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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-52539
OFFER TO EXCHANGE
ALL OUTSTANDING 11% SENIOR NOTES DUE 2008
FOR 11% SENIOR NOTES DUE 2008 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
OF
GLOBAL HEALTH SCIENCES, INC.
THIS EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
SAN FRANCISCO TIME, ON SEPTEMBER 11, 1998, UNLESS EXTENDED.
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Global Health Sciences, Inc., a California corporation (the "Company" or
"Global Health"), hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying Letter of Transmittal (the
"Exchange Offer"), to exchange $1,000 principal amount of its 11% Senior Notes
due 2008 (the "New Notes") which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), for each $1,000 principal amount of
its 11% Senior Notes due 2008 (the "Old Notes"), of which an aggregate principal
amount of $225,000,000 is outstanding as of the date hereof. The Old Notes were
issued and sold (the "Old Notes Offering") in a transaction exempt from the
registration requirements of the Securities Act and may not be offered or sold
in the United States unless so registered or pursuant to an applicable exemption
under the Securities Act.
The form and terms of the New Notes are identical to the form and terms of
the Old Notes except that the New Notes have been registered under the
Securities Act, and will not bear any legends restricting the transfer thereof.
The New Notes will evidence the same debt as the Old Notes and will be issued
pursuant to, and entitled to the benefits of, the Indenture governing the Old
Notes (the "Indenture"). The New Notes will be initially issued as a single,
permanent global certificate. See "Book Entry; Delivery and Form" and
"Description of the New Notes."
The Exchange Offer is being made in order to satisfy certain contractual
obligations of Global Health contained in the Registration Rights Agreement (as
defined herein). Based on no-action letters issued by the staff of the
Securities and Exchange Commission (the "Commission") to third parties, Global
Health believes that the New Notes issued 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 Global Health 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 such New
Notes are acquired in the ordinary course of such holder's business, such holder
is not engaging in and does not intend to engage in a distribution of such New
Notes and such holder has no arrangement or understanding with any person to
participate in the distribution of such New Notes. Any holder who tenders in the
Exchange Offer for the purpose of participating in a distribution of New Notes
cannot rely on such interpretation by 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 transactions. Each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such New
Notes. The letter of transmittal accompanying this Prospectus (the "Letter of
Transmittal") states that, by so acknowledging and by delivering a prospectus
meeting the requirements of the Securities Act, 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 Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Global Health has agreed that, for a period of 180 days after the
Expiration Date (as defined), it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution." There will be no cash proceeds to Global Health from the exchange
pursuant to the Exchange Offer. See "The Exchange Offer" and "Description of the
New Notes." As used herein, the term "Notes" means the Old Notes and the New
Notes treated as a single class.
The New Notes will bear interest from and including their respective dates
of issuance. Holders whose Old Notes are accepted for exchange will receive
accrued interest thereon to, but not including, the date of issuance of such New
Notes, such interest to be payable with the first interest payment on such New
Notes. Holders whose Old Notes are accepted for exchange will not receive any
payment in respect of interest thereon accrued after the issuance of the New
Notes. Global Health will accept for exchange any and all Old Notes validly
tendered and not withdrawn prior to 5:00 p.m., San Francisco time, on September
11, 1998, unless extended (as so extended, the "Expiration Date"). Tenders of
Old Notes may be withdrawn at any time prior to the Expiration Date. The
Exchange Offer is subject to certain customary conditions. See "The Exchange
Offer." The Exchange Offer is not conditioned upon any minimum principal amount
of Old Notes being tendered for exchange.
The New Notes will be general unsecured senior obligations of the Company
and will rank PARI PASSU in right of payment with all other senior indebtedness
of the Company and senior in right of payment to all subordinated indebtedness
of the Company. The Company is a holding company with limited assets, other than
the stock of its subsidiaries, and conducts substantially all of its business
through its subsidiaries. The Old Notes are, and the New Notes will be,
unconditionally guaranteed, jointly and severally (the "Guarantees"), by all of
the Company's existing and future subsidiaries (the "Subsidiary Guarantors").
The Guarantees will be general unsecured obligations of the Subsidiary
Guarantors, will be subordinated in right of payment to all existing and future
Guarantor Senior Debt (as defined herein), including the guarantees to be
delivered by the Subsidiary Guarantors under the Acquisition Facility (as
defined herein), and will rank PARI PASSU in right of payment to all other
senior indebtedness of the Subsidiary Guarantors and senior in right of payment
to all subordinated obligations of the Subsidiary Guarantors. As of March 31,
1998, after giving pro forma effect to the Old Notes Offering, the Acquisition
Facility and the application of the net proceeds therefrom, the Company and the
Subsidiary Guarantors would have had approximately $1.5 million of indebtedness
outstanding other than the Notes and trade payables and undrawn availability of
$48.5 million under the Acquisition Facility which, if drawn, would constitute
outstanding senior indebtedness of the Company and the Subsidiary Guarantors.
