and additions permitted hereunder
shall be made and performed by Tenant in a good and workmanlike manner without
cost or expense to Landlord including any reasonable costs or expenses which
Landlord may incur in electing to have an outside agency review said plans and
specifications.
(b) REMOVAL. Landlord shall have the right to require Tenant to
remove any or all non-office mezzanines shown on EXHIBIT I attached hereto, and
other alterations, additions, improvements and partitions (including additional
non-office mezzanines) made by or for Tenant during the Lease Term
(collectively, the "SUBJECT ALTERATIONS") and restore the Project to its
original condition (but with such non-office mezzanines removed and the floor
thereunder restored to a flat, rackable condition) by the termination of this
Lease, by lapse of time or otherwise, all at Tenant's expense. All such removals
and restoration shall be accomplished in a good workmanlike manner so as not to
cause any damage to the Project whatsoever. If Landlord so elects, such
alternations, physical additions or improvements shall become the property of
Landlord and surrendered to Landlord upon the termination of this Lease by lapse
of time or otherwise; provided, however, that this clause shall not apply to
trade fixtures or furniture owned by Tenant. Tenant may, but shall not be
obligated to, request in writing that Landlord and Tenant conduct a walk through
of the Project approximately ten (10) months prior to the expiration of the
Lease Term. Upon receipt of such request, Landlord and Tenant shall agree upon
a mutually acceptable time and date for such walk through, and at such walk
through Landlord shall identify the Subject Alterations Landlord will require
that Tenant remove, and Landlord and Tenant shall agree on the schedule for and
cost of such removal, which matters shall be memorialized in a DEMOLITION MEMO
(herein so called). Tenant shall have the option to request a follow-up walk
through at approximately sixty (60) days prior to the expiration of the Lease
Term, and Landlord and Tenant shall update the Demolition Memo as Landlord and
Tenant mutually agree (although Landlord may make changes in the Subject
Alterations Landlord will require be removed or left in its sole discretion
without Tenant's approval). In addition, Tenant may request that in lieu of
removing the Subject Alterations requested by Landlord, and with Landlord's
consent (which consent may be withheld in Landlord's sole and absolute
discretion), Tenant may pay to Landlord, in cash, on or prior to the expiration
or termination of the Lease Term, an amount determined by Landlord to be the
total cost of removing the requested Subject Alterations (the "REMOVAL
PAYMENT"). If prior to the date eighteen (18) months following the date Tenant
has paid the Removal Payment to Landlord, Landlord has re-leased the Project to
another tenant and incurred expenses in removing the Subject Alterations which
Landlord requested be removed in an amount less than the Removal Payment,
Landlord shall return to Tenant one-half (1/2) of the amount by which the
Removal Payment exceeds the aggregate expenses incurred by Landlord in removing
such Subject Alterations (but Landlord shall be entitled to offset against such
amounts to be returned to Tenant any amount due, owing and unpaid by Tenant to
Landlord under this Lease as of such date). In all other cases, Landlord shall
be entitled to retain the full Removal Payment.
(c) COSTS. Tenant shall be responsible for and shall pay prior to
delinquency any taxes or governmental service fees, possessory interest taxes,
fees or charges in lieu of any such taxes, capital levies, or other charges
imposed upon, levied with respect to or assessed against its personal property,
on the value of its alternations, additions or improvements and on its interest
pursuant to this Lease. To the extent that any such taxes are not separately
assessed or billed to Tenant, Tenant shall pay the amount thereof as invoiced to
Tenant by Landlord.
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(d) PLANS. Tenant shall not make any change in the plans for any
alterations approved by Landlord without the prior written consent of Landlord.
Upon completion of such alterations, Tenant shall deliver to Landlord a copy of
the "field grade as-built" plans, building permits (with all inspection
approvals signed by the local governmental agency) and certificates of
occupancy.
8.2 SIGNS. Tenant may, at its sole cost and expense, install signage in,
on or about the Project (including, without limitation, interior identification
signage or monument signage) indicating Tenant as the occupant of the Building
and may install directional and informational signs, so long as such signage is
installed and maintained in accordance with Governmental Requirements, the Rules
and Regulations and the CCR's. Notwithstanding the foregoing, Tenant may not
install any signage on or attached to the roof, or which in any way adversely
affects the structure or value of the Building, or for any purpose other than
identifying Tenant's occupancy of the Building or for providing directional and
information signs without in each case the prior written consent of Landlord,
which consent may be withheld in Landlord's sole and absolute discretion, except
that Landlord shall not unreasonably withhold its consent to signage on or
attached to the roof. Tenant shall remove all such signs and graphics by the
termination of this Lease. Such installations and removals shall be made in such
manner as to avoid injury to or defacement of the Building or Project and any
other improvements contained therein, and Tenant shall repair any injury or
defacement including, without limitation, discoloration caused by such
installation or removal.
ARTICLE 9: INSPECTION AND NOTICES
----------------------------------
9.1 INSPECTION. After reasonable notice, except in emergencies where no
such notice shall be required, Landlord, its agents and representatives, shall
have the right to enter the Project to inspect the same, to perform such work as
may be permitted or required hereunder, to make repairs to the extent permitted
hereunder, to deal with emergencies, to post such notices as may be permitted or
required by law to prevent the perfection of liens against Landlord's interest
in the Project or to exhibit the Project to prospective purchasers, encumbrances
or others, or for any other purpose of inspection as Landlord may deem necessary
or desirable; provided, however, that Landlord shall not unreasonably interfere
with Tenant's business operations or security or knowingly enter upon the
Project in violation of FDA Requirements. Tenant shall not be entitled to any
abatement of Rent by reason of the exercise of any such right of entry.
Beginning one (1) year prior to the end of the Lease, Landlord shall have the
right to exhibit the Project to prospective tenants and to erect on the Building
and/or Project a suitable sign indicating that the Project is available for
lease. Tenant shall give written notice to Landlord at least thirty (30) days
prior to vacating the Building or Project and shall meet with Landlord for a
joint inspection of the Project at the time of vacating. In the event of
Tenant's failure to give such notice or participate in such joint inspection,
Landlord's inspection at or after Tenant's vacating the Building or Project
shall conclusively be deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration.
ARTICLE 10: LENDER AND FINANCING PROVISIONS
--------------------------------------------
10.1 SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, this Lease
shall be subject and subordinate at all times to (a) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Land, Building, and Project, and (b) any mortgage or deed of trust which may now
exist or be placed upon the Land, Building, Project, land, ground leases, or
underlying leases, and Landlord's interest or estate in any of said items, which
is specified as security, but only if the holder of any such ground lease,
underlying lease, mortgage or deed of trust agrees in writing that, subject to
the terms and conditions of this Lease, such holder will respect Tenant's rights
and interests under this Lease. Notwithstanding the foregoing, Landlord or any
such holder shall have the right to subordinate or cause to be subordinated any
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such ground leases or underlying leases or any such liens to this Lease. In the
event that any ground lease or underlying lease terminates for any reason or any
mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure
is made for any reason, Tenant shall, notwithstanding any subordination, attorn
to and become the Tenant of the successor in interest to Landlord. Tenant shall
execute and deliver, upon demand by Landlord and in the form requested by
Landlord, any additional documents evidencing the priority or subordination of
this Lease with respect to any such ground leases or underlying leases or any
such mortgage or deed of trust.
10.2 FINANCIAL STATEMENTS. At the request of Landlord, Tenant shall
provide to Landlord current financial statements for Tenant and other
information discussing the financial worth of Tenant which information Landlord
shall use solely for purposes of this Lease, in a manner consistent with SECTION
21.23 hereof, and in connection with the ownership, management and disposition
of the property subject hereto.
10.3 ESTOPPEL CERTIFICATES. Within ten (10) business days following a
request in writing by Landlord, Tenant shall execute and deliver to Landlord an
estoppel certificate, which, as submitted by Landlord, shall be substantially in
the form of EXHIBIT E, attached hereto (or such other form as may be required by
any prospective mortgagee or purchaser of the Project, or any portion thereof),
indicating therein any exceptions thereto that may exist at that time, and shall
also contain any other information reasonably requested by Landlord or
Landlord's mortgagee or prospective purchaser or mortgagee. Tenant shall
execute and deliver whatever other instruments may be reasonably required for
such purposes. Landlord hereby agrees to provide to Tenant an estoppel
certificate signed by Landlord, containing the same types of information, and
within the same period of time, as set forth above, with such changes as are
reasonably necessary to reflect that the estoppel certificate is being granted
and signed by Landlord to Tenant, rather than from Tenant to Landlord or a
lender of Landlord. Failure of Tenant or Landlord, as the case may be, to
timely execute, acknowledge and deliver such estoppel certificate upon ten (10)
additional days written notice from the requesting party shall constitute an
acknowledgment by the other party that statements included in the estoppel
certificate are true and correct, without exception.
ARTICLE 11: SECURITY DEPOSIT
-----------------------------
11.1 DEPOSIT OF CASH AND LETTERS OF CREDIT. Tenant has previously paid to
or deposited with Landlord as required by the Agreement Regarding Closing
between Landlord, Tenant and Crescent, the following: (a) $192,377 in cash (the
"CASH SECURITY DEPOSIT"), (b) a letter of credit (the "SECOND LETTER OF CREDIT")
in the amount of $1,154,262 issued by The Bank of Nova Scotia to Landlord, as
beneficiary, for the account of Tenant, and (c) a letter of credit (the "FIRST
LETTER OF CREDIT"), in the amount of $4,825,000, issued by The Bank of Nova
Scotia to Crescent as beneficiary, for the account of Tenant, the rights of
Crescent thereunder having been transferred to Landlord upon Landlord's
acquisition of the Project. For purposes hereof, the First Letter of Credit and
the Second Letter of Credit shall be together referred to as the "LETTERS OF
CREDIT." The Cash Security Deposit and the Letters of Credit will be held as
security for timely performance of Tenant's obligations and liabilities under
the Agreement Regarding Assignment of Build-to-Suit Purchase Agreement dated of
even date between Landlord and Tenant, the Agreement Regarding Closing of even
date between Landlord, Tenant and Crescent, and this Lease (collectively, the
"SECURED AGREEMENTS"). Interest shall not accrue on the Cash Security Deposit
or the proceeds of any Letter of Credit held by Landlord. If Landlord elects to
hold all or any portion of such funds in an interest bearing account (which
Landlord has no obligation to do), such interest shall accrue for the sole
benefit of the Landlord, and shall not become a portion of the Cash Security
Deposit or any other security hereunder, and shall not in any event be paid to
or for the benefit of Tenant.
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11.2 SPECIAL PROVISIONS REGARDING LETTERS OF CREDIT. No later than sixty
(60) days prior to the expiration date of any Letter of Credit, Tenant shall
deliver to Landlord a substitute Letter of Credit similar in form, substance and
amount, and issued by the same issuer or another issuer approved by Landlord
(which approval shall not be unreasonably withheld by Landlord for an issuing
bank with a credit rating better than BBB+ by Standard and Poor and providing
for a place of presentation in a major urban area in the continental United
States), to the Letter of Credit to be replaced (except that the expiration date
shall be no sooner than twelve (12) months after the date such Letter of Credit
is issued). Tenant's failure to timely deliver a substitute Letter of Credit
under this SECTION 11.2 or as required by SECTION 16.1(g) shall, without notice,
demand or cure rights, automatically constitute an Event of Default hereunder
and, in addition to any other right or remedy available to Landlord hereunder or
otherwise available at law or in equity, Landlord may cash such Letter(s) of
Credit and hold such cash collateral as security for the obligations formerly
secured by such Letter(s) of Credit and/or apply such amounts to any amounts due
or to become due by Tenant under this Lease. Any such proceeds of the First
Letter of Credit which Landlord elects to apply to Tenant's obligations under
this Lease shall be applied first to the Amortized Improvement Repayment
(whether or not then due and owing), and then to any other amounts then due or
past due by Tenant hereunder. Any such proceeds of the Second Letter of Credit
which Landlord elects to apply to Tenant's obligations under this Lease will be
applied first to amounts then due and owing and amounts past due under this
Lease, and then to amounts not yet accrued hereunder. Tenant recognizes,
however, that Landlord has negotiated for collateral in the form of letters of
credit because of additional security and benefits associated with letters of
credit; therefore, Landlord shall not in any event be required to draw upon a
Letter of Credit to "cure" any failure to deliver a substitute or extension
Letter of Credit hereunder, and shall be entitled to all rights and remedies
available at law or in equity upon the occurrence of an Event of Default. If
Tenant fails to timely deliver a substitute or renewal Letter of Credit as
required by this Lease and Landlord draws upon the Letter of Credit and holds
the proceeds as security for Tenant's obligations under this Lease, and Tenant
subsequently delivers such substitute or renewal Letter of Credit to Landlord in
a form which otherwise complies with the requirements of this Lease, then, so
long as no other Material Default or Bankruptcy Event has occurred and is
continuing as of such date, Landlord shall accept such substitute or renewal
Letter of Credit, and shall return the remainder of the cash proceeds of the
draw under the prior Letter of Credit, but not to the extent the remainder of
such proceeds exceed the amount of the substitute Letter of Credit. Upon
termination of the Lease Term and satisfaction of all of Tenant's obligations,
duties and liabilities under the Secured Agreements, Landlord shall return the
undrawn Letters of Credit to Tenant.
11.3 RIGHTS UPON DEFAULT. Upon the occurrence and during the continuance
of an Event of Default or a Bankruptcy Event, without further confirmation or
verification, Landlord shall be entitled to draw, in whole or in part, either or
both of the Letters of Credit and be paid the amount drawn thereon. It is
expressly understood and agreed that neither the Cash Security Deposit nor the
Letters of Credit are an advance rental deposit or a measure of damages incurred
by Landlord in case of Tenant's default. Upon the occurrence of any Event of
Default or a Bankruptcy Event, Landlord may, from time to time, without
prejudice to any other remedy provided herein or provided by law, use the Cash
Security Deposit and/or any draw(s) made on the Letters of Credit to the extent
necessary to make good any arrears of Rent or other payments due or to become
due to Landlord hereunder, and any other damage, injury, expense or liability
caused by such Event of Default or Bankruptcy Event. Application of the Cash
Security Deposit or the proceeds of the Second Letter of Credit will not cure
any default hereunder unless immediately following such application Tenant
restores the Cash Security Deposit or the Second Letter of Credit, as
applicable, to its original amount as it existed immediately prior to such
application. Although the Cash Security Deposit shall be deemed the property of
Landlord, any remaining balance shall be returned by Landlord to Tenant at such
time after termination of this Lease that all of the Tenant's obligations,
duties and liabilities under the Secured Agreements have been fulfilled.
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11.4 REDUCTION OF FIRST LETTER OF CREDIT. Notwithstanding the foregoing,
so long as no Material Default or Bankruptcy Event has occurred and is
continuing, and no default has occurred in the payment or performance of
Tenant's obligations, duties or liabilities under the other Secured Agreements,
Tenant may no more frequently than annually or each renewal date for the First
Letter of Credit, reduce the face amount of the First Letter of Credit to an
amount equal to the unpaid Amortized Improvement Repayment as of such date,
which amount shall be calculated in accordance with the special improvements
amortization schedule attached hereto as EXHIBIT H.
11.5 RETURN OF SECOND LETTER OF CREDIT. Notwithstanding the foregoing, so
long as (a) no Material Adverse Change has occurred in the financial condition
of Tenant as of the Term Commencement, and (b) no Material Default or Bankruptcy
Event has occurred and is continuing as of the Term Commencement Date, Landlord
shall return the Second Letter of Credit to Tenant on the Term Commencement
Date, and following such return, the term "Letter of Credit" shall refer only to
the First Letter of Credit (unless Tenant is later required to deliver and
maintain the Second Letter of Credit under SECTION 12.4 hereof). If the
conditions to Landlord's obligation to return the Second Letter of Credit to
Tenant on the Term Commencement Date are not satisfied as of the Term
Commencement Date, Tenant shall maintain the Second Letter of Credit as required
hereby for the Lease Term unless and until the date that both of the following
conditions have been satisfied: (x) the Standard and Poor rating for Tenant is
"BBB-" or better, and (y) no Material Default or Bankruptcy Event has occurred
and is continuing (provided, however, that if Landlord has required that Tenant
maintain the Second Letter of Credit under SECTION 12.4 hereof, the Second
Letter of Credit will not be returned). For purposes hereof, a "MATERIAL
ADVERSE CHANGE" shall be deemed to have occurred with respect to Tenant if, for
the twelve (12) month period ending on the last day of the quarterly fiscal
period of Tenant ending immediately prior to the Term Commencement Date, the Net
Sales of Tenant are less than $350,000,000, or Tenant's EBITDA (and calculated
with adjustments for charges related to Tenant's calendar year 1997
recapitalization) is less than $40,000,000. For purposes hereof, (i) the term
"NET SALES"means Tenant's gross sales less discounts, allowances and returns;
(ii) the term "EBITDA" shall have the meaning assigned to such term in Tenant's
Corporate Credit Agreement; and (iii) the term "TENANT'S CORPORATE CREDIT
AGREEMENT"means the loan or credit agreement governing Tenant's primary third
party credit facility, as of the Term Commencement Date. If Tenant's Corporate
Credit Agreement fails to include a definition for such term, Landlord and
Tenant shall negotiate in good faith to agree upon a definition for such term(s)
in a manner consistent with this Agreement generally accepted accounting
practices, consistently applied.