See "Capitalization." The Indenture limits the incurrence of Debt (as defined)
and the issuance of Preferred Stock (as defined) by the Company and its
subsidiaries. See "Risk Factors" and "Description of New Notes--Certain
Covenants."
Prior to the Exchange Offer, there has been no public market for the New
Notes. Global Health does not intend to list the New Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system and there can be no assurance that an active public market for the New
Notes will develop.
See "Risk Factors" beginning on Page 18 for a discussion of certain factors
which holders of Old Notes should consider in connection with the Exchange
Offer.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS AUGUST 12, 1998
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NOTICE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact included in this
Prospectus, including without limitation, certain statements under the
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" and located
elsewhere herein regarding the Company's operations, financial position and
business strategy, may constitute forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe" or "continue" or the negative thereof or
variations thereon or similar terminology. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable at
this time, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in conjunction with
the forward-looking statements included in this Prospectus and under "Risk
Factors." All subsequent forward-looking statements attributable to the Company
or persons acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS THE CONTEXT OTHERWISE REQUIRES, AS USED IN THIS PROSPECTUS (I) REFERENCES
TO "GLOBAL HEALTH" OR THE "COMPANY" MEAN GLOBAL HEALTH SCIENCES, INC. AND ITS
SUBSIDIARIES AND (II) ALL INFORMATION CONTAINED HEREIN GIVES EFFECT TO THE
REORGANIZATION (AS DEFINED HEREIN). IN ADDITION TO THE HISTORICAL FINANCIAL
INFORMATION OF D&F INDUSTRIES ("D&F") PRESENTED HEREIN, SUPPLEMENTAL INFORMATION
IS PRESENTED TO REFLECT THE COMBINED HISTORICAL FINANCIAL INFORMATION OF D&F,
WHICH WAS RENAMED GLOBAL HEALTH SCIENCES, INC. IN CONNECTION WITH THE
REORGANIZATION, AND OMNI-PAK AND AFFILIATES (AS DEFINED HEREIN). THE
SUPPLEMENTAL INFORMATION PRESENTS THE COMBINED GROUP'S HISTORICAL OPERATING
RESULTS WHICH, IN THE OPINION OF MANAGEMENT, PROVIDE A MORE MEANINGFUL
REPRESENTATION OF THE UNDERLYING BUSINESS AND CASH FLOWS. THESE ENTITIES
HISTORICALLY OPERATED UNDER COMMON MANAGEMENT AND HAD A HIGH DEGREE OF COMMON
OWNERSHIP, CUSTOMERS AND SYSTEMS, INCLUDING SIMILAR ACCOUNTING AND FINANCIAL
REPORTING SYSTEMS TO MANAGE THE COMBINED ENTERPRISES. STATISTICAL INFORMATION
CONTAINED HEREIN WITH RESPECT TO THE DIETARY AND NUTRITIONAL SUPPLEMENT INDUSTRY
HAS BEEN DERIVED FROM PUBLICLY AVAILABLE SOURCES, INCLUDING PACKAGED FACTS
MARKET INTELLIGENCE REPORTS ("PACKAGED FACTS"), A PUBLICATION WRITTEN BY AN
INDEPENDENT RESEARCH, ADVISORY AND BUSINESS INTELLIGENCE CONSULTING FIRM, WHICH
THE COMPANY HAS NOT INDEPENDENTLY VERIFIED, BUT BELIEVES TO BE RELIABLE.
THE COMPANY
OVERVIEW
The Company is one of the world's leading developers and custom
manufacturers of dietary and nutritional supplements. The Company develops and
manufactures vitamins, minerals, herbs, teas and other supplements in tablet,
capsule and powder form in a variety of shapes, sizes, colors, flavors and
textures designed to meet its customers' specifications. The Company supplies
specialty products for branded distributors, branded retailers, television
marketing companies and network marketing organizations who then distribute
these products around the world. The Company controls the entire development
process for the vast majority of its products from the initial market
identification stage through formulation, manufacturing, label design and
distribution to its customers. The Company believes that it has distinguished
itself during its 20 years in the industry through its ability to develop
products in anticipation of market trends, its superior customer service and its
ability to produce a large variety of high quality products. According to
PACKAGED FACTS, domestic retail sales in the dietary and nutritional supplement
industry reached $6.5 billion in 1996 and are estimated to grow to $12.3 billion
by 2001. The Company believes that it is well positioned to capitalize on this
forecasted growth. For the fiscal year ended December 31, 1997, the Company's
sales increased by 26.1% to $182.4 million from $144.7 million for the same
period in 1996 and EBITDA (as defined herein) increased by 32.7% to $52.7
million from $39.7 million for the same period in 1996. See "Summary Unaudited
Pro Forma Condensed Combined Financial Data" for a discussion of EBITDA. In
addition, the ratio of earnings to fixed charges increased from 75.2x to 88.1x
and cash flows from operations increased 29.1% to $49.0 million in 1997 from
$38.0 million in 1996. Uses of cash flow from investing and financing activities
during the periods presented were principally purchases of equipment of $1.0
million in 1997 and $2.3 million in 1996, and cash dividends paid to
stockholders of $46.0 million in 1997 and $36.7 million in 1996.