11.6 OBLIGATION TO MAINTAIN THE FIRST LETTER OF CREDIT. If at any time
during the Lease Term no Material Default or Bankruptcy Event has occurred and
is continuing and the Standard and Poor rating for Tenant is "BBB-" or better,
Landlord shall, upon Tenant's request, return the First Letter of Credit to
Tenant (so long as such conditions continue to be satisfied as of the date
Tenant requests such return). Notwithstanding the foregoing, if at any time
subsequent to the return of the First Letter of Credit the Standard & Poor
rating for Tenant is not "BBB-" or better, Tenant shall within thirty (30) days
deliver to Landlord a new First Letter of Credit in form and substance similar
to the original First Letter of Credit, except that the amount thereof shall not
exceed the unpaid Amortized Improvement Repayment as of such date (calculated in
accordance with EXHIBIT H attached hereto) and the expiration date therefor
shall be no sooner than twelve (12) months after the date of issuance. Tenant
shall maintain the First Letter of Credit as required by this Agreement at all
times that the Standard & Poor rating of Tenant is not "BBB-" or better, and
Landlord shall not require that Tenant maintain such First Letter of Credit and
will return same (within thirty (30) days following the date Tenant requests in
writing that Tenant return same and delivers to Landlord evidence of the
requisite Standard and Poor rating) at all times Tenant's Standard & Poor rating
is BBB- or better.
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ARTICLE 12: ASSIGNMENT AND SUBLETTING
--------------------------------------
12.1 CONSENT REQUIRED. Except for an Approved Sublease, Tenant shall not
assign or sublet the Project or any part thereof without Landlord's prior
written approval, which approval shall not be unreasonably withheld so long as
(a) no Material Event of Default has occurred and remains uncured, (b) the
proposed assignee or subtenant's activities at the Project will not involve a
violation of ARTICLES 3 OR 8 hereof, (c) the proposed assignee or subtenant is
of sound financial condition, and (d) Tenant has not previously assigned this
Lease or its rights hereunder. For purposes hereof, the term "APPROVED
SUBLEASE" means a sublease of less than thirty percent (30%) (or thirty percent
(30%) calculated in the aggregate all subleases) of the Building so long as the
following conditions are satisfied: (i) no Material Event of Default has
occurred and is continuing, (ii) the use of the Project by such subtenant shall
be limited to the Permitted Use, (iii) such sublease complies with one (1) or
more of the following: (A) a sublease to an entity wholly owned or controlled
by Tenant, (B) a sublease to a party or parties conducting business as a
supplier, distributor or otherwise with respect to Tenant's activities at the
Project, and for a term not to exceed ninety (90) days, or (C) the proposed
sublessee is of sound financial condition, (iv) the activities of such subtenant
at the Project shall be limited to uses not detrimental to the Project,
(v) Tenant has not previously assigned this Lease or its rights hereunder, and
(vi) the term of the sublease is shorter than the then remaining Lease Term. If
Tenant desires to assign this Lease or sublet any or all of the Project, Tenant
shall give Landlord written notice forty-five (45) days prior to the anticipated
effective date of the assignment or sublease. Landlord shall then have a period
of thirty (30) days following receipt of such notice and the information
required hereunder to notify Tenant in writing that Landlord elects to either
(x) refuse to consent to the proposed assignment or sublease, or (y) permit
Tenant to assign this Lease or sublet such space, except that Landlord may not
refuse to consent to an Approved Sublease. If Landlord should fail to notify
Tenant in writing of such election within said period, Landlord shall be deemed
to have waived option (x) above. Prior to the effective date of any assignment
or sublease (whether or not permitted hereunder), Tenant shall furnish to
Landlord true, correct and complete copies of all documents, instruments and
other information executed or delivered in connection therewith.
12.2 BONUS RENT. Any Rent or other consideration realized by Tenant under
any such sublease or assignment in excess of the Rent payable hereunder, after
amortization of (a) the reasonable cost of any improvements (including
demolition of the Subject Alterations) which Tenant has made for the purpose of
assigning or subletting all or part of the Project and (b) reasonable subletting
and assignment leasing commissions paid by Tenant to unaffiliated third parties,
shall be paid one-half (1/2) to Tenant and one-half (1/2) to Landlord.
12.3 MARKET RENT. In any subletting or assignment undertaken by Tenant,
Tenant shall diligently seek to obtain the maximum rental amount available in
the marketplace for such subletting or assignment.
12.4 OTHER TRANSFERS. If Tenant is a corporation, a transfer of corporate
shares by sale, assignment, bequest, inheritance, operation of law or other
disposition (including such a transfer to or by a receiver or trustee in federal
or state bankruptcy, insolvency or other proceedings), so as to result in a
change in the present control of such corporation or any of its parent
corporations by the person or persons owning a majority of said corporate
shares, shall constitute an assignment for purposes of this paragraph. If
Tenant is a partnership, joint venture, limited liability company, trust or
other unincorporated business form, a transfer of the interest of persons, firms
or entities responsible for managerial control of Tenant by sale, assignment,
bequest, inheritance, or operation of law or other disposition (including such a
transfer to or by a receiver or trustee in federal or state bankruptcy,
insolvency or other proceedings), so as to result in a change in the present
control of said entity and/or a change in the identity of the persons
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responsible for the general credit obligations of said entity shall constitute
an assignment for purposes of this ARTICLE 12. Notwithstanding the foregoing,
none of the following events shall constitute an "assignment" for purposes of
this Lease (except that Tenant shall remain liable and SECTION 12.6 shall apply
thereto) so long as such assignee continues to use the Property for a Permitted
Use: (a) a sale of all or substantially all the assets of Tenant or all or
substantially all of the corporate shares of Tenant in a single transaction or a
staged transaction which is part of an integrated whole (provided, however, that
if Landlord determines that such transaction will cause a material denigration
in the financial condition of the Tenant under this Lease, Landlord may require
as a condition thereto that Tenant restore and maintain the Second Letter of
Credit), (b) one or more public offerings of some or all of Tenant's equity
securities or the trading of such publicly offered shares thereafter, or (c) any
other sale of shares of Tenant leading to a change in control, so long as
Landlord agrees in writing that such sale shall not constitute an "assignment"
for purposes of this Lease.
12.5 NO RELEASE. No assignment or subletting by Tenant shall relieve
Tenant of any obligations under this Lease (or under any amendments to this
Lease or under any new Lease as contemplated by ARTICLE 18 hereof, for which
each and every Tenant hereunder shall have full joint and several liability).
Any assignment or subletting which conflicts with the provisions of this ARTICLE
12 shall, at Landlord's election, be voidable.
12.6 EFFECT OF ASSIGNMENT OR SUBLEASE. Upon an assignment of or sublease
under this Lease, (a) the terms and conditions of this Lease shall in no way be
deemed to have been waived or modified, (b) Tenant shall deliver to Landlord,
promptly after execution, an original executed copy of all documentation
pertaining to the assignment or sublease, and (c) no assignment or sublease
relating to this Lease or agreement entered into with respect thereto shall
relieve Tenant or any guarantor of the Lease from liability under this Lease.
Each and every sublease under this Lease shall be subordinate to this Lease.
ARTICLE 13: CONDEMNATION
-------------------------
13.1 SUBSTANTIAL TAKING. Each of Landlord and Tenant shall notify the
other promptly upon notice of a condemnation or threatened condemnation of all
or any portion of the Project. If the whole or any substantial portion of the
Project (which shall be deemed to mean sixty percent (60%) or more of the
Building or the Land) should be taken or condemned for any public use under
governmental law, ordinance, or regulation, or by right of eminent domain, or by
private purchase in lieu thereof, and the taking would prevent or materially
interfere with Tenant's Permitted Use of the Project, this Lease shall terminate
and the Rent (but excluding the Amortized Improvement Repayment) shall be abated
during the unexpired portion of this lease, effective when the physical taking
of said Project shall have occurred.
13.2 PARTIAL TAKING. If a portion of the Project should be taken or
condemned for any public use under any governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof, and this Lease is not terminated as provided in SECTION 13.1 above,
this Lease shall not terminate, but the Rent (but excluding the Amortized
Improvement Repayment) payable hereunder during the unexpired portion of the
Lease shall be reduced to such extent as may be fair and reasonable under all of
the circumstances.
13.3 AWARD. Landlord shall be entitled to any and all payment, income,
rent, award, or any interest therein whatsoever which may be paid or made in
connection with such taking or conveyance and Tenant shall have no claim against
Landlord or otherwise for the value of any unexpired portion of this Lease.
Notwithstanding the foregoing, any compensation specifically awarded Tenant for
loss of business, Tenant's personal property, moving cost, loss of goodwill or
otherwise, shall be and remain the property
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of Tenant, and upon Tenant's request Landlord will, at Tenant's expense,
cooperate with Tenant in Tenant's efforts to assert such separate award(s) so
long as neither Landlord's cooperation nor the separate award(s) sought by
Tenant will negatively impact Landlord or Landlord's condemnation-related
claim(s).
13.4 PAYMENT OF AMORTIZED IMPROVEMENT REPAYMENT. Notwithstanding anything
set forth herein to the contrary, upon any termination of this Lease under this
ARTICLE 13, Tenant shall pay to Landlord the unpaid Amortized Improvement
Repayment as of such date, calculated as described in EXHIBIT H attached hereto.
Notwithstanding SECTION 13.3 hereof, upon payment in full of the Amortized
Improvement Repayment, upon Tenant's request, Landlord will assign to Tenant
(without recourse, representation or warranty) Landlord's condemnation award, if
any, with respect to the special improvements paid for with the $4,825,000
Amortized Improvement Repayment, and will reasonably cooperate with Tenant (at
Tenant's sole cost and expense) with respect to any separate claim Tenant may
file with respect to such improvements.
ARTICLE 14: CASUALTY DAMAGE
----------------------------
14.1 CASUALTY. If the Project or any portion thereof should be damaged or
destroyed by any casualty, Tenant shall give immediate written notice thereof to
Landlord and shall, within thirty (30) days thereafter, notify Landlord if
Tenant wishes to rebuild or wishes Landlord to rebuild (consistent, however,
with Landlord's obligations to do so under this ARTICLE 14). Tenant shall have
the option to rebuild so long as no Material Default or Bankruptcy Event has
occurred and is continuing as of such date, Tenant deposits with Landlord (or
such other party as may be holding the insurance proceeds as provided in
SECTION 6.1 hereof) the additional amounts, if any, required to complete such
rebuilding, and, prior to the commencement of such construction or renovation,
Landlord has approved the plans and specifications, construction means and
methods and contractors and primary subcontractors for such work (provided,
however, that Landlord shall not unreasonably withhold its consent to such plans
and specifications if such improvements (a) will be structurally sound and
comply in all respects with Governmental Requirements and the CCR's, (b) will be
substantially similar to or better in quality than the improvements as of the
Term Commencement Date, (c) in Landlord's sole but reasonable discretion, will
have a value which equals or exceeds the value of the improvements prior to such
casualty, and (d) have substantially the same size, area and dimensions as the
pre-casualty improvements.
If Tenant does not elect, or is not authorized to elect to so rebuild, then
Tenant shall immediately pay to Landlord (or such other party as may be holding
the insurance proceeds under SECTION 6.1 hereof) the applicable deductible and,
within sixty (60) days following the date of Tenant's notice of election or
other notice with respect to the unavailability of Tenant's option to rebuild
under this SECTION 14.1 (it being understood and agreed that Landlord shall have
sixty (60) days following final resolution of all issues associated with
Tenant's right to rebuild under this SECTION 14.1 before Landlord is required to
give the notice required hereby), Landlord shall notify Tenant whether in
Landlord's opinion such repairs can be made either (a) within ninety (90) days,
(b) in more than ninety (90) days, but in less than twenty-four (24) months, or
(c) in more than twenty-four (24) months from the date of such notice.
14.2 MINOR DAMAGE. Subject to the provisions of SECTION 14.1 of this
Lease, if the Building should be damaged by any casualty but only to such
extent that rebuilding or repairs can in Landlord's estimation be completed
within ninety (90) days after the date upon which Landlord is notified by Tenant
of such damage, this Lease shall not terminate, and Landlord shall at its sole
cost and expense thereupon proceed with reasonable diligence to rebuild and
repair the Building to substantially the condition in which it existed prior to
such damage, except that Landlord shall not be required to rebuild, repair or
replace any part of the partitions, fixtures, additions and other improvements
which may have been placed in, on or about the Building by Tenant. If the
Building is untenantable in whole or in part following such damage,
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the Rent (but excluding the Amortized Improvement Repayment) payable hereunder
during the period in which it is untenantable shall be reduced to such extent as
may be fair and reasonable under all of the circumstances.
14.3 PARTIAL DAMAGE. Subject to the provisions of SECTIONS 14.1 and 14.10
of this Lease, if the Building should be damaged by any casualty, but only to
such extent that rebuilding or repairs can in Landlord's estimation be completed
in more than ninety (90) days but in less than twenty-four (24) months, then
Landlord shall have the option of either (a) terminating the Lease upon not less
than one hundred and eighty (180) days notice, or (b) electing to rebuild or
repair the Building to substantially the condition in which it existed prior to
such damage except that Landlord shall not be required to rebuild, repair or
replace any part of the partitions, fixtures, additions and other improvements
which may have been placed in, on or about the Building by Tenant. If the
Building is untenantable in whole or in part following such damage, the Rent
(but excluding the Amortized Improvement Repayment) payable hereunder during the
period in which it is untenantable shall be reduced to such extent as may be
fair and reasonable under all of the circumstances. In the event that Landlord
should fail to complete such repairs and rebuilding within twenty-four (24)
months after the date upon which Landlord is notified by Tenant of such damage,
such period of time to be extended for delays caused by the fault or neglect of
Tenant or because of acts of God, acts of public agencies, labor disputes,
strikes, fires, freight embargoes, windy, stormy or inclement weather, inability
to obtain materials, supplies or fuels, or delay of the contractors or
subcontractors due to such causes or other contingencies beyond the reasonable
control of Landlord, Tenant may at its option terminate this Lease by delivering
one hundred and eighty (180) days prior written notice of termination to
Landlord as Tenant's exclusive remedy, whereupon all rights and obligations
hereunder shall cease and terminate.
14.4 MAJOR DAMAGE. Subject to the provisions of SECTIONS 14.1 and 14.10 of
this Lease, if the Building should be damaged by any casualty and rebuilding or
repairs cannot in Landlord's estimation be completed within twenty-four (24)
months after the date upon which Landlord is notified by Tenant of such damage,
this Lease shall terminate upon not less than one hundred eighty (180) days
notice and the Rent (but excluding the Amortized Improvement Repayment) shall be
abated during the unexpired portion of this Lease, effective upon the date of
the occurrence of such damage.
14.5 LENDER REQUIREMENTS. Notwithstanding anything herein to the contrary,
but subject to the provisions of SECTION 14.10 below, in the event that a holder
of any indebtedness secured by a mortgage or deed of trust covering the Project
requires that the insurance proceeds be applied to such indebtedness, then
Landlord shall have the right to terminate this Lease upon not less than one
hundred and eighty (180) days notice by delivering written notice of termination
to Tenant within fifteen (15) days after such requirement is made by any such
holder, whereupon all rights and obligations hereunder shall cease and
terminate.
14.6 UNINSURED LOSS. Subject to the provisions of SECTION 14.10 below, if
the Building or Project is damaged or destroyed by any casualty that is
uninsured (excluding the amount of the deductible), then regardless of the
length of time to restore the damage portion of the property, Landlord shall
have the right to terminate this Lease.
14.7 END OF TERM. Subject to the provisions SECTION 14.10 below, in the
event of a property loss occurring during the last two (2) years of the Initial
Term hereof or of any Extension Term for which Tenant has duly exercised its
renewal option hereunder, Landlord need not undertake any repairs and may cancel
this Lease upon one hundred and eighty (180) days' notice.
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14.8 AMORTIZED IMPROVEMENT REPAYMENT. Notwithstanding anything set forth
herein to the contrary, upon any termination of this Lease under this ARTICLE
14, Tenant shall pay to Landlord the unpaid Amortized Improvement Repayment as
of such date, calculated in accordance with EXHIBIT H attached hereto.
14.9 REPAIR COSTS. Landlord shall only be obligated to make repairs
pursuant to ARTICLE 14 of this Lease out of the insurance proceeds paid to
Landlord. In the event the insurance award under Landlord's casualty insurance
(but in any event excluding any rental loss insurance proceeds) exceeds the
aggregate costs, losses and expenses of Landlord in connection with such
casualty and the repair of same, and in the event Landlord repairs the Project
with the proceeds hereof and this Lease remains in effect, then, to the extent
Landlord's casualty insurance policy and proceeds include losses with respect to
Tenant's personal property or fixtures at the Project, no Material Default or
Bankruptcy Event has occurred and is continuing, and Tenant is not otherwise
compensated for such losses, Landlord shall pay such excess casualty insurance
proceeds (and specifically include rental loss insurance proceeds) to Tenant.
14.10 TENANT'S OPTION TO AVOID TERMINATION. Within thirty (30) days
following receipt by Tenant of any Lease termination notice from Landlord under
this ARTICLE 14, Tenant shall have the option to notify Landlord of its intent
to rebuild, restore and/or repair the Project so long as, prior to the
commencement of construction or renovation, Landlord has approved the plans and
specifications, construction means and methods and contractors and primary
subcontractors for such work (provided, however, that Landlord shall not
unreasonably withhold its consent to the plans and specifications if such
improvements (a) will be structurally sound and comply in all respects with
Governmental Requirements and the CCR's, (b) will be substantially similar to or
better in quality than the improvements as of the Term Commencement Date, (c) in
Landlord's sole but reasonable discretion, will have a value which equals or
exceeds the value of the improvements prior to such casualty, and (d) have
substantially the same size, area and dimensions as the pre-casualty
improvements, and Tenant deposits with Landlord or its mortgagee sufficient
funds for such rebuilding, restoration or repair, to be held and disbursed by
Landlord or such mortgagee to pay such costs as incurred). Notwithstanding the
foregoing, Tenant may begin grading and clearing for site preparation work prior
to Tenant's deposit of funds sufficient to pay for all such rebuilding, repair
or restoration if, as of the date of commencement of such site preparation work
(i) the Standard and Poor rating for Tenant is "BBB-" or better, and (ii) Tenant
delivers to Landlord a letter of credit meeting the requirements of ARTICLE 11
of this Lease, but in an amount equal to the total costs for all such
rebuilding, restoration or repair. Tenant shall furnish Landlord such
information, documentation, permits, plans and specifications and other matters
with respect to the proposed work as Landlord may request. Upon Landlord's
written confirmation that the conditions to this SECTION 14.10 have been
satisfied, Landlord's termination notice shall be deemed to be revoked, and
Tenant shall diligently prosecute such work in a good and workmanlike manner,
and consistent with the materials furnished to Landlord under this SECTION
14.10.