During the three months ended March 31, 1998, sales increased 19.7% to $46.8
million from $39.1 million in the same period in 1997, net income increased
12.5% to $11.3 million from $10.1 million in the same period in 1997 and EBITDA
increased by 10.5% to $11.6 million from $10.5 million in the first quarter of
1997. In addition, the ratio of earnings to fixed charges increased to 115x in
the first quarter of 1998 from 101x in the first quarter of 1997 and cash flows
from operations increased 35.7% to $13.8 million from $10.2 million in the same
period in 1997. Uses of cash from investing and financing activities were
principally purchases of equipment of $0.6 million in the first quarter of 1998
and $0.2 million in the first quarter of 1997, and cash dividends paid to
stockholders of $9.8 million in the first quarter of 1998 and $6.0 million in
the first quarter of 1997.
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The Company's products are sold to over 60 customers, including Herbalife
International, Inc. ("Herbalife"), Natural Supplement Association, Inc. d/b/a
Experimental and Applied Sciences ("EAS") and Metagenics, Inc. ("Metagenics"),
who then distribute these products in over 35 countries. Herbalife, the
Company's largest customer, and one of the largest network marketing companies
specializing in a wide range of nutritional, weight management and personal care
products, reported retail sales of approximately $1.5 billion and net sales of
$782.5 million in 1997. For the fiscal year ended December 31, 1997, sales to
Herbalife represented approximately 76% of the Company's total sales. Since
1995, sales to non-Herbalife customers have grown from $14.8 million in 1995 to
$37.8 million in 1996 to $44.8 million in 1997. See "Business--Sales and
Distribution."
COMPETITIVE STRENGTHS
ABILITY TO INTRODUCE NEW AND INNOVATIVE PRODUCTS. A key to the Company's
success has been its ability to quickly develop and market new and innovative
products. The Company believes it has been an industry leader in the
introduction of new products that utilize new scientific and medical findings
and which anticipate customer demand. The Company's seven-member product
development team, led by Mr. Richard D. Marconi, the co-founder and principal
shareholder of the Company, who has over 40 years of experience in the
pharmaceutical and dietary and nutritional supplement industries, keeps abreast
of new developments by maintaining and building its extensive database and
library, reviewing a wide variety of scientific and medical journals and
attending industry seminars and conferences. The Company believes that its
ability to create new products, reformulate existing products and quickly
introduce these products to the marketplace will attract new customers and
places the Company in a position to capitalize on the strong anticipated growth
in the dietary and nutritional supplement industry.
FOCUS ON CUSTOMER SERVICE. The Company believes that its commitment to
customer service is its defining characteristic and has contributed to its
strong and loyal relationships with its customers. The Company's superior level
of customer service includes a flexible and responsive manufacturing process
that can accommodate simultaneous new product launches and unexpected customer
demand. Furthermore, the Company, at a customer's request, will assist such
customer with its foreign regulatory compliance process and coordinate its
global marketing efforts. The Company's ability to design, develop and
manufacture new products has enabled it to be a "one-stop shop" for most of its
customers, alleviating the necessity of current and potential customers to seek
out multiple manufacturers to fulfill all of their product needs. This
capability also creates a synergy between the Company and its customers in the
development and enhancement of a customer's products or product lines. The
Company believes that its high level of customer service is a competitive
advantage and it plans to aggressively market its superior customer service to
attract new customers.
HIGH PRODUCT QUALITY. The Company believes that its products meet the
highest quality standards in the industry. The Company believes that its
knowledge and expertise allow it to operate its manufacturing facilities in a
low-cost, highly efficient manner that provides the Company with a competitive
advantage. Utilizing technologically advanced laboratory equipment, the
Company's products are subject to product quality standards that include testing
each raw material for quality, physical conformity, cleanliness and, in the case
of botanicals, the absence of microorganisms. During the manufacturing process,
each tablet product is periodically tested for hardness, friability, thickness
and weight, and powder products are tested and sampled for proper mix and "taste
and mouth-feel" to ensure correct color and consistency. The Company believes
that these standards, developed over its 20 years in the industry, have earned
the Company a reputation for manufacturing high-quality products.
EXTENSIVE EXPERIENCE WITH START-UPS. Since its inception, the Company has
placed significant emphasis on working with new companies in the dietary and
nutritional supplement industry to develop products and strategies that will
help these companies achieve their goals and will enable the Company to
establish loyal and profitable customer relationships. In 1980, the Company
worked with Herbalife, then a start-up company, to develop products that would
fit Herbalife's long-term objectives. Herbalife is not only the
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Company's largest customer but also one of the largest network marketing
companies in the dietary and nutritional supplement industry. The Company also
worked with EAS when it began operations in 1994 to help the company create
sports nutrition products that would meet EAS's high standards and help EAS
realize its objectives in one of the fastest growing segments in the industry.