ARTICLE 15: HOLDING OVER
-------------------------
If Tenant shall retain possession of the Project or any portion thereof
without Landlord's consent following the expiration of the Lease or sooner
termination for any reason, then Tenant shall pay to Landlord, in addition to
other amounts due and owing by Tenant under this Lease (calculated as if the
Lease Term were extended for the holdover period), for each day of such
retention triple the amount of the Scheduled Base Rent (prorated on a daily
basis) for the first month prior to the date of expiration or termination;
provided, however, upon not less than one hundred twenty (120) days written
notice from Tenant, and so long as no Material Default has occurred and is
continuing, Tenant may request that Tenant retain possession of the Project for
either one (1) or two (2) months following the expiration or termination of the
Lease Term for the sole purpose of completing the removal of the Subject
Alterations
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in a manner consistent with the Demolition Memo, and the Scheduled Base Rent
monthly rental for each month in such one (1) or two (2) month period shall be
one hundred and fifty percent (150%) of the Scheduled Base Rent for the month
ending immediately prior to the expiration or termination of the Lease Term.
Tenant shall also indemnify and hold Landlord harmless from any loss or
liability resulting from delay by Tenant in surrendering the Project including,
without limitation, any claims made by any succeeding tenant founded on such
delay (which indemnity amount shall be reduced by the amount by which holdover
Scheduled Base Rent under this ARTICLE 15 which is paid by Tenant exceeds the
product of (a) Scheduled Base Rent for the month ending immediately prior to
such holdover period, times (b) the number of months in such holdover period.
Alternatively, if Landlord gives notice of Landlord's consent to Tenant's
holding over, such holding over shall constitute renewal of the Lease on a
month-to-month basis, requiring payment of Scheduled Base Rent at the rate
provided in this ARTICLE 15 and on the other terms and conditions of this Lease.
Acceptance of Rent by Landlord following expiration or termination shall not
constitute a renewal of this Lease, and nothing contained in this paragraph
shall waive Landlord's right of reentry or any other right. Unless Landlord
exercises the option hereby given to it, Tenant shall be only a tenant at
sufferance, whether or not Landlord accepts any Rent from Tenant while Tenant is
holding over without Landlord's written consent. Additionally, in the event that
upon termination of the Lease, Tenant has not fulfilled its obligation with
respect to repairs and cleanup of the Project or any other Tenant obligations as
set forth in this Lease, then Landlord shall have the right to perform any such
obligations as it deems necessary at Tenant's sole cost and expense, and any
time required by Landlord to complete such obligations shall be considered a
period of holding over and the terms of this ARTICLE 15 shall apply; provided,
however, that with respect to Scheduled Base Rent for such additional holdover
period, Tenant shall be credited in full for any Scheduled Base Rent received by
Landlord as damages under the provisions of ARTICLE 16 of this Lease which
relate to such additional holdover period.
ARTICLE 16: DEFAULT
--------------------
16.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "EVENT OF DEFAULT" on the part of Tenant:
(a) ABANDONMENT. For any period prior to the last year of the Lease
Term, vacation or abandonment of the Building for a continuous period in excess
of thirty (30) days; provided, however, that if Tenant is actively seeking an
assignee or subtenant for this Lease which Tenant in good faith believes will be
acceptable to Landlord, and the Standard and Poor rating of Tenant is "BBB-" or
better, such thirty (30)-day period may be extended for up to (i) if Tenant has
assigned its rights under this Lease, one (1) year, or (ii) if Tenant has not
assigned its rights under this Lease, five (5) years, but in either case only so
long as Tenant continues to actively seek an acceptable assignee for this Lease
or subtenant for the Premises and maintains such Standard and Poor rating;
provided, however, that in the case of SUBSECTION (II), above, extending such
period to five (5) years, it is understood, agreed and confirmed that at any
time after the expiration of the first year of such five (5) year period, and
without declaring a default hereunder, Landlord shall have the option but not
the obligation, to terminate this Lease or relet the Project as provided in
SECTIONS 16.2(A)(I) and (II) hereof, and Tenant shall be liable to Landlord for
all damages, claims and other amounts which would otherwise be payable by Tenant
under SECTION 16.2 hereof if an Event of Default had occurred and Landlord
exercised such remedy in connection therewith.
(b) NONPAYMENT OF RENT. Failure to pay any installment of Rent or
any other amount due hereunder upon the date when said payment is due, and the
continuance of such failure for ten (10) days following written notice from
Landlord (or its agent) of such failure. All failures to pay any monetary
obligation to be paid by Tenant under this Lease shall be construed as
obligations for payment of Rent.
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(c) OTHER OBLIGATIONS. Failure to perform any obligation, agreement
or covenant under this Lease other than those matters specified in SUBSECTIONS
(A), (B), (G) or (H) of this SECTION 16.1, such failure continuing for thirty
(30) days after written notice of such failure, or such longer period as
Landlord reasonably determines to be reasonably necessary to remedy such
default, provided that Tenant shall continuously and diligently pursue such
remedy at all times until such default is cured.
(d) GENERAL ASSIGNMENT. A general assignment by Tenant for the
benefit of its creditors.
(e) RECEIVERSHIP. The employment of a receiver, trustee or
liquidator to take possession of all or substantially all of the assets of
Tenant or of the Project, if such attachment or other seizure remains
undismissed or undischarged for a period of ninety (90) days after the levy
thereof.
(f) ATTACHMENT. The attachment, execution or other judicial seizure
of all or substantially all of the assets of Tenant or of the Project, if such
attachment or other seizure remains undismissed or undischarged for a period of
ninety (90) days after the levy thereof.
(g) LETTERS OF CREDIT - ISSUER. Landlord notifies Tenant in writing
that a material adverse change has occurred in the financial condition or net
worth of the issuer of any Letter of Credit or that Landlord believes that the
ability or willingness of any issuer of any Letter of Credit has been impaired,
and Tenant fails to deliver to Landlord within sixty (60) days following the
date of such notice substitute Letter(s) of Credit issued by another issuer
acceptable to Landlord and otherwise conforming in amount, form and substance to
the Letter(s) of Credit being replaced (except that the expiration date of such
substitute Letter(s) of Credit shall be no sooner than the expiration date of
the Letter of Credit being replaced).
(h) LETTER OF CREDIT. Tenant fails to deliver substitute Letter(s)
of Credit to Landlord at the times and in the manner required by SECTION 11.2
hereof.
16.2 RIGHTS AND REMEDIES UPON DEFAULT.
(a) REMEDIES UPON DEFAULT. On the occurrence and during the
continuance of an Event of Default, Landlord may pursue any one or more of the
following remedies without any notice or demand whatsoever, except as otherwise
indicated:
(i) LEASE TERMINATION. Terminate this Lease by giving
written notice of termination to Tenant, in which event Tenant shall immediately
surrender the Project to Landlord. If Tenant fails to so surrender the Project,
then Landlord may, without prejudice to any other remedy it has for possession
of the Project or arrearages in Rent or other damages, re-enter and take
possession of the Project and expel or remove Tenant and any other person
occupying the Project or any part thereof, without being liable for any damages,
whether caused by the negligence of Landlord or otherwise (excepting Landlord's
gross negligence or willful misconduct), all of which damages are hereby waived
by Tenant.
(ii) RELETTING. Landlord may re-enter and take possession
of the Project without terminating this Lease and without being liable for any
damages, whether caused by the negligence of Landlord or otherwise (excepting
Landlord's gross negligence or willful misconduct) (all of which damages are
hereby waived by Tenant), and relet the Project and apply the rent received to
the account of Tenant. No reletting by Landlord is considered to be for its own
account unless Landlord has notified Tenant in writing that this Lease has been
terminated. Landlord may relet the Project on whatever
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terms and conditions Landlord, in its sole discretion, deems advisable.
Landlord's action under this SUBSECTION 16.2(A)(II) is not considered an
acceptance of Tenant's surrender of the Project unless Landlord so notifies
Tenant in writing.
(iii) LANDLORD PERFORMANCE OF TENANT'S OBLIGATIONS. Re-enter
the Project without terminating this Lease and without being liable for any
damages, whether caused by the negligence of Landlord or otherwise (excepting
Landlord's gross negligence or willful misconduct), and do whatever Tenant is
obligated to do under the terms of this Lease. Tenant shall pay to Landlord, on
demand, the expenses incurred by Landlord in effecting compliance with Tenant's
obligations under this Lease, PLUS interest thereon at the rate provided in
SECTION 16.4 until repaid.
(b) TENANT PAYMENTS. Upon the occurrence of an Event of Default by
Tenant with respect to which Landlord elects to either terminate this Lease or
terminate Tenant's possession of the Project without terminating this Lease (and
without limiting Tenant's obligations provided elsewhere in this Lease,
including under SUBSECTION 16.2(D) below) and until Landlord relets the Project,
Tenant shall pay to Landlord, by the first day of each calendar month, the
amount owed by Tenant under this Lease. After the Project has been relet by
Landlord, Tenant shall pay to Landlord, on the 20th day of each calendar month,
the difference between the amount owed by Tenant under this Lease and the amount
actually collected by Landlord for that month. If Landlord brings suit to
collect a deficiency, Landlord may allow the deficiency to accumulate and may
bring an action on several or all of the accrued deficiencies at one time. No
suit shall prejudice Landlord's right to bring a similar action for any
deficiency or deficiencies that arise later. Any amount collected by Landlord
for any calendar month from subsequent tenants which exceeds the amounts owed by
Tenant shall be credited to reduce Tenant's future liability in a calendar month
for which the amount collected by Landlord is less than the amount owed by
Tenant, as Tenant's sole right to that excess.
(B) [Intentionally Deleted].
(c) PAYMENTS. All payments by Tenant under this Lease shall be paid
without deduction, offset or recoupment whatsoever, to Landlord at the address
specified in the Basic Lease Information or to such other firm or to such other
place as Landlord may from time-to-time designate in writing or pursuant to wire
transfer instructions which shall be on file with Tenant at all times during the
term of this Lease, which instructions may be modified at any time by Landlord
by written notice to Tenant.
(d) MEASURE OF CERTAIN DAMAGES. In all events, Tenant is liable for
all damages of whatever kind or nature, direct or indirect, suffered by Landlord
as a result of the occurrence of an Event of Default. If Tenant fails to
promptly pay Landlord for the damages suffered, Landlord may pursue a monetary
recovery from Tenant. Included among those damages are all expenses incurred by
Landlord in repossessing the Project (including increased insurance premiums
resulting from Tenant's vacancy), all expenses incurred by Landlord in reletting
the Project (including those incurred for advertisements and brokerage fees and
needed repairs, remodeling and replacements), all concessions granted to a new
tenant on a reletting, all losses incurred by Landlord as a result of Tenant's
default, a reasonable allowance for Landlord's administrative costs attributable
to Tenant's default, and all reasonable attorneys' fees and expenses incurred by
Landlord in enforcing any of Landlord's rights or remedies against Tenant. All
capital expenditures reasonably incurred by Landlord in constructing additions
or alterations for the reletting of the Project and all rent concessions granted
to a new tenant as a term or condition of such reletting shall be amortized over
the term of such new lease or, with respect to the cost of additions and
alteration, the shorter useful life of such additions and alterations as
reasonably determined by Landlord.
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(e) PAYMENT OF AMORTIZED IMPROVEMENT REPAYMENT. At Landlord's
option, upon the occurrence and during the continuance of an Event of Default,
and in addition to (but without duplication of, e.g. drawing on the First Letter
of Credit) any other right or remedy of Landlord in connection therewith, Tenant
shall pay to Landlord the unpaid Amortized Improvement Repayment as of such
date, calculated in accordance with EXHIBIT H attached hereto.
(f) NO ELECTION OF REMEDIES. Pursuit of any of the foregoing
remedies does not constitute an irrevocable election of remedies nor preclude
pursuit of any other remedy provided elsewhere in this Lease or by applicable
law, and none is exclusive of another unless so expressly provided in this Lease
or by applicable law. Likewise, except to the extent provided specifically to
the contrary in this Lease, such as in SECTIONS 4.2(B) and 16.4, forbearance by
Landlord to enforce one or more of the rights or remedies available to it upon
an Event of Default does not constitute a waiver of that default or of the right
to exercise that right or remedy later or of any rent, damages or other amounts
due to Landlord hereunder. Amounts drawn by Landlord under the Letters of
Credit shall be applied to satisfy Tenant's obligations under this Lease,
whether or not then due and owing.
(g) LIEN FOR RENT. SUBJECT TO ANY SECURITY INTEREST OR CONDITIONAL
SALES CONTRACT IN FAVOR OF A THIRD PARTY NOT AN AFFILIATE OF TENANT, WHICH SHALL
HAVE PRIORITY, TENANT HEREBY GRANTS TO LANDLORD A LIEN AND SECURITY INTEREST IN
TENANT'S PROPERTY (TOGETHER WITH THE PROCEEDS FROM THE DISPOSITION OF THOSE
ITEMS) AS SECURITY FOR PAYMENT OF ALL RENT AND OTHER SUMS AGREED TO BE PAID BY
TENANT IN THIS LEASE. THE PROVISIONS OF THIS SUBSECTION 16.2(G) CONSTITUTE A
SECURITY AGREEMENT UNDER THE UNIFORM COMMERCIAL CODE OF THE STATE IN WHICH THE
LAND IS LOCATED, AND LANDLORD HAS AND MAY ENFORCE A SECURITY INTEREST IN
TENANT'S PROPERTY. LANDLORD MAY AT ITS ELECTION AT ANY TIME FILE A PHOTOCOPY OF
A MEMORANDUM OF THIS LEASE AS A FINANCING STATEMENT. LANDLORD, AS SECURED
PARTY, HAS ALL OF THE RIGHTS AND REMEDIES AFFORDED A SECURED PARTY UNDER THE
UNIFORM COMMERCIAL CODE OF THE STATE IN WHICH THE LAND IS LOCATED IN ADDITION TO
AND CUMULATIVE OF THE LANDLORD'S LIENS AND RIGHTS PROVIDED BY LAW OR BY THE
OTHER TERMS AND PROVISIONS OF THIS LEASE.
Upon Landlord's request, Tenant agrees to execute UCC-1 financing
statements with respect to the security interests granted herein.
16.3 [INTENTIONALLY DELETED].
16.4 INTEREST. Any amount owed by Tenant to Landlord which is not paid on
or before the date thirty (30) days after the date due shall bear interest at
the lesser of (a) the rate per annum which shall from day to day be equal to the
sum of two and one-half percent (2-1/2%) over the prime rate reported in the
Wall Street Journal as published closest prior to the date when due, or the (b)
the maximum rate of interest permitted to be contracted for by applicable law.
However, interest shall not be payable on late charges to be paid by Tenant
under this Lease. The payment of interest on such amounts shall not excuse or
cure any default by Tenant under this Lease, and shall be due and payable by
Tenant on or before the date thirty (30) days following receipt by Tenant of an
invoice with respect to such interest sent by or on behalf of Landlord (which
invoice shall be sent by Landlord within sixty (60) days following the end of
any calendar month for which interest is being so invoiced or the liability
therefor shall be deemed waived by Landlord).
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16.5 REMEDIES CUMULATIVE. All rights, privileges and elections or remedies
of the parties are cumulative and not alternative to the extent permitted by law
and except as otherwise provided herein. All amounts drawn by Landlord under
any Letter of Credit shall be applied by Landlord to amounts due or to become
due by Tenant under this Lease.
16.6 BANKRUPTCY. If at any time during the term of this Lease there shall
be filed by or against Tenant in any court pursuant to any statute either of the
United States or of any State a petition in bankruptcy or insolvency or for
reorganization or for the appointment of a receiver or trustee of all or a
portion of the property of Tenant, or if a receiver or trustee takes possession
of any of the assets of Tenant, or if the leasehold interest herein passes to a
receiver, or if Tenant makes an assignment for the benefit of creditors or
petitions for or enters into an arrangement (any of which are referred to herein
as a "BANKRUPTCY EVENT"), then the following provisions shall apply:
(a) In all events any receiver or trustee in bankruptcy of Tenant as
debtor in possession ("DEBTOR") shall either expressly assume or reject this
Lease within sixty (60) days following the entry of an "Order for Relief."
(b) In the event of an assumption of the Lease by a Debtor, receiver,
or trustee, such Debtor, receiver, or trustee shall immediately after such
assumption (i) cure any default or provide adequate assurances that defaults
will be promptly cured; and (ii) compensate Landlord for actual pecuniary loss
or provide adequate assurances that compensation will be made for actual
pecuniary loss; and (iii) provide adequate assurance of future performance.
(c) If an Event of Default has occurred, the party assuming the Lease
may not require Landlord to provide services or supplies incidental to the Lease
before its assumption by such trustee or Debtor, unless Landlord is compensated
under the terms of the Lease for such services and supplies provided before the
assumption of such Lease.