For the year ended December 31, 1997, sales to EAS totalled approximately $27.2
million. Through these and other relationships, including manufacturing products
for Rockwood Cosmetics, Bally's Total Fitness and American Health Sciences,
Inc., the Company has developed an expertise in developing and manufacturing
products for start-up companies and other companies attempting to break into the
growing dietary and nutritional supplement industry.
BUSINESS STRATEGY
EXPAND CUSTOMER BASE. The Company intends to increase sales by
significantly expanding its sales force, attracting new customers and developing
other outlets for its products. As the dietary and nutritional supplement
industry grows, the Company plans to take advantage of new opportunities, such
as sales through health maintenance organizations, mail order companies and
increased sales to network marketing organizations. The Company also intends to
expand its presence in the health food/retail market through customers such as
EAS, in the direct television market through customers such as The Good Doctors
and in direct sales to fitness centers through Bally's Total Fitness. Management
also plans to attract new customers in the United States and the growing markets
of Europe, Latin America and Asia.
INCREASE PRODUCTION CAPACITY TO MEET GROWING INDUSTRY DEMAND. According to
estimates by Packaged Facts, the dietary and nutritional supplement industry
will grow at a compound annual growth rate of 13.6% between 1996 and 2001 and
the herbal supplement segment of the industry will grow at a compound annual
growth rate of 16.4% between 1997 and 2002. Management believes that this
projected growth provides the Company with a significant opportunity to increase
sales and profits. The Company plans to make modest capital expenditures to
upgrade its information systems and increase production capacity in order to
address increasing demand. The Company also intends to purchase equipment and
expand its operations to new facilities as necessary to meet this demand.
SUPPLEMENT INTERNAL GROWTH THROUGH STRATEGIC ACQUISITIONS. The dietary and
nutritional supplement industry is highly fragmented and the Company believes
that the industry is in a favorable position for consolidation. Many of the
Company's competitors are private companies that produce and/or distribute only
a single line of products and would complement the Company's current business,
if acquired. Furthermore, as one of the industry's largest developers and
manufacturers of dietary and nutritional supplements, the Company believes that
there are significant opportunities to acquire companies that distribute these
products, many of which are smaller than the Company and lack their own
manufacturing capability. Certain of these companies also have distribution
channels not presently utilized by the Company's larger customers, including
direct mail, direct television marketing and distribution to health maintenance
organizations. Management believes that the Company is strategically positioned
to participate in the anticipated consolidation of the dietary and nutritional
supplement industry and intends to aggressively pursue acquisition opportunities
that would complement, enhance or vertically integrate existing operations.
Simultaneously with the consummation of the Old Notes Offering, the Company
entered into the $50.0 million Acquisition Facility. The Company is currently
engaged in preliminary discussions with several acquisition candidates. In
addition, on August 7, 1998, the Company entered into a non-binding letter of
intent to acquire for approximately $30 million certain assets of another
manufacturer of dietary and nutritional supplements whose products would
complement the Company's current business. This acquisition is subject to, among
other conditions, satisfactory completion of the Company's due diligence and the
execution of a definitive agreement. There can be no assurance that a definitive
agreement will be entered into with such manufacturer or if such acquisition
will be completed. Moreover, there can be no assurance that any definitive
agreement will be entered into with other potential acquisition candidates or if
any such other acquisition will be completed.
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THE REORGANIZATION
Prior to the consummation of the Reorganization, the Company's operations
were conducted by four corporations: D&F, Raven Industries d/b/a Omni-Pak
Industries ("Omni-Pak"), Dynamic Products Inc. ("Dynamic") and West Coast Sales
("West Coast"). Historically, the four corporations operated under common
management and had a high degree of common ownership, customers and systems,
including similar accounting and financial reporting systems to manage the
combined enterprises. On April 23, 1998, the Company issued and sold
$225,000,000 in aggregrate principal amount of the Old Notes for net proceeds of
approximately $211.1 million. In connection with the consummation of the Old
Notes Offering, D&F, Omni-Pak, Dynamic and West Coast entered into a
reorganization agreement dated as of April 23, 1998 (the "Reorganization
Agreement") pursuant to which (i) D&F changed its name to Global Health
Sciences, Inc., (ii) Global Health Sciences, Inc. formed a new subsidiary,
Global Health Sub, Inc. ("Global Sub"), (iii) Global Sub formed four new
subsidiaries named D&F Industries, Inc. ("D&F Sub"), Raven Sub, Inc. ("Omni-Pak
Merger Sub"), New West Coast Sales, Inc. ("West Coast Merger Sub") and Dynamic
Sub, Inc. ("Dynamic Merger Sub"), (iv) Global Health Sciences, Inc. transferred
to D&F Sub all of its assets and liabilities except for its obligation under the
Notes and the common stock of Global Sub, (v) Global Health Sciences, Inc.
through Global Sub acquired Omni-Pak, Dynamic and West Coast (together referred
to herein as "Omni-Pak and Affiliates") from their respective shareholders for
approximately $137.9 million in cash and expenses, in transactions accounted for
under the purchase method of accounting, pursuant to the mergers of Omni-Pak
Merger Sub and Omni-Pak (with Omni-Pak as the surviving corporation), Dynamic
Merger Sub and Dynamic (with Dynamic as the surviving corporation) and West
Coast Merger Sub and West Coast (with West Coast as the surviving corporation),
and (vi) the shareholders of Global Health Sciences, Inc. received approximately
$58.7 million in cash in exchange for the cancellation of approximately 50% of
the outstanding common stock of Global Health Sciences, Inc. The transactions
described above are hereinafter referred to as the "Reorganization."