(d) Landlord specifically reserves any and all remedies available to
Landlord in ARTICLE 16 hereof or at law or in equity in respect of a Bankruptcy
Event by Tenant to the extent such remedies are permitted by law, and the
occurrence of any Bankruptcy Event shall constitute an additional Event of
Default under this Lease.
16.7 SUBLESSEES OF TENANT. If Landlord terminates this Lease following an
Event of Default or Bankruptcy Event, or if this Lease is terminated or the
Lease Term expires for any reason whatsoever, Landlord shall have the right to
terminate any and all subleases, licenses, concessions or other consensual
arrangements for possession entered into by Tenant and affecting the Project or
may, in Landlord's sole discretion, succeed to Tenant's interest in such
subleases, licenses, concessions or arrangements. In the event of Landlord's
election to succeed to Tenant's interest in any such subleases, licenses,
concessions or arrangements, Tenant shall, as of the date of notice by Landlord
of such election, have no further right to or interest in the rent or other
consideration receivable thereunder; provided, however, that Tenant shall be
entitled to a full credit toward its rental obligations to Landlord under this
Lease for any rent received by Landlord with respect to any such subleases,
licenses, concessions or other consensual arrangements.
16.8 WAIVER OF DEFAULT. No waiver by Landlord or Tenant of any violation
or breach of any of the terms, provisions and covenants herein contained shall
be deemed or construed to constitute a waiver of any other or later violation or
breach of the same or any other of the terms, provisions, and covenants herein
contained. Forbearance by Landlord or Tenant in enforcement of one or more of
the remedies available to such party upon an Event of Default or Bankruptcy
Event shall not be deemed or construed to constitute a waiver of such Event of
Default or Bankruptcy Event. The acceptance of any
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Rent hereunder by Landlord following the occurrence of any Event of Default,
Potential Default or Bankruptcy Event, whether or not known to Landlord, shall
not be deemed a waiver of any such Event of Default, Potential Default or
Bankruptcy Event, except only a default in the payment of the Rent so accepted.
ARTICLE 17: RIGHT OF FIRST OFFER
---------------------------------
In the event Landlord decides to sell the Project (with the exception of
the sale of all or substantially all of Landlord's assets), and so long as
Tenant has not assigned its rights hereunder, Landlord shall deliver written
notice of its intent to sell (the "SELLING NOTICE") to Tenant. Upon receipt of
the Selling Notice, Tenant shall have the right and option to offer to purchase
the Project (the "OFFER RIGHT"), exercisable by written notice ("TENANT OFFER
NOTICE") to Landlord at any time during a period of thirty (30) days from
Tenant's receipt of the Selling Notice. Such Tenant Offer Notice shall provide
that such sale to Tenant shall be an all-cash sale; the Project shall be
conveyed to Tenant on an "as-is, where-is, with all faults" basis and without
representations or warranties by Landlord except as to Landlord's existence and
authority to convey the Project to Tenant, and free and clear of any voluntary
encumbrances granted by Landlord with respect to the Project without Tenant's
consent or which are caused or arise from Tenant's actions or inactions in
violation of this Lease (any such encumbrances to be referred to herein as
"LANDLORD ENCUMBRANCES"); Tenant's offer shall be absolute and subject to no
contingencies; atTenant's option, this Lease shall be automatically terminated
as of the date of such conveyance; and Landlord shall be automatically released
with respect to all of its obligations and liabilities under this Lease as of
the date of such conveyance. Tenant shall have the obligation to consummate the
sale notwithstanding any casualty or condemnation that occurs with respect to
the Project after delivery of the Tenant Offer Notice and before closing, and,
at closing, Landlord shall assign to Tenant such casualty or condemnation
proceeds, as applicable. Further, the Tenant Offer Notice shall outline the
other material terms and conditions of the sale, including, without limitation,
the purchase price, and the closing date. If the terms outlined in the Tenant
Offer Notice are acceptable to Landlord, Landlord and Tenant shall enter into a
purchase agreement consistent with the terms and conditions of such Tenant Offer
Notice. Within forty-five (45) days following Landlord's acceptance thereof,
Tenant shall purchase the Project within the period set forth in the Tenant
Offer Notice and on the terms and conditions set forth herein and therein. If
Tenant fails to purchase the Project after giving the Tenant Offer Notice,
Landlord may either enforce Tenant's obligation to so purchase the Property by
specific performance (and recover all costs of enforcement) or pursue Tenant for
all losses, costs, damages and expenses incurred by Landlord because of such
default. Notwithstanding anything set forth herein to the contrary, Tenant
shall have no Offer Right if Tenant fails to pay to Landlord the entire unpaid
Amortized Improvement Repayment under this Lease as of the date of closing (in
addition to the purchase price set forth in this ARTICLE 17). If Landlord
rejects the Tenant Offer Notice, Tenant shall have no further rights with
respect to the Project under this ARTICLE 17, but if Landlord accepts bids for
the Project from the public generally, Landlord will allow Tenant to submit a
bid for purchase of the Project, although Landlord will not be required to
accept Tenant's offer, it being agreed that Landlord may accept an offer lower
than or less favorable to Landlord than Tenant's offer, and this ARTICLE 17
shall continue in effect if any such successor Landlord decides to sell the
Project.
ARTICLE 18: EXPANSION
----------------------
18.1 TENANT'S EXPANSION RIGHT. Landlord has of even date herewith entered
into an Option Agreement (such agreement as it may from time to time be amended,
restated, or supplemented, the "OPTION AGREEMENT") containing an "OPTION"
(therein so called) for Landlord to purchase certain real property located
adjacent to the Land, as more particularly described on EXHIBIT C attached
hereto (the
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"ADJACENT LAND"). At any time during the period commencing on the Term
Commencement Date and ending on the date six (6) months prior to the termination
of the Option Period under the Option Agreement (the "EXPANSION OPTION PERIOD"),
if Tenant determines that it would like to expand its activities at the Project
onto the Adjacent Land, Tenant shall comply with the provision of this ARTICLE
18 with respect thereto (the "EXPANSION RIGHT"). The Adjacent Land and the
expansion of the Building and improvements proposed to be constructed on the
Adjacent Land shall be referred to herein as the "EXPANSION PROJECT." Landlord
agrees that Landlord will not voluntarily terminate the Option Agreement or any
Purchase and Sale Agreement thereunder without Tenant's consent.
18.2 EXERCISE OF TENANT'S EXPANSION RIGHT. Tenant may exercise the
Expansion Right at any time during the Expansion Option Period by delivering
written notice (the "TENANT EXPANSION NOTICE") to Landlord of Tenant's exercise
of the Expansion Right. The Tenant Expansion Notice shall contain (i) Tenant's
preliminary plans and specifications for the proposed expansion, (ii) Tenant's
proposed schedule for construction and completion, and (iii) Tenant's proposed
budget for the expansion (collectively, the "EXPANSION PROPOSAL").
18.3 LANDLORD'S RESPONSE TO TENANT EXPANSION NOTICE. Within thirty (30)
days following Landlord's receipt of the Tenant Expansion Notice, Landlord shall
give Tenant a preliminary, non-binding indication of its interest in developing
the Expansion Project for lease to Tenant. If Landlord's preliminary,
non-binding response is favorable, Landlord and Tenant shall work diligently and
in good faith to finalize the plans and specifications, budget,
construction/project schedule and enter into an amendment to this Lease (the
"EXPANSION AMENDMENT") consistent with SECTION 18.4 hereof, within ninety (90)
days. Within one hundred and twenty (120) days following Landlord's receipt of
the Tenant Expansion Notice, Landlord shall deliver written notice to Tenant in
which Landlord shall indicate whether (i) Landlord elects to exercise the Option
with respect to the Adjacent Land, construct the Expansion Project, and lease
the Expansion Project to Tenant upon the terms provided in this ARTICLE 18
("LANDLORD ACCEPTANCE") and as provided in the agreed upon plans and
specifications, budget, construction/project schedule and Expansion Amendment;
or (ii) Landlord elects not to acquire the Adjacent Land and construct the
Expansion Project ("LANDLORD REJECTION").
(a) Within thirty (30) days following Tenant's receipt of the
Landlord Rejection, Tenant shall deliver written notice (the "TENANT DECISION
NOTICE") to Landlord indicating whether Tenant elects to purchase the Project
and the Option from Landlord. If Tenant elects to purchase the Project and the
Option from Landlord, the sale will be consummated in accordance with SECTION
18.5. If Tenant does not elect to purchase the Project and the Option, or
Tenant fails to respond to the Landlord Rejection within thirty (30) days of
such Landlord Rejection, Tenant shall have no further rights with respect to the
Adjacent Land.
(b) If Landlord and Tenant are unable to agree on a form of Expansion
Amendment by the Landlord Acceptance, Landlord and Tenant shall continue to
negotiate in good faith to execute the Expansion Amendment consistent with
SECTION 18.4 hereof, for a period of up to sixty (60) days following the date of
the Landlord Acceptance. If Landlord and Tenant are unable to agree with
respect to the Expansion Amendment within sixty (60) days following the date of
the Landlord Acceptance, Landlord shall be deemed to have elected the Landlord
Rejection as of such last date, and Tenant shall have the rights and options
provided in SECTION 18.3(A) hereof.
18.4 EXPANSION AMENDMENT. Within sixty (60) days following the date of the
Landlord Acceptance, Tenant and Landlord shall execute the Expansion Amendment
setting forth the agreement of Landlord and Tenant regarding the Expansion
Project as specified herein (but subject in any event to
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Landlord's acquisition of the Adjacent Land pursuant to the Option Agreement).
The Expansion Amendment shall contain the following terms and conditions:
(a) Scheduled Base Rent per annum for the Expansion Project shall be
(i) in years 1-5 of the Initial Term of the Expansion Lease, the Total Expansion
Costs MULTIPLIED BY the sum of the Ten-Year Mortgage Money Rate at the beginning
of the applicable lease year and three-hundred (300) basis points (the "INITIAL
BASE RENT"); (ii) in years 6-10, an amount equal to 110% of the Initial Base
Rent (the "STEPPED BASE RENT"); and (iii) if the Initial Term of the Expansion
Lease is more than ten (10) years, in years 10 through the end of the term of
the Expansion Lease, an amount equal to 110% of the most recent Stepped Base
Rent, adjusted at the end of each five (5) year period. Notwithstanding the
foregoing, if Scheduled Base Rent under this Lease is scheduled to increase
under this Lease prior to the date for a Scheduled Base Rent increase under the
Expansion Amendment, Scheduled Base Rent under the Expansion Amendment shall be
increased by an amount equal to 0.167% times the number of months from
substantial completion of the Expansion Project until the date of such rental
increase. The term "TEN-YEAR MORTGAGE MONEY RATE" shall mean the mortgage
interest rate (i.e., the amount of annual debt service, expressed as a
percentage of the loan amount, that is necessary to pay interest) at the time
such determination is being made associated with mortgage loans made available
by one of the following institutional lenders for permanent loans from
properties similar to the Expansion Project, with a maturity date of no less
than ten (10) years: Metropolitan Life Insurance Company; Prudential Life
Insurance Company; and The Principal Financial Group. If such mortgage interest
rates at the above-named institutional lenders differ, Landlord may choose one
of such interest rates. If any of such institutional lenders are not providing
permanent financing for properties similar to the Expansion Project, then
Landlord may substitute another comparable lender therefor. The term "TOTAL
EXPANSION COSTS" shall mean all soft and hard costs incurred by Landlord in
connection with the acquisition, design, construction and leasing of the
Expansion Project, including, without limitation, all architectural,
engineering, contractor, marketing, leasing, brokerage and legals fees and
expenses, any interest expenses, tax insurance payments incurred during such
construction process, the cost of landscaping and any loan or mortgage fees, and
any other costs, fees or expenses incurred with such acquisition, construction
and development. Amortized Improvement Repayment shall be determined based upon
the special improvements required by the plans and specifications for the
Expansion Project.
(b) The Term Commencement Date for the Expansion Project under the
Expansion Amendment shall be the date the Expansion Project is "Substantially
Complete", as such term is defined in the Agreement Regarding Closing of even
date between Tenant, Crescent and Landlord. The term of this Lease, as amended
by the Expansion Amendment, shall expire on the later of (i) one-hundred-twenty
(120) full calendar months thereafter, or (ii) the expiration of this Lease. If
at the time of the Expansion Amendment less than ten (10) years remain in the
Initial Term of this Lease, the Initial Term of this Lease shall automatically
and without further documentation be extended to be co-terminus with the
Expansion Amendment. The Base Rent for such extended Initial Term of this Lease
shall be determined as if such extended term were an extension term under
SECTION 2.1(B) of this Lease.
(c) Landlord's obligations under the Expansion Amendment (and
Landlord's acceptance of Tenant's Expansion Proposal under this ARTICLE 18)
shall be contingent upon Landlord's acquisition of the Adjacent Land pursuant to
the Option Agreement. However, at Tenant's request, Landlord will cooperate
with Tenant to jointly enforce Crescent's obligation to sell the Adjacent Land
pursuant to the Option Agreement, and the costs incurred by Landlord in pursuing
same shall be added to the Total Expansion Costs. If an Expansion Amendment is
not executed with respect to the Adjacent Land, Tenant shall reimburse Landlord
within ten (10) days following Landlord's written demand therefor, for the costs
incurred by Landlord in cooperating with Tenant and enforcing the Option
Agreement.
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18.5 SALE TO TENANT. If Tenant elects to purchase the Project and the
Option pursuant to SECTION 18.3(A), Tenant must close such purchase within
forty-five (45) days following the date of such Tenant Decision Notice. The
purchase price for the Project and the Option shall be the amount necessary to
produce an internal rate of return to Landlord of thirteen percent (13%),
calculated using an initial investment of $16,800,000 (which amount shall be
adjusted on a dollar-for-dollar basis for any reductions in the purchase price
which reduce Scheduled Base Rent, as provided in SECTION 4.4 hereof) and
Scheduled Base Rent actually paid and collected by Landlord. Such sale to
Tenant shall be an all-cash sale; the Project shall be conveyed to Tenant on an
"as-is, where-is, with all faults" basis and without representations or
warranties by Landlord except as to Landlord's existence and authority to convey
the Project to Tenant, and free and clear of all Landlord Encumbrances; the
conveyance shall be absolute and subject to no contingencies; and the Lease
shall be automatically terminated as of the closing date of such conveyance.
Notwithstanding the foregoing, Tenant shall have no option to so purchase the
Project and the Option if a Material Event of Default or Bankruptcy Event has
occurred and is continuing as of such date, or if Tenant fails to pay to
Landlord the entire unpaid Amortized Improvement Repayment under this Lease as
of the date of closing (in addition to the purchase price set forth in this
SECTION 18.5).
18.6 TENANT'S ADDITIONAL RIGHTS WITH RESPECT TO THE ADJACENT LAND.
Notwithstanding the foregoing, if Tenant is not willing to commit to the
expansion onto the Adjacent Land prior to the expiration of the Expansion Option
Period, Tenant may give written notice to Landlord prior to expiration of the
Expansion Option Period that Tenant has elected to exercise the Option with
respect to the Adjacent Land (the "TENANT PURCHASE NOTICE"), and purchase the
Adjacent Land pursuant thereto, and Landlord shall assign to Tenant and Tenant
shall assume the Option Agreement effective as of the date of delivery of such
written notice from Tenant to Landlord. If at any time following Tenant's
acquisition of the Adjacent Land Tenant wishes to expand its activities at the
Project onto the Adjacent Land, or Tenant otherwise wishes to construct
improvements on the Land to be used by Tenant or its designees in conjunction
with Tenant's activities at the Project, Landlord shall have the option to
purchase the Adjacent Land from Tenant and provide such improvements and lease
such improvements to Tenant on the terms described in this ARTICLE 18.
18.7 INDEMNITY. Tenant shall indemnify, hold harmless, and, at Landlord's
option (with such attorneys as Landlord may approve in advance and in writing),
defend Landlord, Landlord's mortgagees and other lien holders, and the other
Landlord Indemnified Parties, from and against any and all claims, demands,
actions, causes of action, losses, costs, damages, fees and expenses incurred or
asserted against, relating to, arising from or in connection with, or associated
in any way with the Option, or the Option Agreement or the Adjacent Land during
the period prior to Landlord's assignment of the Option or termination of the
Option Agreement (including, without limitation, any amounts related to
Landlord's exercise of its Option in connection with a Landlord Acceptance).
18.8 ASSIGNMENT BY TENANT. Notwithstanding anything set forth herein, this
ARTICLE 18 and Tenant's rights hereunder shall immediately and automatically
terminate upon any assignment by Tenant under this Lease.
ARTICLE 19: TRANSFERS BY LANDLORD
----------------------------------
In the event of a sale or conveyance by Landlord of the Project, the same
shall operate to release Landlord from any future liability upon any of the
covenants or conditions, express or implied, herein contained in favor of
Tenant, and in such event Tenant agrees to look solely to the responsibility of
the successor in interests of Landlord in and to this Lease. This Lease shall
not be affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee.
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ARTICLE 20: FEE-IN-LIEU TRANSACTION
------------------------------------
20.1 FEE-IN-LIEU TRANSACTION. Upon Tenant's written request, and upon
compliance with the conditions set forth in this ARTICLE 20, Landlord agrees
that it will convey title to the Project to York County, South Carolina (the
"COUNTY") in order to facilitate qualification of the Project for payment of a
negotiated fee in lieu of ad valorem property taxes ("FEE-IN-LIEU TRANSACTION"),
and to otherwise cooperate with Tenant in connection with such Fee-In-Lieu
Transaction. Tenant agrees to pay all reasonable expenses in connection
therewith (including, without limitation, any sum required to be paid for
Landlord to repurchase the Project). Upon such conveyance of title by the
Landlord to the County, this Lease will automatically convert to a sub-lease
arrangement between Landlord and Tenant without the necessity of further
amendments hereto, and this Lease shall be deemed to be modified accordingly in
all aspects necessary to permit such treatment. Landlord shall remain
responsible as Landlord, except that Landlord shall not be liable for actions
suffered or taken by the County over which Landlord has or had no control, which
actions or failure would otherwise constitute a default under this Lease.