Approximately $196.6 million of the proceeds from the Old Notes Offering was
used to consummate the Reorganization.
In the Reorganization, Mr. Marconi received approximately $38.6 million from
the repurchase of his shares of Omni-Pak and Affiliates, Mr. Fred E. Siegel,
co-founder of the Company, received approximately $63.9 million from the
repurchase of his shares of Omni-Pak and Affiliates and a portion of his shares
of D&F and Mr. Mark Hughes, the Chairman and Chief Executive Officer of
Herbalife, received $43.0 million from the repurchase of his shares of Omni-Pak
and Affiliates. As a result of the consummation of the Reorganization, Mr.
Marconi and Mr. Siegel own 94% and 6%, respectively, of the common stock of
Global Health Sciences, Inc., and each of Global Sub, D&F Sub, Dynamic, Omni-Pak
and West Coast is a wholly-owned subsidiary of Global Health Sciences, Inc.
In accordance with historical practice, the Company distributed to those
persons that were shareholders at the time of the Reorganization, all net income
generated by the Company from January 1, 1998 through April 23, 1998 (the
"Original Issue Date") in excess of $2.0 million, in order for, among other
things, such shareholders to pay their required state and federal income taxes
for the period from January 1, 1998 through the Original Issue Date.
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The Company is a California corporation whose principal executive offices
are located at 987 N. Enterprise Street, Orange, California and whose telephone
number is (714) 633-2320.
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THE EXCHANGE OFFER
The Exchange Offer is being made with respect to all of the Company's
outstanding 11% Senior Notes due 2008 (the "Old Notes"). On April 23, 1998, the
Company issued and sold $225.0 million in aggregate principal amount of the Old
Notes in the Old Notes Offering. The form and terms of the New Notes are the
same as the form and terms of the Old Notes, except that the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof. The New Notes will evidence the same debt as
the Old Notes and will be issued pursuant to, and entitled to the benefits of,
the Indenture pursuant to which the Old Notes were issued. The Old Notes and the
New Notes are sometimes referred to collectively herein as the "Notes." The Old
Notes are, and the New Notes will be, unconditionally guaranteed by Global Sub,
Omni-Pak, Dynamic, West Coast and D&F Sub. See "Description of the New Notes."
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The Exchange Offer........... $1,000 principal amount of New Notes in exchange for each
$1,000 principal amount of Old Notes. As of the date hereof,
$225,000,000 aggregate principal amount of the Old Notes are
outstanding. The terms of the New Notes and the Old Notes
are substantially identical.
Based on an interpretation by the staff of the Commission
set forth in no-action letters issued to third parties, the
Company believes that New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by a holder thereof
(other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 promulgated 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 of such holder, (ii) such holder
is not engaging in and does not intend to engage in a
distribution of such New Notes, and (iii) such holder does
not have an arrangement or understanding with any person to
participate in the distribution of such New Notes. Any
holder who tenders in the Exchange Offer for the purpose of
participating in a distribution of the New Notes cannot rely
on such interpretation by the staff of the Commission and
must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a
secondary resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old
Notes, where such Old 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 in connection with any resales of such New
Notes. See "The Exchange Offer--Purpose and Effect" and
"Plan of Distribution."
Registration Rights In connection with the issuance of the Old Notes pursuant to
Agreement.................. the Old Notes Offering, the Company and the Subsidiary
Guarantors entered into a registration rights agreement (the
"Registration Rights Agreement") pursuant to which they
agreed to use their best efforts to cause a registration
statement to become effective with respect to an exchange
offer of a new security for the Old Notes. See "The Exchange
Offer--Purpose and Effect."
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Expiration Date.............. The Exchange Offer will expire at 5:00 p.m., San Francisco
time, on September 11, 1998, or at such later date or time
to which it is extended (as so extended, the "Expiration
Date"). The Company does not intend to extend the Exchange
Offer, although it reserves the right to do so.
Withdrawal................... The tender of Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to 5:00 p.m., San Francisco
time, on the Expiration Date. Any Old Notes not accepted for
exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Interest on the New Notes and
Old Notes.................. The Notes will pay interest in cash at the rate of 11% per
annum, payable on May 1 and November 1 each year, commencing
on November 1, 1998 to the persons who are registered
holders on the immediately preceding April 15 and October
15. See "Description of the New Notes--Principal, Maturity
and Interest."
Conditions to the Exchange
Offer...................... The Exchange Offer is subject to certain customary
conditions, each of which may be waived by the Company. The
Exchange Offer is not conditioned upon any principal amount
of Old Notes being tendered for exchange pursuant to the
Exchange Offer. See "The Exchange Offer--Conditions."