Tenant acknowledges that any conveyance to the County to facilitate a
Fee-In-Lieu Transaction will be for the sole benefit of Tenant and that all risk
of loss or damage to Tenant or Landlord as a result of the Fee-In-Lieu
Transaction shall be borne solely by Tenant and not by Landlord. If Landlord is
unable to perform, or is delayed in performing, its obligations under this Lease
because of the Fee-In-Lieu Transaction or any limitations, obligations or duties
imposed on Landlord in connection therewith, Landlord's failure of performance
hereunder shall not constitute a Landlord default under this Lease.
20.2 CONDITIONS OF CONVEYANCE TO COUNTY. The following shall be conditions
to Landlord conveying title to the Project to the County or otherwise
participating in the Fee-In-Lieu Transaction:
(a) No Material Event of Default or Bankruptcy Event shall have
occurred and be continuing;
(b) Tenant shall have provided to Landlord such reasonable assurances
as Landlord shall require as to Landlord's right to repurchase the Project from
the County for a nominal sum at any time during the term of the Lease, free and
clear of any liens or encumbrances of any nature (with the exception of those
liens or encumbrances existing at the time of such conveyance to the County or
created by Landlord), which assurances may include, but shall not be limited to,
a favorable opinion of counsel by Tenant's attorney, as well as a mortgage and
security agreement, which shall be in form and content reasonably satisfactory
to the County, and UCC-1 financing statement from the County to Landlord to
secure the County's reconveyance obligations under the Lease between the County,
as landlord, and Landlord, as tenant.
(c) Tenant shall have paid or agreed to pay all costs, fees and
expenses incurred or to be incurred by Landlord in connection with the
Fee-In-Lieu Transaction including, without limitation Landlord's reasonable
attorney's fees and expenses, recording fees and any additional title policy
premiums (for title insurance issued at the time Landlord exercises its option
to repurchase the Project or otherwise) or title search fees in connection
therewith.
(d) Tenant shall have provided to Landlord either an endorsement to
the existing owner's title insurance policy of Landlord or a new policy insuring
Landlord's leasehold interest, and Tenant shall further be responsible for all
costs associated with Landlord obtaining owner's title insurance covering
Landlord's fee simple ownership interest upon the termination of the Fee-In-Lieu
Transaction.
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20.3 INDEMNITY FOR FEE-IN-LIEU TRANSACTIONS. Tenant shall indemnify, hold
harmless, and, at Landlord's option (with such attorneys as Landlord may
reasonably approve in advance and in writing), defend the Landlord Indemnified
Parties from and against any and all Losses incurred or asserted against,
relating to, arising from or in connection with, or associated in any way with
the Fee-in-Lieu Transaction, but excluding amounts incurred by Landlord and
which result primarily from (a) a violation by Landlord of the first sentence of
SECTION 20.4 of this Lease, or (b) the wrongful actions of Landlord or any
subsequent owner or tenant of the Project after the Lease Term (but excluding
Landlord's exercise of its repurchase option thereunder); the provisions of this
indemnity and hold harmless shall survive expiration or termination of this
Lease.
20.4 LANDLORD'S RIGHT TO REPURCHASE. Landlord agrees that it will not
during the Lease Term exercise its option to repurchase the Project pursuant to
the lease agreement to be entered into between Landlord and the County
evidencing the Fee-in-Lieu Transaction without the prior written consent of
Tenant unless such repurchase is necessary, in Landlord's reasonable judgment,
to protect Landlord's investment in the Project, and Landlord shall indemnify
and hold harmless Tenant from any Tax Increase suffered by Tenant during the
remainder of the Lease Term and resulting directly and solely from Landlord's
repurchase of the Project in violation of the foregoing clause. Landlord shall
notify Tenant of its intent to so repurchase prior to the consummation of such
repurchase by Landlord. For purposes of this SECTION 20.4, "TAX INCREASE" shall
equal the amount by which ordinary and customary ad valorem real and personal
property taxes with respect to the Project exceed the total amount of any
Fee-In-Lieu Transaction payments and ad valorem real and personal property taxes
payable by Tenant pursuant to a Fee-In-Lieu Transaction with the County with
respect to the Project, adjusted to give effect to any credits or abatement
relief available to Tenant with respect to the Project.
ARTICLE 21: MISCELLANEOUS
---------------------------
21.1 LIMITATION. Tenant shall look solely to Landlord's interest in the
Project for recovery of any judgment from Landlord. Landlord, or if Landlord is
a partnership, its partners whether general or limited, or if it is a
corporation, its directors, officers or shareholders, or if Landlord is a trust,
its trustees, officers and employees, or if Landlord is a limited liability
company or other entity, its members or managers or owners, shall never be
personally liable for any such judgment. Any lien obtained to enforce any such
judgment and any levy of execution thereon shall be subject and subordinate to
any lien, mortgage or deed of trust on the Project. Tenant acknowledges that no
trustee, shareholder, officer, employee or agent of Landlord shall be held for
any personal liability, jointly or severally, for any obligation of or claim
against Landlord.
21.2 QUIET ENJOYMENT. Landlord represents that it has full right and
authority to enter into this Lease and that Tenant, upon paying the Rent and
performing its other covenants and agreements herein set forth, shall peaceably
and quietly have, hold and enjoy the Project for the Term hereof without
hindrance or molestation from Landlord, subject to the terms and provisions of
this Lease.
21.3 WAIVER. No waiver of any provision of this Lease shall be implied by
(a) any failure of either party to insist in any instance on the strict keeping,
observance or performance of any covenant or agreement contained in this Lease
or to exercise any election contained in this Lease, or (b) any failure of
either party to enforce any remedy on account of the violation of such
provision, even if such violation shall continue or be repeated subsequently,
any waiver by either party of any provision of this Lease may only be in
writing, and no express waiver shall affect any provision other than the one
specified in such waiver and that one only for the time and in the manner
specifically stated. No receipt of monies by Landlord from Tenant after the
termination of this Lease shall in any way alter the length of the Lease
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Term or of Tenant's right of possession hereunder or after the giving of any
notice shall reinstate, continue or extend the Lease Term or affect any notice
given Tenant prior to the receipt of such monies, it being agreed that after the
Project, Landlord may receive and collect any Rent due, and the payment of said
Rent shall not waiver or affect said notice, suit or judgment.
21.4 NOTICES. Each provision of this Lease or of any Governmental
Requirements with reference to the sending, mailing or delivery of any notice or
the making of any payment by Landlord or Tenant to the other shall be deemed to
be complied with when and if the following steps are taken:
(a) All Rent and other payments required to be made by Tenant to
Landlord hereunder shall be payable to Landlord at the address set forth in the
Basic Lease Information, or at such other address as Landlord may specify from
time to time by written notice delivered in accordance herewith, but Landlord
shall in any event maintain at all times during the Lease Term wire transfer
instructions for payments of Rent under this Lease. Tenant's obligation to pay
Rent and any other amounts to Landlord under the terms of this Lease shall not
be deemed satisfied until such Rent and other amounts have been actually
received by Landlord.
(b) All notices, demands, consents and approvals which may or are
required to be given by either party to the other hereunder shall be in writing
and shall be deemed to be effective and received (i) if by hand delivery, telex,
telecopy or other facsimile transmission, on the day and at the time on which
delivered to such party at the address or fax numbers specified in the Basic
Lease Information; (ii) if by mail, on the second business day following the day
upon which it is deposited, postage prepaid, in the United States, registered or
certified mail, return receipt requested, addressed to such party at the address
specified in the Basic Lease Information; or (iii) if by Federal Express or
other reputable express mail service, on the next business day following the
delivery to such express mail service, addressed to such party at the address
set forth in the Basic Lease Information. Any party may change its address for
purposes of this Lease by giving fifteen (15) days written notice of such change
to the other parties pursuant to this SECTION 21.4.
21.5 ATTORNEYS' FEES. In the event of any litigation or arbitration
proceeding between the parties with respect to this Lease, then all costs and
expenses including, without limitation, all reasonable professional fees such as
appraisers', accountants' and attorneys' fees, incurred by the prevailing party
therein shall be paid or reimbursed by the other party.
21.6 SUCCESSORS AND ASSIGNS. Subject to ARTICLE 19 hereof, this Lease
shall be binding upon and inure to the benefit of Landlord, its successors and
assigns, and shall be binding upon and inure to the benefit of Tenant, its
successors, and to the extent assignment may be approved by Landlord hereunder,
Tenant's assigns.
21.7 FORCE MAJEURE. Whenever a period of time is herein prescribed for
action to be taken by Landlord, Landlord shall not be liable or responsible for,
and there shall be excluded from the computation for any such period of time,
any delays due to strike, riots, acts of God, shortages of labor or materials,
war, governmental laws, regulations or restrictions or any other causes of any
kind whatsoever which are beyond the control of Landlord.
21.8 REFERENCE. The term "Tenant" or any pronoun used in place thereof
shall indicate and include the masculine or feminine, the singular or plural
number, individuals, firms or corporations, and their and each of their
respective successors, executors, administrators and permitted assigns,
according to the context hereof.
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21.9 TIME OF THE ESSENCE. Time is of the essence regarding this Lease and
all of its provisions.
21.10 GOVERNING LAW. This Lease shall in all respects be governed by
the laws of the State of South Carolina.
21.11 INTEGRATION. This Lease, together with its exhibits, contains
all the agreements of the parties hereto and supersedes any previous
negotiations. There have been no representations made by the Landlord or
understandings made between the parties other than those set forth in this Lease
and its exhibits. All references to this Lease shall include all exhibits
attached hereto.
21.12 MODIFICATIONS. This Lease may not be modified except by a
written instrument by the parties hereto.
21.13 SEVERABILITY. If, for any reason whatsoever, any of the
provisions hereof shall be unenforceable or ineffective, all of the other
provisions shall be and remain in full force and effect.
21.14 COUNTERPARTS. This Lease may be executed on one or more
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one agreement.
21.15 WAIVER OF CERTAIN DAMAGES. Except with respect to Tenant's
obligations under SECTION 3.6. hereof, in no event shall either Landlord or
Tenant be liable to the other for any punitive, exemplary or consequential
damages, and each of Landlord and Tenant hereby waives and releases any right or
claim such party may have to same.
21.16 DAYS. All references in this Lease (but excluding ARTICLE 16
hereof) to less than "ten (10) days" shall mean business days. All references
in the Lease to "month" or "months" shall be deemed to include the actual number
of days in such actual month or months.
21.17 LEASE EFFECTIVE DATE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation or option
for lease, and it is not effective as a lease or otherwise until execution by
Landlord and Tenant.
21.18 MEMORANDUM OF LEASE. Concurrently with the execution of this
Lease, Landlord and Tenant shall execute a Memorandum of Lease in the form
attached hereto as EXHIBIT F, and Tenant may record such Memorandum of Lease in
the Office of the Clerk of Court or the Register of Deeds, as applicable, for
York County, South Carolina.
21.19 CAPTIONS. The captions of articles, sections and subsections
herein are for convenience only and shall not be deemed to limit, construe,
affect or alter the meaning of such articles, sections and subsections.
21.20 JOINT AND SEVERAL. If there is more than one Tenant, the
obligations imposed upon Tenant under this Lease are joint and several.
21.21 SUBMISSION OF LEASE. Submission of this Lease for examination or
signature by Tenant does not constitute a reservation of or an option for lease,
and it is not effective as a lease or otherwise until execution and delivery by
both Landlord and Tenant.
38
<PAGE>
21.22 BROKERS. Landlord and Tenant hereby warrant to each other that
they have had no dealings with any real estate broker or agent in connection
with the negotiation of this Lease, excepting only CB Commercial Real Estate
Group, Inc., and David Orr (together, the "BROKERS") and that they know of no
real estate broker or agent (including any Broker) who is entitled to a
commission in connection with this Lease. Each party agrees to indemnify and
defend the other party against and hold the other party harmless from any and
all claims, demands, losses, liabilities, lawsuits, judgments, and costs and
expenses (including without limitation reasonable attorneys' fees) with respect
to any leasing commission or equivalent compensation alleged to be owing on
account of the indemnifying party's dealings with any real estate broker or
agent.
21.23 CONFIDENTIALITY. Landlord agrees to use reasonable efforts to
avoid disclosure by Landlord of Tenant's proprietary processes and operations at
the Project or Tenant's financial information, except such information as is
generally available to the public, and specifically excluding the plans and
specifications for the Project or any improvements or alterations thereto,
although the foregoing shall not restrict Landlord from disclosing such
information with the prior written consent of Tenant, (a) upon the order or any
official request of or pursuant to the rules and regulations of any Governmental
Authority, or (b) as otherwise required by law; provided, however, that Landlord
may disclose such financial information to prospective purchasers and lenders so
long as such prospective purchasers and lenders agree to generally adhere to the
same confidentiality standards.
21.24 ALTERNATE DISPUTE REGULATION. Notwithstanding anything set forth
herein to the contrary, if a dispute, controversy or claim (whether based upon
contract, tort, statute, common law or otherwise) (collectively, a "DISPUTE")
arises from or relates directly or indirectly to the subject matter of this
Lease, and if the Dispute cannot be settled through direct discussions, the
parties shall first endeavor to resolve the Dispute by participating in a
mediation administered by the American Arbitration Association (the "AAA") under
its Commercial Mediation Rules before resorting to arbitration. Thereafter, any
unresolved Dispute shall be settled by binding arbitration administered by the
AAA in accordance with its Commercial Arbitration Rules and judgment on the
award rendered by the arbitrator, after the review rights set forth below have
been exhausted, may be entered in any court having jurisdiction. The
arbitration proceedings shall be conducted in Charlotte, North Carolina, on an
expedited basis before a neutral arbitrator who is a member of the Bar of the
State of South Carolina, and has been actively engaged in the practice of law
for at least fifteen (15) years, specializing in commercial transactions with
substantial experience in the subject matter of this Lease. Any attorney who
serves as an arbitrator shall be compensated at a rate equal to his or her
current regular hourly billing rate unless the AAA is able to arrange with the
parties and the arbitrator to agree otherwise. Upon the request of either
party, the arbitrator's award shall include findings of fact and conclusions of
law provided that such findings may be in summary form. Either party may seek
review of the arbitrator's award before an arbitration review panel comprised of
three (3) arbitrators qualified in the same manner as the initial arbitrator (as
set forth above) by submitting a written request to the AAA. The right of
review shall be deemed waived unless requested in writing within ten (10) days
of the delivery of the initial arbitrator's award. The arbitration review panel
shall be entitled to review all findings of fact and conclusions of law in
whatever manner it deems appropriate and may modify the award of the initial
arbitrator in its discretion. Unless otherwise deemed appropriate by the
arbitrator(s), the prevailing party shall be entitled to an award of all
reasonable out-of-pocket costs and expenses (including attorneys' and
arbitrators' fees) related to the entire arbitration proceeding (including
review if applicable).
21.25 CONTRACTORS' WARRANTIES AND GUARANTIES. Notwithstanding anything
to the contrary set forth in that certain Build-to-Suit Purchase Agreement dated
as of October 14, 1997, between Crescent Resources, Inc., as seller, and Tenant,
as purchaser, during the Term, Tenant may unilaterally exercise its rights under
any and all warranties, guaranties and bonds issued in connection with
construction of the
39
<PAGE>
Project, provided that Tenant must give Landlord at least ten (10) business
days' notice before Tenant commences any legal action or proceeding to enforce
such rights. The foregoing shall not prohibit Landlord from participating in
any action or proceeding brought by Tenant to enforce such rights.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
date first above written.
LANDLORD:
TENANT:
MIT UNSECURED, L.P., LEINER HEALTH PRODUCTS INC.,
a California limited partnership a Delaware corporation
By: MIT UNSECURED, INC., By: /s/
a California corporation, --------------------------------
the general partner Name:
------------------------------
Title:
-----------------------------
By: /s/
------------------------
Timothy B. Keith,
Vice President
40
<PAGE>
EXHIBIT A
---------
Legal Description of the Land
and Easements
41
<PAGE>
EXHIBIT B
---------
General Outline of the Building and Project
42
<PAGE>
EXHIBIT C
---------
Legal Description of the Adjacent Land
and Easement
43
<PAGE>
EXHIBIT D
---------
Rules and Regulations
RULES AND REGULATIONS
1. Tenant shall not keep animals or birds within the Project, and shall
not bring bicycles, motorcycles or other vehicles into areas not designated as
authorized for same.
2. Tenant shall not make, suffer or permit litter except in appropriate
receptacles for that purpose.
3. Tenant assumes all risks from theft or vandalism.
4. Except for designated truck parking and truck loading areas, parking
areas shall be used only for daily parking of vehicles.
5. The routine maintenance (i.e., except in the event of an emergency or
if a vehicle is disabled or unsafe), washing, waxing or cleaning of passenger
vehicles in the parking structure or Common Area is prohibited.
44
<PAGE>
EXHIBIT E
---------
FORM OF TENANT'S ESTOPPEL CERTIFICATE
The undersigned as Tenant under that certain Net Lease (the "LEASE") made
and entered into as of ________________, 19___, and between MIT Unsecured, L.P.,
a California limited partnership, as Landlord, and the undersigned as Tenant,
for the Project located at _____________________________, certifies as follows:
1. Attached hereto as EXHIBIT A is a true and correct copy of the Lease
and all amendments and modifications thereto. The documents contained in
EXHIBIT A represent the entire agreement between the parties as to the Project.
2. The undersigned has commenced occupancy of the Project described in
the Lease, and currently occupies the Project.
3. The Lease is in full force and effect and has not been modified,
supplemented or amended in any way except as provided in EXHIBIT A.
4. Tenant has not transferred, assigned, or sublet any portion of the
Project nor entered into any license or concession agreements with respect
thereto except as follows:
5. The Lease Term expires on ___________________. Tenant has not
exercised any right to extend for any Extension Term except as follows:
______________________________________.
6. All conditions to Tenant's obligation to perform under the Lease have
been satisfied and, to the best knowledge of the undersigned, Landlord is not in
default thereunder.
7. No rental has been paid in advance and no security has been deposited
with Landlord except as provided in the Lease.
8. The undersigned has not exercised any of its rights under ARTICLE 17
or ARTICLE 18 of the Lease except as follows:
___________________________________________.
9. All monthly installments of Base Rent have been paid when due through
____________________. The current monthly installment of Scheduled Base Rent is
$________________.
10. The undersigned acknowledges that this Estoppel Certificate may be
delivered to Landlord's prospective mortgagee, or a prospective purchaser, and
acknowledges that it recognizes that if same is done, said mortgagee,
prospective mortgagee, or prospective purchaser will be relying upon the
statements contained herein in making the loan or acquiring the Project, and in
accepting an assignment of the Lease as collateral security, and that receipt by
it of this certificate is a condition of making of the loan or acquisition of
the Project.
11. If Tenant is a corporation or partnership, each individual executing
this Estoppel Certificate on behalf of Tenant hereby represents and warrants
that Tenant is a duly formed and existing entity qualified to do business in the
state in which the Project is located and that Tenant has full right and
45
<PAGE>
authority to execute and deliver this Estoppel Certificate and that each person
signing on behalf of Tenant is authorized to do so.
Executed at _______________ on the _____ day of _____________, 19___.
"Tenant"
LEINER HEALTH PRODUCTS INC.,
a Delaware corporation
By:______________________________________
Its:________________________________
46
<PAGE>
EXHIBIT F
---------
FORM OF MEMORANDUM OF LEASE
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
Leiner Health Products Inc.
901 East 233rd Street
Carson, California 90745-6204
Attn: Senior Vice President of Operations
- --------------------------------------------------------------------------------
MEMORANDUM OF LEASE
-------------------
THIS MEMORANDUM OF LEASE (this "MEMORANDUM") is entered into as of
______________, ____, by and between MIT UNSECURED, L.P., a California limited
partnership ("LANDLORD"), and LEINER HEALTH PRODUCTS INC., a Delaware
corporation ("TENANT").
1. TERMS AND PROVISIONS. Landlord leases to Tenant, and Tenant leases
from Landlord, certain premises (the "PROJECT") to be located on the real
property (the "LAND") described on EXHIBIT A attached hereto on the provisions
of that certain Net Lease between the parties hereto, dated of even date (the
"LEASE"). The provisions of the Lease are incorporated herein.
2. TERM. The initial term of the Lease is fifteen (15) years. Tenant
also has two (2) options to extend the Lease for a period of five (5) years
each.
3. PROVISIONS BINDING ON PARTIES. The provisions of the Lease to be
performed by Landlord or Tenant, whether affirmative or negative in nature, are
intended to and shall bind or benefit the respective parties and their assigns
or successors, as applicable, at all times.
4. LIEN FOR RENT. The Lease includes a provision wherein Tenant has
granted to Landlord a lien and security interest in Tenant's property (together
with the proceeds from the disposition of those items) as security for payment
of all Rent and other sums agreed to be paid by Tenant in the Lease. This lien
and security interest is subordinate to any security interest or conditional
sales contract in favor of a third party not an affiliate of Tenant.
5. RIGHT OF FIRST OFFER AND EXPANSION RIGHTS. The Lease includes a right
of first offer in favor of Tenant and certain provisions regarding Tenant's
expansion into adjacent land upon which Landlord has an option, which provisions
may result in (among other things) an amendment of the Lease to cover the
expansion project or Tenant's purchase of the Project.
THIS AGREEMENT IS SUBJECT TO BINDING
ARBITRATION PURSUANT TO S. C. CODE Section 15-48-10 ET SEQ.,
AS AMENDED FROM TIME TO TIME.
47
<PAGE>
6. PURPOSE OF MEMORANDUM OF LEASE. This Memorandum is prepared solely
for purposes of recordation, and in no way modifies the provisions of the Lease.
"Landlord"
Witnesses: MIT UNSECURED, L.P.,
a California limited partnership,
_________________________ By: MIT UNSECURED, INC.,
a California corporation,
_________________________ the general partner
By:
Timothy B. Keith,
Vice President
"Tenant"
LEINER HEALTH PRODUCTS INC.,
a Delaware corporation
Witnesses: By:_______________________________
_________________________ Name:_____________________________
Title:____________________________
_________________________
48
<PAGE>
STATE OF __________________________)
) ss.
COUNTY OF _________________________)
On _______________________, before me, _______________________, a Notary
Public in and for said state, personally appeared TIMOTHY B. KEITH, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he executed the same in his authorized capacity, and that by his signature
on the instrument, the person, or the entity upon behalf of which the person
acted, executed the instrument.
WITNESS my hand and official seal.
----------------------------------------
Notary Public in and for said State
STATE OF __________________________)
) ss.
COUNTY OF _________________________)
On _______________________, before me, _______________________, a Notary
Public in and for said state, personally appeared ____________________________,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she executed the same in his/her authorized capacity,
and that by his/her signature on the instrument, the person, or the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
----------------------------------------
Notary Public in and for said State
49
<PAGE>
EXHIBIT A
---------
to
FORM OF MEMORANDUM OF LEASE
DESCRIPTION OF THE LAND
AND EASEMENT
50
<PAGE>
EXHIBIT G
---------
[Intentionally Deleted]
51
<PAGE>
EXHIBIT H
---------
SPECIAL IMPROVEMENTS AMORTIZATION SCHEDULE
Exhibit H
Special Improvements Amortization Schedule
Subject to any adjustments to the beginning balance per Section 4.4, the
unamortized principal balance to the Amortized Improvement Repayment shall be
as follows for each month after receipt of Base Rent due through the first
of that month. To the extent the beginning Amortized Improvement Repayment
balance is reduced below $4,825,000 pursuant to Paragraph 4.4, then each
balance in the schedule below shall be reduced by multiplying each figure by
the ratio of the adjusted beginning balance to $4,825,000.
<TABLE>
<CAPTION>
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
Unamortized Unamortized Unamortized Unamortized
Month Balance Month Balance Month Balance Month Balance
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $4,775,143 46 $4,117,294 91 $3,180,833 136 $1,847,763
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
2 4,762,906 47 4,099,874 92 3,156,035 137 1812463
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
3 4,750,572 48 4,082,317 93 3,131,042 138 1776885
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
4 4,738,141 49 4,064,621 94 3,105,853 139 1741027
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
5 4,725,613 50 4,046,786 95 3,080,464 140 1704886
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
6 4,712,985 51 4,028,811 96 3,054,876 141 1668461
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
7 4,700,258 52 4,010,694 97 3,029,086 142 1631748
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
8 4,687,431 53 3,992,434 98 3,003,093 143 1594747
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
9 4,674,503 54 3,974,031 99 2,976,895 144 1557453
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
10 4,661,473 55 3,955,482 100 2,950,491 145 1519866
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
11 4,648,340 56 3,936,787 101 2,923,878 146 1481983
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
12 4,635,104 57 3,917,945 102 2,897,056 147 1443802
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
13 4,621,763 58 3,898,955 103 2,870,023 148 1405319
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
14 4,608,318 59 3,879,815 104 2,842,777 149 1366534
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
15 4,594,766 60 3,860,524 105 2,815,316 150 1327443
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
16 4,581,108 61 3,841,081 106 2,787,639 151 1288044
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
17 4,567,342 62 3,821,485 107 2,759,743 152 1248334
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
18 4,553,468 63 3,801,735 108 2,731,628 153 1208312
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
19 4,539,484 64 3,781,829 109 2,703,292 154 1167974
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
20 4,525,390 65 3,761,766 110 2,674,732 155 1127319
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
21 4,511,185 66 3,741,545 111 2,645,947 156 1086343
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
22 4,496,869 67 3,721,165 112 2,616,936 157 1045045
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
23 4,482,439 68 3,700,624 113 2,587,696 158 1003421
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
24 4,467,896 69 3,679,922 114 2,558,225 159 961469
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
25 4,453,238 70 3,659,056 115 2,528,522 160 919187
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
26 4,438,465 71 3,638,026 116 2,498,586 161 876571
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
27 4,423,575 72 3,616,830 117 2,468,413 162 833620
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
28 4,408,568 73 3,595,467 118 2,438,003 163 790330
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
29 4,393,443 74 3,573,936 119 2,407,353 164 746700
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
30 4,378,199 75 3,552,236 120 2,376,462 165 702726
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
31 4,362,834 76 3,530,364 121 2,345,327 166 658405
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
32 4,347,349 77 3,508,320 122 2,313,947 167 613735
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
33 4,331,741 78 3,486,103 123 2,282,320 168 568713
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
34 4,316,011 79 3,463,710 124 2,250,444 169 523337
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
35 4,300,156 80 3,441,141 125 2,218,317 170 477603
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
36 4,284,177 81 3,418,394 126 2,185,936 171 431508
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
37 4,268,072 82 3,395,468 127 2,153,300 172 385051
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
38 4,251,840 83 3,372,362 128 2,120,408 173 338227
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
39 4,235,480 84 3,349,073 129 2,087,256 174 291035
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
40 4,218,991 85 3,325,601 130 2,053,843 175 243471
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
41 4,202,372 86 3,301,944 131 2,020,166 176 195532
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
42 4,185,622 87 3,278,100 132 1,986,225 177 147215
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
43 4,168,741 88 3,254,069 133 1,952,016 178 98518
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
44 4,151,726 89 3,229,848 134 1,917,537 179 49437
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
45 4,134,578 90 3,205,437 135 1,882,787 180 nm
- -------- ------------ ------- ------------- ------- ------------- ------- --------------
</TABLE>
54
<PAGE>
EXHIBIT I
---------
NON-OFFICE MEZZANINES
55
<PAGE>
Exhibit 12.1
LEINER HEALTH PRODUCTS INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE
30,
FISCAL YEARS ENDED MARCH 31, ----------------------------------
------------------------------------------------------------------
UNAUDITED UNAUDITED
PRO FORMA 1997
1993(1) 1994 1995 1996 1997 1997(2) 1996 1997 PRO FORMA
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income (loss)......... $ (1,119) $ 3,417 $ 3,813 $ 1,166 $ 7,638 $ (2,626) $ 119 $ (12,183) $ (2,431)
Extraordinary item........ -- -- -- -- 2,756 2,756 -- 1,109 1,109
Income taxes.............. 955 3,573 3,524 4,686 8,028 1,669 92 (7,105) (604)
Fixed charges............. 7,184 8,627 10,863 11,484 9,866 24,980 2,544 2,222 6,238
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
Earnings................ $ 7,020 $ 15,617 $ 18,200 $ 17,336 $ 28,288 $ 26,779 $ 2,755 $ (15,957) $ 4,312
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
Fixed charges:
Interest expense.......... $ 5,921 $ 7,144 $ 9,010 $ 9,924 $ 8,281 $ 23,368 $ 2,152 $ 1,800 $ 5,816
Interest portion of rent
expense................. 1,263 1,483 1,853 1,560 1,585 1,612 392 422 422
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
Total fixed charges..... $ 7,184 $ 8,627 $ 10,863 $ 11,484 $ 9,866 $ 24,980 $ 2,544 $ 2,222 $ 6,238
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
Ratio of earnings to fixed
charges(3).............. 1.0 1.8 1.7 1.5 2.9 1.1 1.1 (7.2) 0.7
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
--------- --------- --------- --------- --------- ----------- --------- ---------- -----------
</TABLE>
- ------------------------
(1) The computation of ratio of earnings to fixed charges for the fiscal year
ended March 31, 1993 represents the results of operations of LHP, the
results of operations for XCEL from the date of its acquisition, and
purchase accounting for the acquisitions of LHP and XCEL during that fiscal
year. See "The Company."
(2) On January 30, 1997, the Company purchased Vita Health. This column gives
effect to the acquisition of Vita Health, as well as the Recapitalization
and related transactions. See "Unaudited Pro Forma Financial Information."
The Vita Health acquisition was accounted for under the purchase method of
accounting. Consequently, the results of operations of Vita Health were
included in the consolidated financial results of the Company for the two
months ended March 31, 1997. The pro forma column includes the operating
results of Vita Health for the additional ten months ended January 30, 1997.
(3) In calculating the ratio of earnings to fixed charges, earnings consist of
income before taxes plus fixed charges. Fixed charges consist of interest
expense and amortization of deferred financing fees, whether capitalized or
expensed, plus one-third of rental expense under operating leases (the
portion that has been deemed by the Company to be representative of an
interest factor).
<PAGE>
EXHIBIT 12.2
LEINER HEALTH PRODUCTS INC.
COMPUTATION OF EBITDA TO INTEREST EXPENSE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
THREE
MONTHS
ENDED
JUNE 30,
FISCAL YEARS ENDED MARCH 31, (UNAUDITED)
------------------------------------------------------- ---------
1993(1) 1994 1995 1996 1997(2) 1996
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).......................................... $ (1,119) $ 3,417 $ 3,813 $ 1,166 $ 7,638 $ 119
Add back:
Interest expense, net.................................... 5,921 7,144 9,010 9,924 8,281 23,368
Income taxes............................................. 955 3,573 3,524 4,686 8,028 92
Depreciation and amortization............................ 4,586 7,247 10,514 12,288 12,309 2,867
Extraordinary item....................................... -- -- -- -- 2,756 --
Compensation related to stock options.................... 1,093 264 132 132 99 33
Impairment and closure of facility....................... -- -- -- 4,730 1,416 --
Other non-cash charges................................... -- 1,753 -- -- 18 --
----------- --------- --------- --------- --------- ---------
Subtotal................................................. 12,555 19,981 23,180 31,760 30,446 5,144
----------- --------- --------- --------- --------- ---------
EBITDA(3).................................................. $ 11,436 $ 23,398 $ 26,993 $ 32,926 $ 38,084 $ 5,263
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Interest expense, net(3)................................... $ 5,921 $ 7,144 $ 9,010 $ 9,924 $ 8,281 $ 2,152
Less amortization of deferred financing charges............ -- -- 184 212 239 59
----------- --------- --------- --------- --------- ---------
Adjusted interest expense, net............................. $ 5,921 $ 7,144 $ 8,826 $ 9,712 $ 8,042 $ 2,093
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
Ratio of EBITDA to interest expense........................ 1.9 3.3 3.1 3.4 4.7 2.5
----------- --------- --------- --------- --------- ---------
----------- --------- --------- --------- --------- ---------
<CAPTION>
1997
---------
<S> <C>
Net income (loss).......................................... $ (12,183)
Add back:
Interest expense, net.................................... 2,152
Income taxes............................................. (7,105)
Depreciation and amortization............................ 3,066
Extraordinary item....................................... 1,109
Compensation related to stock options.................... 8,300
Impairment and closure of facility....................... --
Other non-cash charges................................... --
---------
Subtotal................................................. 7,170
---------
EBITDA(3).................................................. $ (5,013)
---------
---------
Interest expense, net(3)................................... $ 1,800
Less amortization of deferred financing charges............ 66
---------
Adjusted interest expense, net............................. $ 1,734
---------
---------
Ratio of EBITDA to interest expense........................ (2.9)
---------
---------
</TABLE>
- ------------------------
(1) The computation of EBITDA to interest expense for the fiscal year ended
March 31, 1993 represents the results of operations of LHP, the results of
operations for XCEL from the date of its acquisition, and purchase
accounting for the acquisitions of LHP and XCEL during that fiscal year. See
"The Company."
(2) On January 30, 1997, the Company purchased Vita Health. The Vita Health
acquisition was accounted for under the purchase method of accounting.
Consequently, the results of operations of Vita Health were included in the
consolidated financial results of the Company for the two months ended March
31, 1997..
(3) For purposes of calculating the ratio of EBITDA to interest expense,
interest expense excludes the amortization of deferred financing fees, which
is included in interest expense in the income statement in the audited
consolidated financial statements.
"EBITDA," as presented, represents earnings before interest expense, income
taxes, depreciation and amortization and other non-cash charges, consisting
of (i) the write off of deferred financing charges, net of income taxes,
included as an extraordinary item in the statements of operations for fiscal
1997 and the first quarter of fiscal 1998, (ii) the non-cash stock
compensation charges, including that which was recorded in connection with
the Recapitalization, (iii) expenses related to the impairment and closure
of the OTC liquid pharmaceuticals manufacturing facility in fiscal 1996 and
1997, and (iv) other non-cash charges in fiscal 1994 and fiscal 1997.
Although EBITDA (as well as related EBITDA ratios) is a non-GAAP
measurement, EBITDA, EBITDA margin, the ratio of total debt to EBITDA and
the ratio of EBITDA to interest expense are included because management
understands that such information is considered by certain investors to be
an additional basis for evaluating the Company's ability to pay interest,
repay debt and make capital expenditures. EBITDA should not be considered an
alternative to measures of operating performance as determined in accordance
with generally accepted accounting principles, including net income as a
measure of the Company's operating results and cash flows as a measure of
the Company's liquidity. Because EBITDA is not calculated identically by all
companies, the presentation herein may not be comparable to other similarly
titled measures of other companies.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Historical and Pro Forma Financial Data," "Selected Historical and Pro Forma
Financial Information" and "Experts" and to the use of our reports dated April
25, 1997 in Amendment No. 2 to the Registration Statement (Form S-4 No.