Procedures for Tendering Old
Notes...................... Each holder of Old Notes wishing to accept the Exchange
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 such Old Notes and any other
required documentation, to Chase Manhattan Bank and Trust
Company, National Association (the "Exchange Agent") at the
address set forth herein unless an Agent's Message (as
defined herein) is transmitted in lieu of such Letter of
Transmittal. Tendered Old Notes must be received by the
Exchange Agent by 5:00 p.m., San Francisco time, on the
Expiration Date. By executing the Letter of Transmittal, or
by transmitting an Agent's Message, each holder will
represent to the Company that, among other things, (i) the
New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of such holder,
(ii) the holder is not engaging in and does not intend to
engage in a distribution of such New Notes, (iii) the holder
does not have an arrangement or understanding with any
person to participate in the distribution of such New Notes,
and (iv) the holder is not an "affiliate," as defined under
Rule 405 promulgated under the Securities Act, of the
Company. Pursuant to the Registration Rights Agreement, the
Company is required to file a registration statement for a
continuous offering pursuant to Rule 415 under the
Securities Act in respect of the Old Notes of any holder
that (i) would not receive freely tradeable New Notes in the
Exchange Offer, (ii) is a broker-dealer and owns Old Notes
acquired directly
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
from the Company or an affiliate of the Company, (iii) may
not resell New Notes acquired by it in the Exchange Offer
without delivering a prospectus and the prospectus contained
in the registration statement is not appropriate or (iv) is
ineligible to participate in the Exchange Offer and
indicates that it wishes to have its Old Notes registered
under the Securities Act. See "The Exchange
Offer--Procedures for Tendering."
Book-Entry Transfer.......... The Exchange Agent will make a request to establish an
account with respect to the Old Notes at The Depository
Trust Company (the "Book-Entry Transfer Facility") for
purposes of the Exchange Offer within two business days
after receipt of this Prospectus, and any financial
institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes
by causing the Book-Entry Transfer Facility to transfer such
Old 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, although delivery of Old Notes may be effected
through book-entry transfer at the Book-Entry Transfer
Facility, in order to properly tender Old Notes in the
Exchange Offer, the Letter of Transmittal (unless an Agent's
Message is transmitted in lieu thereof) (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 its address set
forth herein on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be
complied with.
Special Procedures for
Beneficial Owner........... Any beneficial owner whose Old Notes are registered in the
name of a broker, dealer, commercial bank, trust company, or
other nominee (with respect to the New Notes, each, a
"Registered Holder") and who wishes to tender such Old Notes
should contact the Registered Holder promptly and instruct
such Registered Holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to completing and
executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such beneficial
owner's name or obtain a properly completed bond power from
the Registered Holder. The transfer of registered ownership
may take considerable time. See "The Exchange
Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures................. If a Registered Holder of the Old Notes desires to tender
such Old Notes and the Old Notes are not immediately
available, or time will not permit such holder's Old Notes
or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may
be effected according to the guaranteed delivery procedures
set forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Acceptance of Old Notes and
Delivery of New Notes...... The Company will accept for exchange any and all Old Notes
which are properly tendered in the Exchange Offer prior to
5:00 p.m., San Francisco time, on the Expiration Date. The
New Notes issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Exchange Agent............... Chase Manhattan Bank and Trust Company, National Association
is serving as the Exchange Agent in connection with the
Exchange Offer.
Consequences of Failure to
Exchange................... The liquidity of the market for a holder's Old Notes could
be adversely affected upon completion of the Exchange Offer
if such holder does not participate in the Exchange Offer.
See "The Exchange Offer--Consequences of Failure to
Exchange."
Federal Income Tax
Consequences............... The exchange of Old Notes for New Notes pursuant to the
Exchange Offer will not be a taxable event for U.S. federal
income tax purposes. See "Material United States Federal
Income Tax Considerations."
</TABLE>
10
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
<TABLE>
<S> <C>
Issuer....................... Global Health Sciences, Inc.
Securities Offered........... $225,000,000 aggregate principal amount of 11% Senior Notes
due 2008 which have been registered under the Securities Act
(the "New Notes").
Interest..................... The New Notes will bear interest at a rate of 11% per annum.
Interest on the New Notes will accrue from the date of
issuance and will be payable semi-annually on each May 1 and
November 1, commencing on November 1, 1998.
Maturity Date................ May 1, 2008.
Redemption................... The Notes will be redeemable, in whole or in part, at the
option of the Company, on or after May 1, 2003 at the
redemption prices set forth herein, plus accrued and unpaid
interest, if any, to the date of redemption. In addition, at
any time on or prior to May 1, 2001, the Company may, at its
option, use the net proceeds of one or more Public Equity
Offerings to redeem up to 35% of the principal amount of the
Notes at a redemption price equal to 111% of the principal
amount thereof plus accrued and unpaid interest, if any, to
the redemption date; PROVIDED, HOWEVER, that at least 65% of
the principal amount of Notes originally issued remain
outstanding immediately after any such redemption. See
"Description of the New Notes-- Redemption."
Ranking...................... The Notes will be general unsecured senior obligations of
the Company and will rank PARI PASSU in right of payment
with all other senior indebtedness of the Company and senior
in right of payment to all subordinated indebtedness of the
Company. The Company is a holding company with limited
assets, other than the stock of its subsidiaries, and
conducts substantially all of its business through its
subsidiaries. The Old Notes are, and the New Notes will be,
unconditionally guaranteed, jointly and severally (the
"Guarantees"), by all of the Company's existing and future
subsidiaries (the "Subsidiary Guarantors"). As of March 31,
1998, after giving pro forma effect to the Old Notes
Offering, the Acquisition Facility and the application of
the net proceeds therefrom, the Company and the Subsidiary
Guarantors would have approximately $1.5 million of
indebtedness outstanding (other than the Notes),
approximately $14.1 million of trade payables and undrawn
availability of $48.5 million under the Acquisition Facility
which, if drawn, would constitute outstanding senior
indebtedness of the Company and the Subsidiary Guarantors.
See "Capitalization".
Guarantees................... The Guarantees will be general unsecured obligations of the
Subsidiary Guarantors, will be subordinated in right of
payment to all existing and future Guarantor Senior Debt (as
defined), including the guarantees to be delivered by the
Subsidiary Guarantors under the Acquisition Facility, and
will rank PARI PASSU in right of payment to all other senior
indebtedness of the Subsidiary Guarantors and senior in
right of payment to all subordinated obligations of the
Subsidiary Guarantors. Under certain circumstances, the
Subsidiary Guarantors
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
may not make payments in respect of the Guarantees if a
default exists with respect to Guarantor Senior Debt. As of
March 31, 1998, after giving pro forma effect to the Old
Notes Offering, the Acquisition Facility and the application
of the net proceeds therefrom, the Company would have had
outstanding $1.5 million of Guarantor Senior Debt. See
"Description of the New Notes--Ranking and Subordinated
Guarantees."
Change of Control............ In the event of a Change of Control, the Company will be
obligated to make an offer to purchase all of the
outstanding Notes at a redemption price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest,
if any, to the purchase date. See "Description of the New
Notes--Change of Control."
Asset Sale Proceeds.......... The Company will be obligated in certain circumstances to
offer to purchase the Notes at a redemption price equal to
100% of the principal amount thereof, plus accrued and
unpaid interest, if any, with the net cash proceeds of
certain sales or other dispositions of assets. See
"Description of the New Notes--Certain Covenants--
Disposition of Proceeds of Asset Sales."
Certain Covenants............ The Indenture under which the Old Notes were issued and the
New Notes will be issued (the "Indenture") contains certain
covenants relating to, among other things, the following
matters: (i) limitations on additional indebtedness; (ii)
limitations on restricted payments; (iii) limitations on
transactions with affiliates; (iv) limitations on liens; (v)
limitations on creation of subsidiaries; (vi) limitations on
ownership of stock of wholly-owned subsidiaries; (vii)
limitations on dividends and other payment restrictions
affecting subsidiaries; (viii) limitations on sale and
leaseback transactions; and (ix) restrictions on mergers,
consolidations and transfers of all or substantially all of
the assets of the Company to another person. See
"Description of the New Notes--Certain Covenants."
Use of Proceeds.............. There will be no cash proceeds to the Company from the
Exchange Offer.
Exchange Offer; Registration
Rights..................... The Company and the Subsidiary Guarantors have agreed to use
their best efforts to cause to become effective by September
20, 1998, a registration statement with respect to the
Exchange Offer. In the event that changes in law or in
currently applicable interpretations of the staff of the
Commission do not permit the Company and the Subsidiary
Guarantors to effect the Exchange Offer, or if for any other
reason the Exchange Offer is not consummated by October 20,
1998, or if, under certain circumstances, a holder of the
Old Notes is not permitted to participate in the Exchange
Offer or, under certain circumstances, the initial purchaser
of the Old Notes requests, the Company and the Subsidiary
Guarantors will use their best efforts to cause to become
effective a shelf registration statement with respect to the
resale of the Old Notes and keep such shelf registration
statement continuously effective up to two years after the
Original Issue Date. If the Company and the Subsidiary
Guarantors are not in compliance with their exchange offer
or registration obligations, they
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
will be required to pay liquidated damages to the holders of
the Old Notes. See "Description of the New Notes--Exchange
Offer-- Purpose and Effect."
</TABLE>
RISK FACTORS
Prospective purchasers of the New Notes should consider carefully all of the
information contained in this Prospectus and, in particular, should evaluate the
specific factors set forth herein under "Risk Factors" regarding certain risks
involved in an investment in the New Notes.