333-33121) and related Prospectus of Leiner Health Products Inc. for the
registration of $85,000,000 of its Senior Subordinated Notes due 2007.
ERNST & YOUNG LLP
Orange County, California
November 3, 1997
<PAGE>
Exhibit 99.1
[FORM OF LETTER OF TRANSMITTAL]
LEINER HEALTH PRODUCTS INC.
Offer to Exchange its 9 5/8% Senior Subordinated Notes
due 2007 ("New Notes"), which have been registered under the
Securities Act, for any and all outstanding 9 5/8% Senior Subordinated Notes
due 2007 ("Existing Notes"), pursuant to the Prospectus dated , 1997
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
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1997 OR SUCH LATER DATE AND TIME TO WHICH THE EXCHANGE OFFER MAY BE EXTENDED
(THE "EXPIRATION DATE"). TENDERS MAY BE WITHDRAWN PRIOR TO THE EXPIRATION
DATE.
To: United States Trust Company of New York, Exchange Agent
By Mail: By Facsimile:
United States Trust Company of New York (212) 780-0592
P.O. Box 843, Cooper Station (For Eligible Institutions Only)
New York, New York 10276 Attention: Customer Service
Attention: Corporate Trust Services Confirm by Telephone to:
(800) 548-6565
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By Hand Before 4:30 p.m.: By Overnight Courier and By Hand after 4:30 p.m.:
United States Trust Company of New York United States Trust Company of New York
111 Broadway 770 Broadway, 13th Floor
New York, New York 10006 New York, New York 10003
Attention: Lower Level Corporate Trust Window
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For Information Call:
(800) 548-6565
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER
THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING ANY BOX BELOW
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List below the Existing Notes to which this Letter of Transmittal
relates. If the space provided below is inadequate, the certificate
number(s) and principal amount of Existing Notes should be listed on a
separate signed schedule affixed hereto.
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Description of Existing Notes
Tendered (1) (2) (3) (4)
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Principal Amount of
Aggregate Existing Notes Tendered
Principal Aggregate Principal in Exchange for
Name(s) and Address(es) of Certificate Amount of Amount of Existing certificated New
Registered Holder(s) Numbers(s)* Existing Notes Notes Tendered** Notes***
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* Need not be completed by book-entry holders.
** Unless otherwise indicated in this column, the holder will be deemed to
have tendered the full aggregate principal amount represented by such
Existing Notes.
*** Unless otherwise indicated, the holder will be deemed to have tendered
Existing Notes in exchange for a beneficial interest in one or more fully
registered global notes, which will be deposited with, or on behalf of,
The Depository Trust Company ("DTC") and registered in the name of Cede &
Co., its nominee.
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The undersigned acknowledges that he, she or it has received and
reviewed the Prospectus, dated , 1997 (the "Prospectus"), of
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Leiner Health Products Inc., a Delaware corporation ("LHP"), and this Letter
of Transmittal (the "Letter of Transmittal"), which together constitute LHP's
offer (the "Exchange Offer") to exchange up to $85,000,000 aggregate
principal amount of its New Notes, which will have been registered under the
Securities Act of 1933, as amended (the "Securities Act") for a like
principal amount of its outstanding Existing Notes. The New Notes and the
Existing Notes are collectively referred to as the "Notes." Capitalized
terms used but not defined herein have the meanings ascribed to them in the
Prospectus.
This Letter of Transmittal is to be used if (i) certificates of
Existing Notes are to be forwarded herewith (ii) delivery of Existing Notes
is to be made by book-entry transfer to an account maintained by the Exchange
Agent at DTC, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering" in the Prospectus or (iii) the Existing
Notes are tendered according to the guaranteed delivery procedures set forth
in "The Exchange Offer--Guaranteed Delivery Procedures" in the Prospectus.
Delivery of this Letter of Transmittal and any other required documents
should be made to the Exchange Agent. Delivery of documents to a book-entry
transfer facility does not constitute delivery to the Exchange Agent.
Holders whose Existing Notes are not immediately available or who
cannot deliver their Existing Notes and all other documents required hereby
to the Exchange Agent on or prior to the Expiration Date must tender their
Existing Notes according to the guaranteed delivery procedure set forth in
the Prospectus under the caption "The Exchange Offer--Procedures for
Tendering." See Instruction 1. Holders of Existing Notes that are tendering
by book-entry transfer to the Exchange Agent's account at DTC can execute the
tender through the DTC Automated Tender Offer Program ("ATOP") for which the
transaction will be eligible. DTC participants should transmit their
acceptance to DTC, which will verify the acceptance and execute a book-entry
delivery to the Exchange Agent's account at DTC. DTC will then send an
Agent's Message (as defined in the Prospectus) to the Exchange Agent for its
acceptance. DTC participants may also accept the Exchange Offer by
submitting a notice of guaranteed delivery through ATOP.
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED
HEREWITH TO THE EXCHANGE AGENT IN EXCHANGE FOR CERTIFICATED
NEW NOTES.
Unless the undersigned (i) has completed item (4) in the box entitled
"Description of Existing Notes Tendered" and (ii) has checked the box above,
the undersigned will be deemed to have tendered Existing Notes in exchange
for a beneficial interest in one or more fully registered global
certificates, which will be deposited with, or on behalf of, DTC and
registered in the name of Cede & Co., its nominee. Beneficial interests in
such registered global certificates will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its
participants. See "Description of the New Notes -- Book-Entry, Delivery and
Form" as set forth in the Prospectus.
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY
BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE
EXCHANGE AGENT WITH A BOOK-ENTRY TRANSFER FACILITY AND
COMPLETE THE FOLLOWING:
Name of Tendering Institution / / The Depository Trust Company
---------------
Account Number
---------------------------------------------------------------
Transaction Code Number
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/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO
THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
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Window Ticket Number (if any)
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Date of Execution of Notice of Guaranteed Delivery
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Name of Eligible Institution that Guaranteed Delivery
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If delivered by book-entry transfer:
Account Number Transaction Code Number
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/ / CHECK HERE IF YOU (I) ARE A BROKER-DEALER (II) WISH TO RECEIVE
10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS MADE THERETO, (III) WILL RECEIVE NEW
NOTES FOR YOUR OWN ACCOUNT IN EXCHANGE FOR EXISTING NOTES THAT
WERE ACQUIRED AS A RESULT OF MARKET MAKING ACTIVITIES OR OTHER
TRADING ACTIVITIES AND
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(IV) ACKNOWLEDGE THAT YOU WILL DELIVER THE PROSPECTUS IN
CONNECTION WITH ANY RESALE OF SUCH NEW NOTES (BY SO ACKNOWLEDGING
AND DELIVERING THE PROSPECTUS, YOU WILL NOT, HOWEVER, BE DEEMED TO
ADMIT THAT YOU ARE AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT).
Name
Address
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PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to conditions of the Exchange Offer
described herein and in the Prospectus, the undersigned hereby tenders to LHP
the aggregate principal amount of Existing Notes indicated above. Subject
to, and effective upon, the acceptance for exchange of Existing Notes
tendered hereby, the undersigned hereby sells, assigns and transfers to, or
upon the order of, the Exchange Agent, as agent of LHP, all right, title and
interest in and to such Existing Notes as are being tendered hereby, and
irrevocably constitutes and appoints the Exchange Agent as the true and
lawful agent and attorney-in-fact of the undersigned to cause the Existing
Notes tendered hereby to be transferred and exchanged.
The undersigned hereby represents and warrants that the undersigned
has full power and authority to tender, exchange, sell, assign and transfer
the Existing Notes tendered hereby and to acquire the New Notes issuable upon
the exchange of such tendered Existing Notes, and that the Exchange Agent, as
agent of LHP, will acquire good and unencumbered title thereto, free and
clear of all liens, restrictions, charges and encumbrances and not subject to
any adverse claim when the same are accepted by the Exchange Agent, as agent
of LHP. The undersigned will, upon request, execute and deliver any
additional documents deemed by LHP or the Exchange Agent to be necessary or
desirable to complete the exchange, sale, assignment and transfer of the
Existing Notes tendered hereby.
The undersigned also acknowledges that this Exchange Offer is being
made in reliance on the interpretations of the staff of the Securities and
Exchange Commission (the "SEC"), as set forth in no-action letters issued to
third parties (including Exxon Capital Holdings Corporation (available May
13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991), K-III
Communications Corporation (available May 14, 1993) and Shearman & Sterling
(available July 2, 1993)). Based on such interpretations of the staff of the
SEC set forth in such no-action letters, LHP believes that the New Notes
issued in exchange for the Existing Notes pursuant to the Exchange Offer may
be offered for resale, resold and otherwise transferred by a holder thereof
(other than any such holder that is an "affiliate" of LHP within the meaning
of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that (i) such New Notes are acquired in the ordinary course of such
holder's business, (ii) at the time of the commencement of the Exchange Offer
such holder has no arrangement with any person to participate in a
distribution of the New Notes and (iii) such holder is not engaged in, and
does not intend to engage in and does not have an understanding or
arrangement with any person to engage in a distribution of the New Notes.
LHP has not sought, and does not intend to seek, a no-action letter from the
SEC with respect to the effects of the Exchange Offer, and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the New Notes as it has in such no-action letters.
By tendering Existing Notes in exchange for New Notes or executing
this Letter of Transmittal, each holder will represent to LHP that: (i) it
is not such an affiliate of LHP, (ii) any New Notes to be received by it will
be acquired in the ordinary course of business and (iii) at the time of the
commencement of the Exchange Offer it had no arrangement with any person to
participate in a distribution of the New Notes. If the undersigned is not a
broker-dealer or is a broker-dealer but will not receive New Notes for its
own account in exchange for Existing Notes, the undersigned represents that
it is not engaged in, and does not intend to engage in, a distribution
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of New Notes. If the undersigned is not a broker-dealer or is a
broker-dealer but will not receive New Notes for its own account in exchange
for Existing Notes, the undersigned represents that it is not engaged in, and
does not intend to engage in, a distribution of New Notes. If a holder of
Existing Notes is unable to make the foregoing representations, such holder
may not rely on the applicable interpretations of the staff of the SEC and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction unless
such sale is made pursuant to an exemption from such requirements.
If the undersigned is a broker-dealer that will receive New Notes
for its own account in exchange for Existing Notes, where such Existing Notes
were acquired as a result of market-making activities or other trading
activities, by tendering Existing Notes in exchange for New Notes or
executing this Letter of Transmittal the undersigned acknowledges that it
will deliver a prospectus meeting the requirements of the Securities Act and
that it has not entered into any arrangement or understanding with LHP or an
affiliate of LHP in connection with any resale of such New Notes; however, by
so acknowledging and by delivering a prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. The SEC has taken the position that such broker-dealers may
fulfill their prospectus delivery requirements with respect to the New Notes
(other than a resale of New Notes received in exchange for an unsold
allotment from the original sale of the Existing Notes) with the Prospectus.
The Prospectus, as it may be amended or supplemented from time to time, may
be used by such broker-dealers for a period of time, starting on the
Expiration Date and ending on the close of business 180 days after the
Expiration Date in connection with the sale or transfer of such New Notes.
LHP has agreed that, for such period of time, it will make the Prospectus (as
it may be amended or supplemented) available to a broker-dealer which, with
LHP's prior written consent, makes a market in the Existing Notes and
receives New Notes pursuant to the Exchange Offer (each a "Participating
Broker-Dealer") for use in connection with any resale of such New Notes. By
accepting the Exchange Offer, each broker-dealer that receives New Notes
pursuant to the Exchange Offer acknowledges and agrees to notify LHP prior to
using the Prospectus in connection with the sale or transfer of New Notes and
that, upon receipt of notice from LHP of the happening of any event which
makes any statement in the Prospectus untrue in any material respect or which
requires the making of any changes in the Prospectus in order to make the
statements therein not misleading, such broker-dealer will suspend use of the
Prospectus until (i) LHP has amended or supplemented the Prospectus to
correct such misstatement or omission and (ii) either LHP has furnished
copies of the amended or supplemented Prospectus to such broker-dealer or, if
LHP has not otherwise agreed to furnish such copies and declines to do so
after such broker-dealer so requests, such broker-dealer has obtained a copy
of such amended or supplemented Prospectus as filed with the SEC. LHP agrees
to deliver such notice and such amended or supplemented Prospectus promptly
to any Participating Broker-Dealer that has so notified LHP. Except as
described above, the Prospectus may not be used for or in connection with an
offer to resell, a resale or any other retransfer of New Notes. A
broker-dealer that acquired Existing Notes in a transaction other than as
part of its market-making activities or other trading activities will not be
able to participate in the Exchange Offer.
If the undersigned is not a broker dealer, by accepting the
Exchange Offer, the undersigned represents to LHP that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of such holder's business, (ii) such holder is not participating in,
does not intend to participate in and has no arrangement or understanding
with any person to participate in the distribution of such New Notes and
(iii) such holder is not an "affiliate," as defined in Rule 405 under the
Securities Act, of LHP or if such holder is such an affiliate, such
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holder will comply with the registration and prospectus delivery requirements
of the Securities Act to the extent applicable.
All authority conferred or agreed to be conferred in this Letter of
Transmittal and every obligation of the undersigned hereunder shall be
binding upon the successors, assigns, heirs, executors, administrators,
trustees in bankruptcy and legal representatives of the undersigned and shall
not be affected by, and shall survive, the death or incapacity of the
undersigned. This tender may be withdrawn only in accordance with the
procedures set forth in the instructions contained in this Letter of
Transmittal.
The undersigned understands that tenders of the Existing Notes
pursuant to any one of the procedures described under "The Exchange
Offer--Procedures for Tendering" in the Prospectus and in the instructions
hereto will constitute a binding agreement between the undersigned and LHP in
accordance with the terms and subject to the conditions of the Exchange Offer.
The undersigned understands that if its Existing Notes are accepted
for exchange, interest on the New Notes will accrue from the last interest
payment date on which interest was paid on the Existing Notes surrendered in
exchange thereof, or if no interest has been paid, from the original date of
issuance of the Existing Notes.
The undersigned recognizes that unless the holder of Existing Notes
(i) completes item (4) of the Box entitled "Description of Existing Notes
Tendered" above and (ii) checks the box entitled "Check here if tendered
shares of Existing Notes are being delivered to the Exchange Agent in
exchange for certificated New Notes" above, such holder, when tendering such
Existing Notes, will be deemed to have tendered such Existing Notes in
exchange for a beneficial interest in one or more fully registered global
certificates, which will be deposited with, or on behalf of, DTC and
registered in the name of Cede & Co., its nominee. Beneficial interests in
such registered global certificates will be shown on, and transfers thereof
will be effected only through, records maintained by DTC and its
participants. See "The Exchange Offer -Book-Entry Transfer" in the
Prospectus.
The undersigned recognizes that, under certain circumstances set
forth in the Prospectus under "The Exchange Offer--Conditions," LHP may not
be required to accept for exchange any of the Existing Notes tendered.
Existing Notes not accepted for exchange or withdrawn will be returned to the
undersigned at the address set forth below unless otherwise indicated under
"Special Delivery Instructions" below.
The undersigned acknowledges that by tendering the Existing Notes
pursuant to any one of the procedures described under "The Exchange
Offer--Procedures for Tendering" in the Prospectus and in the instructions
hereto, the undersigned agrees that once the Exchange Offer is consummated,
LHP shall not be obligated to file or prepare a Shelf Registration Statement
(as defined in the Registration Rights Agreement, dated as of June 30, 1997,
as amended (the "Registration Rights Agreement"), among Leiner Health
Products Group Inc., LHP and the Initial Purchasers, or take any other action
provided in Sections 2 or 3 of the Registration Rights Agreement with respect
to a Shelf Registration Statement, and the undersigned hereby waives any
requirement of the Registration Rights Agreement that LHP files, prepares or
takes any other action relating to a Shelf Registration Statement once the
Exchange Offer is consummated.
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All questions as to the validity, form, eligibility (including time
of receipt) and withdrawal or acceptability of any tender will be determined
by LHP, in its sole discretion, which determination will be final and
binding. LHP reserves the absolute right to reject any and all Existing
Notes not properly tendered or any Existing Notes which, if accepted, would,
in the opinion of counsel for LHP, be unlawful. LHP also reserves the
absolute right to waive any irregularities or conditions of tender as to
particular Existing Notes. LHP'S interpretation of the terms and conditions
of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Existing Notes must
be cured within such time as LHP shall determine. Neither LHP, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Existing Notes, nor
shall any of them incur any liability for failure to give such notification.
Tenders of Existing Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Existing Notes received by the
Exchange Agent that is not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost to
such holder by the Exchange Agent, unless otherwise provided in this Letter
of Transmittal, as soon as practicable following the Expiration Date.
Unless otherwise indicated herein in the box entitled "Special
Issuance Instructions" below, the undersigned hereby requests that the New
Notes (and, if applicable, substitute certificates representing Existing
Notes for any Existing Notes not exchanged) be issued in the name of the
undersigned. Similarly, unless otherwise indicated under the box entitled
"Special Delivery Instructions" below, the undersigned hereby requests that
the New Notes (and, if applicable, substitute certificates representing
Existing Notes for any Existing Notes not exchanged) be sent to the
undersigned at the address shown above in the box entitled "Description of
Existing Notes Tendered."
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF
EXISTING NOTES TENDERED" ABOVE AND SIGNING THIS LETTER, WILL BE DEEMED TO
HAVE TENDERED THE EXISTING NOTES AS SET FORTH IN SUCH BOX(ES) ABOVE.
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/ PLEASE SIGN HERE /
/ (TO BE COMPLETED BY ALL TENDERING HOLDERS) /
/ (Complete Accompanying Substitute Form W-9) /
/ /
/ /
/ X /
/ ----------------------------- ----------------------------- /
/ /
/ X /
/ ----------------------------- ----------------------------- /
/ Signature(s) of Owner(s) Date /
/ /
/ Area Code and Telephone Number /
/ ----------------------------- /
/ /
/ If a holder is tendering any Existing Notes, this Letter of /
/ Transmittal must be signed by the registered holders(s) as the /
/ name(s) appear(s) on the certificate(s) for the Existing Notes or /
/ by any person(s) authorized to become registered holders(s) by /
/ endorsements and documents transmitted herewith. If signature is /
/ by a trustee, executor, administrator, guardian, officer or other /
/ person acting in a fiduciary or representative capacity, please set /
/ forth full title below. See Instruction 3. /
/ /
/ /
/ Name(s): /
/ --------------------------------------------- /
/ /
/ ------------------------------------------------------ /
/ (Please Type or Print) /
/ /
/ Capacity: /
/ ------------------------------------------- /
/ /
/ Address: /
/ ------------------------------------------- /
/ /
/ ------------------------------------------------------ /
/ (Include Zip Code) /
/ /
/ /
/ SIGNATURE GUARANTEE /
/ (If required by Instruction 3) /
/ /
/ /
/ Signature(s) Guaranteed by /
/ an Eligible Institution: /
/ ---------------------------- /
/ (Authorized Signature) /
/ /
/ /
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/--------------------------------/ /---------------------------------/
/ SPECIAL ISSUANCE INSTRUCTIONS / / SPECIAL DELIVERY INSTRUCTIONS /
/ (See Instructions 3, 4, and 6) / / (See Instructions 3, 4, and 6) /
/ / / /
/ To be completed ONLY if / / To be completed ONLY if /
/ New Notes (and, if applicable, / / certificates for New Notes /
/ substitute certificates / / (and, if applicable, substitute /
/ representing Existing Notes / / certificates representing /
/ for any Existing Notes not / / Existing Notes for any Existing /
/ exchanged) are to be issued in / / Notes not exchanged) are to be /
/ the name of and sent to / / sent to someone other than the /
/ someone other than the person / / person or persons whose /
/ or persons whose signature(s) / / signature(s) appear(s) on this /
/ appear(s) on this Letter of / / Letter of Transmittal above or /
/ Transmittal above. / / to such person or persons at an /
/ / / address other than shown in the /
/ Issue New Notes to: / / box entitled "Description of /
/ / / Existing Notes Tendered" on this/
/ Name(s): / / Letter of Transmittal above. /
/ ---------------- / / /
/ / / Mail New Notes to: /
/ ---------------------- / / /
/ (Please Type or Print) / / Name(s): /
/ / / ---------------------- /
/ ---------------------- / / /
/ (Please Type or Print) / / ---------------------- /
/ / / (Please Type or Print) /
/ Address: / / /
/ ---------------- / / ---------------------- /
/ / / (Please Type or Print) /
/ ---------------------- / / /
/ (Zip Code) / / Address): /
/ / / --------------- /
/ / / /
/ (Complete Subsitutue Form W-9) / / ---------------------- /
/ / / (Zip Code) /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/ / / /
/--------------------------------/ /---------------------------------/
IMPORTANT: UNLESS GUARANTEED DELIVERY PROCEDURES ARE COMPLIED
WITH, THIS LETTER OF TRANSMITTAL OR A FACSIMILE HEREOF (TOGETHER WITH THE
CERTIFICATE(S) FOR EXISTING NOTES OR A CONFIRMATION OF BOOK-ENTRY TRANSFER OF
SUCH EXISTING NOTES AND ALL OTHER REQUIRED DOCUMENTS) MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION
DATE.
<PAGE>
TO BE COMPLETED BY ALL TENDERING HOLDERS
(See Instruction 5)
PAYOR'S NAME: LEINER HEALTH PRODUCTS INC.
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SUBSTITUTE Part I--Taxpayer Identification Number
Form W-9 Enter your taxpayer identification number in the
Department of the Treasury appropriate box. For most individuals, this is your
Internal Revenue Service social security number. If you do not have a number, ------------------------------
see how to obtain a "TIN" in the enclosed Guidelines. Social Security Number
NOTE: If the account is in more than one name, see OR
the chart on page 2 of the enclosed Guidelines to
determine what number to give. ------------------------------
Employer Identification Number
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Part II--For Payees Exempt from Backup Withholding (See enclosed Guidelines)
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Payor's Request for Taxpayer CERTIFICATION--UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT:
Identification Number (TIN)
and Certification (1) the number shown on this form is my correct Taxpayer Identification Number (or I am
waiting for a number to be issued to me), and
(2) I am not subject to backup withholding either because I have not been notified by
the Internal Revenue Service (the "IRS") that I am subject to backup withholding as
a result of a failure to report all interest or dividends or the IRS has notified
me that I am no longer subject to backup withholding.
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SIGNATURE_____________________________________________ DATE___________________________
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Certification Guidelines--You must cross out item (2) of the above certification if you have been notified by the IRS that
you are subject to backup withholding because of underreporting of interest or dividends on your tax return. However, if
after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS
that you are no longer subject to backup withholding, do not cross out item (2).
- ---------------------------------------------------------------------------------------------------------------------------
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CERTIFICATION OF PAYEE AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify, under penalties of perjury, that a Taxpayer
Identification Number has not been issued to me, and that I mailed
or delivered an application to receive a Taxpayer Identification
Number to the appropriate Internal Revenue Service Center or Social
Security Administration Office (or I intend to mail or deliver an
application in the near future). I understand that if I do not
provide a Taxpayer Identification Number to the payer, 31 percent
of all payments made to me on account of the New Preferred Stock
shall be retained until I provide a Taxpayer Identification Number
to the payer and that, if I do not provide my Taxpayer
Identification Number within sixty (60) days, such retained amounts
shall be remitted to the Internal Revenue Service as backup
withholding and 31 percent of all reportable payments made to me
thereafter will be withheld and remitted to the Internal Revenue
Service until I provide a Taxpayer Identification Number.
SIGNATURE___________________________ DATE___________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU ON
ACCOUNT OF THE NEW NOTES . PLEASE REVIEW THE ENCLOSED
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Exchange Offer
1. Delivery of this Letter of Transmittal and Existing Notes;
Guaranteed Delivery Procedure
The Letter of Transmittal is to be used to forward, and must accompany,
all certificates representing Existing Notes tendered pursuant to the
Exchange Offer. Certificates representing the Existing Notes in proper form
for transfer (or a confirmation of book-entry transfer of such Existing Notes
into the Exchange Agent's account at the book-entry transfer facility) as
well as a properly completed and duly executed copy of this Letter of
Transmittal and all other documents required by this Letter of Transmittal,
must be received by the Exchange Agent at its address set forth herein prior
to 5:00 p.m., New York City time, on the Expiration Date. Existing Notes
tendered must be in integral multiples of $1,000.
The method of delivery of this Letter of Transmittal, the Existing Notes
and all other required documents, including delivery through DTC and any
acceptance of an Agent's Message delivered through ATOP, is at the election
and risk of the tendering holders, but the delivery will be deemed made only
when actually received or confirmed by the Exchange Agent. If such delivery
is by mail, it is recommended that registered or certified mail properly
insured, with return receipt requested, be used. In all cases, sufficient
time should be allowed to permit timely delivery.
If a holder desires to tender Existing Notes and such holder's Existing
Notes are not immediately available or time will not permit such holder's
Letter of Transmittal, Existing Notes (or a confirmation of book-entry
transfer of Existing Notes into the Exchange Agent's account at the
book-entry transfer facility) or other required documents to reach the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or such holder cannot complete the procedure of book-entry transfer on
a timely basis, such holder may nevertheless tender Existing Notes if:
(a) such tender is made by or through an Eligible Institution
(as defined below);
(b) the Exchange Agent has received from such Eligible Institution
prior to 5:00 p.m., New York City time, on the Expiration Date, a properly
completed and duly executed Letter of Transmittal (or facsimile thereof)
and Notice of Guaranteed Delivery, substantially in the form provided by
LHP (by facsimile transmission, mail or hand delivery), or an Agent's
Message with respect to guaranteed delivery that is accepted by LHP,
setting forth the name and address of the holder of such Existing Notes
and the principal amount of Existing Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York
Stock Exchange ("NYSE") trading days after the execution of the Notice of
Guaranteed Delivery, a Book-Entry Confirmation and any other documents
required by this Letter of Transmittal and the instructions hereto, will
be deposited by such Eligible Institution with the Exchange Agent; and
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(c) a Book-Entry Confirmation and all other required documents
required by the Letter of Transmittal are received by the Exchange Agent
within three NYSE trading days after the Notice of Guaranteed Delivery.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Existing
Notes (or a timely confirmation of a book-entry transfer of Existing Notes
into the Exchange Agent's account at the book-entry transfer facility) or a
Notice of Guaranteed Delivery from an Eligible Institution is received by the
Exchange Agent.
See "The Exchange Offer" in the Prospectus.
2. Withdrawals
Any holder may withdraw a tender of Existing Notes prior to 5:00 p.m.,
New York City time on the Expiration Date. For a withdrawal to be effective,
a written notice of withdrawal must be received by the Exchange Agent prior
to 5:00 p.m., New York City time on the Expiration Date at one of its
addresses set forth herein. Any such notice of withdrawal must specify the
name and number of the account at the Book-Entry Transfer Facility from which
the Existing Notes were tendered, identify the principal amount of the
Existing Notes to be withdrawn, specify the name and number of the account at
the Book-Entry Transfer Facility to be credited with the withdrawn Existing
Notes and otherwise comply with the procedures of such facility and state
that such holder is withdrawing its election to have those Existing Notes
exchanged. All questions as to the validity, form and eligibility (including
time of receipt) of such notice will be determined by LHP, whose determination
shall be final and binding on all parties. See "The Exchange Offer--Withdrawal
of Tenders" in the Prospectus. If Existing Notes have been tendered pursuant
to the procedures for book-entry transfer, any notice of withdrawal must
specify the name and number of the participant's account at DTC to be credited
with the withdrawn Existing Notes or otherwise comply with DTC's procedures.
See "The Exchange Offer-Withdrawal of Tenders" in the Prospectus. Properly
withdrawn Existing Notes may be re-tendered by following one of the procedures
described under "the Exchange Offer--Procedures for Tendering" in the
Prospectus.
3. Signatures on this Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures
If this Letter of Transmittal or a notice of withdrawal, as the case may
be, is signed by the registered holder of the Existing Notes tendered hereby,
the signature must correspond exactly with the name as written on the face of
the certificates without any change whatsoever.
If any tendered Existing Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of
this Letter of Transmittal as there are different names in which tendered
Existing Notes are held.
If this Letter of Transmittal or any Existing Notes or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary
or representative capacity, such persons should indicate when signing, and
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unless waived by LHP, proper evidence satisfactory to LHP of their authority
so to act must be submitted.
The signatures on this Letter of Transmittal or a notice of withdrawal,
as the case may be, must be guaranteed unless the Existing Notes surrendered
for exchange pursuant thereto are tendered (i) by a registered holder of the
Existing Notes who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in this Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that the signatures in this Letter of Transmittal or a notice of withdrawal,
as the case may be, are required to be guaranteed, such guarantees must be by
a firm which is a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc., or by a
commercial bank or trust company having an office or correspondent in the
United States, or an "eligible institution" within the meaning of Rule
17Ad-15 of the Securities Exchange Act of 1934, as amended (each an "Eligible
Institution"). If Existing Notes are registered in the name of a person
other than the signer of this Letter of Transmittal, the Existing Notes
surrendered for exchange must be endorsed by, or be accompanied by a written
instrument or instruments of transfer or exchange, in satisfactory form as
determined by LHP in its sole discretion, duly executed by the registered
holder with the signature thereon guaranteed by an Eligible Institution.
4. Special Issuance and Delivery Instructions
Tendering holders of Existing Notes should indicate in the applicable
box the name and address to which New Notes issued pursuant to the Exchange
Offer are to be issued or sent, if different from the name or address of the
person signing this Letter of Transmittal. In the case of issuance in a
different name, the employer identification or social security number of the
person named must also be indicated. If no such instructions are given, any
New Notes will be issued in the name of, and delivered to, the name or
address of the person signing this Letter of Transmittal and any Existing
Notes not accepted for exchange will be returned to the name or address of
the person signing this Letter of Transmittal.
5. Backup Federal Income Tax Withholding and Substitute Form W-9
Under the federal income tax laws, payments that may be made by LHP on
account of New Notes issued pursuant to the Exchange Offer may be subject to
backup withholding at the rate of 31%. In order to avoid such backup
withholding, each tendering holder should complete and sign the Substitute
Form W-9 included in this Letter of Transmittal and either (a) provide the
correct taxpayer identification number ("TIN") and certify, under penalties
of perjury, that the TIN provided is correct and that (i) the holder has not
been notified by the Internal Revenue Service (the "IRS") that the holder is
subject to backup withholding as a result of failure to report all interest
or dividends or (ii) the IRS has notified the holder that the holder is no
longer subject to backup withholding; or (b) provide an adequate basis for
exemption. If the tendering holder has not been issued a TIN and has applied
for one, or intends to apply for one in the near future, such holder should
write "Applied For" in the space provided for the TIN in Part I of the
Substitute Form W-9, sign and date the Substitute Form W-9 and sign the
Certificate of Payee Awaiting Taxpayer Identification Number. If "Applied
For" is written in Part I, LHP (or the Exchange Agent with respect to the New
Notes or a broker or custodian) may still withhold 31% of the amount of any
payments made on account of the New Notes until the holder furnishes LHP (or
the Exchange Agent with respect to the New Notes or a broker or custodian)
with its TIN. In general, if a holder is an individual, the taxpayer
identification number is the Social Security number of
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such individual. If the Exchange Agent or LHP is not provided with the
correct TIN, the holder may be subject to a $50 penalty imposed by the IRS.
Certain holders (including, among others, all corporations and certain
foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, such holder must submit a statement (generally, IRS Form
W-8), signed under penalties of perjury, attesting to that individual's
exempt status. Such statements can be obtained from the Exchange Agent. For
further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a taxpayer
identification number if you do not have one and how to complete the
Substitute Form W-9 if Existing Notes are registered in more than one name),
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
Failure to complete the Substitute Form W-9 will not, by itself, cause
Existing Notes to be deemed invalidly tendered, but may require LHP (or the
Exchange Agent with respect to the New Notes or a broker or custodian) to
withhold 31% of the amount of any payments made on account of the New Notes.
Backup withholding is not an additional federal income tax. Rather, the
federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained from the IRS.
6. Transfer Taxes
LHP will pay all transfer taxes, if any, applicable to the transfer of
Existing Notes to it or its order pursuant to the Exchange Offer. If,
however, New Notes and/or substitute Existing Notes not exchanged are to be
delivered to, or are to be registered or issued in the name of, any person
other than the registered holder of the Existing Notes tendered hereby, or if
tendered Existing Notes are registered in the name of any person other than
the person signing this Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the transfer of Existing Notes to LHP or
its order pursuant to the Exchange Offer, the amount of any such transfer
taxes (whether imposed on the registered holder or any other person) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted herewith, the amount of such
transfer taxes will be billed directly to such tendering holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Existing Notes specified in this
Letter of Transmittal.
7. Waiver of Conditions
LHP reserves the absolute right to waive satisfaction of any or all
conditions enumerated in the Prospectus.
8. No Conditional Tenders
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Existing Notes, by execution of this
Letter of Transmittal, shall waive any right to receive notice of the
acceptance of their Existing Notes for exchange.
LHP nor any other person is obligated to give notice of defects or
irregularities in any tender, nor shall any of them incur any liability for
failure to give any such notice.
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9. Inadequate Space
If the space provided herein is inadequate, the aggregate principal
amount of Existing Notes being tendered and the certificate number or numbers
(if available) should be listed on a separate schedule attached hereto and
separately signed by all parties required to sign this Letter of Transmittal.
10. Mutilated, Lost, Stolen or Destroyed Existing Notes
Any holder whose Existing Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above
for further instructions.
11. Requests for Assistance or Additional Copies
Questions relating to the procedure for tendering, as well as requests
for additional copies of the Prospectus and this Letter of Transmittal, may
be directed to the Exchange Agent at the address and telephone number
indicated above.
12. Validity of Tenders
All questions as to the validity, form, eligibility (including time of
receipt) and withdrawal or acceptability of any tender will be determined by
LHP in its sole discretion, which determination will be final and binding.
LHP reserves the absolute right to reject any and all Existing Notes not
properly tendered or any Existing Notes which, if accepted, would, in the
opinion of counsel for LHP, be unlawful. LHP also reserves the absolute
right to waive any irregularities or conditions of tender as to particular
Existing Notes. LHP's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) will
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Existing Notes must be cured
within such time as LHP shall determine. Neither LHP, the Exchange Agent nor
any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Existing Notes, nor shall any of
them incur any liability for failure to give such notification. Tenders of
Existing Notes will not be deemed to have been made until such irregularities
have been cured or waived. Any Existing Notes received by the Exchange Agent
that is not properly tendered and as to which the defects or irregularities
have not been cured or waived will be returned without cost to such holder by
the Exchange Agent, unless otherwise provided in this Letter of Transmittal,
as soon as practicable following the Expiration Date.
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