13
<PAGE>
SUMMARY D&F HISTORICAL FINANCIAL DATA
The following table sets forth summary historical financial data of D&F (the
predecessor), as of and for each of the three years in the period ended December
31, 1997 and the three months ended March 31, 1998 and 1997. The information set
forth below should be read in conjunction with the "Unaudited Pro Forma
Condensed Combined Financial Statements," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Historical Financial
Statements (as defined herein), each of which is included elsewhere in this
Prospectus. The Company and each of its subsidiaries are S corporations and,
accordingly, all federal and a majority of state income taxes are paid directly
by the shareholders. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results to be expected for the
full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales........................................ $ 52,164 $ 73,523 $ 85,191 $ 18,921 $ 22,372
Cost of sales................................ 34,895 47,958 55,020 12,134 15,595
--------- --------- --------- --------- ---------
Gross profit............................... 17,269 25,565 30,171 6,787 6,777
Selling, general and administrative
expenses................................... 5,462 6,347 7,088 1,536 1,750
--------- --------- --------- --------- ---------
Operating income............................. 11,807 19,218 23,083 5,251 5,027
Interest income (expense), net................. 76 56 82 33 38
--------- --------- --------- --------- ---------
Income before state income taxes............... 11,883 19,274 23,165 5,284 5,065
State income taxes(a).......................... 137 280 350 78 76
--------- --------- --------- --------- ---------
Net income(a).................................. $ 11,746 $ 18,994 $ 22,815 $ 5,206 $ 4,989
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 4,474 4,571 3,768 5,552 5,581
Working capital.............................. 3,258 4,048 5,612 6,094 7,114
Total assets................................. 11,948 13,670 16,736 16,455 18,698
Total debt................................... 640 540 420 510 400
Shareholders' equity (deficit)............... 5,170 6,328 7,596 8,309 9,359
OTHER DATA(B):
EBITDA....................................... $ 12,256 $ 19,722 $ 23,606 $ 5,326 $ 5,132
EBITDA margin................................ 23.5% 26.8% 27.7% 28.1% 22.9%
Cash flows provided by:
Operating activities....................... $ 14,447 $ 18,905 $ 21,090 $ 4,237 $ 5,426
Investing activities....................... (420) (871) (226) -- (367)
Financing activities....................... (11,344) (17,936) (21,667) (3,255) (3,246)
Capital expenditures......................... 420 871 226 -- 367
Dividends(a)(b).............................. 11,214 17,836 21,547 3,224 3,225
Depreciation and amortization................ 449 504 523 79 105
Ratio of earnings to fixed charges (c)....... 43.3x 75.2x 88.1x 78.7x 69.5x
</TABLE>
- ------------------------
See footnotes below.
14
<PAGE>
SUMMARY SUPPLEMENTAL COMBINED HISTORICAL FINANCIAL DATA
The following table sets forth summary historical combined D&F and Omni-Pak
and Affiliates financial data ("Combined Financial Data"), as of and for each of
the three years in the period ended December 31, 1997 and the three months ended
March 31, 1998 and 1997. The Combined Financial Data presents the combined
group's historical operating results, which, in the opinion of management,
provide a more meaningful representation of the underlying business and cash
flows. These entities historically operated under common management and had a
high degree of common ownership, customers and systems, including similar
accounting and financial reporting systems to manage the combined enterprises.
The information set forth below should be read in conjunction with the
"Unaudited Pro Forma Condensed Combined Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Historical Financial Statements, each of which is included elsewhere in this
Prospectus. The Company and each of its subsidiaries are S corporations and,
accordingly, all federal and a majority of state income taxes are paid directly
by the shareholders. The results of operations for the three months ended March
31, 1998 are not necessarily indicative of the results to be expected for the
full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales..................................... $ 85,264 $ 144,735 $ 182,385 $ 39,117 $ 46,842
Cost of sales............................. 55,382 94,758 117,733 25,979 32,124
--------- --------- --------- --------- ---------
Gross profit............................ 29,882 49,977 64,652 13,138 14,718
Selling, general and administrative
expenses................................ 8,246 11,203 13,019 2,973 3,286
--------- --------- --------- --------- ---------
Operating income.......................... 21,636 38,774 51,633 10,165 11,432
Interest income (expense), net.............. 144 162 279 55 72
--------- --------- --------- --------- ---------
Income before state income taxes............ 21,780 38,936 51,912 10,220 11,504
State income taxes(a)....................... 283 567 778 145 173
--------- --------- --------- --------- ---------
Net income(a)............................... $ 21,497 $ 38,369 $ 51,134 $ 10,075 $ 11,331
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 8,155 $ 7,079 $ 8,957 $ 10,625 $ 12,377
Working capital........................... 6,601 6,901 12,032 11,091 13,059
Total assets.............................. 21,047 23,783 31,505 29,621 34,438
Total debt................................ 640 540 420 510 400
Shareholders' equity (deficit)............ 9,789 11,498 16,643 15,537 17,652
OTHER DATA(B):
EBITDA.................................... $ 22,363 $ 39,676 $ 52,669 $ 10,527 $ 11,634
EBITDA margin............................. 26.2% 27.4% 28.9% 26.9% 24.8%
Cash flows provided by:
Operating activities.................... $ 25,814 $ 37,995 $ 49,037 $ 10,174 $ 13,802
Investing activities.................... (786) (2,311) (1,050) (211) (587)
Financing activities.................... (20,939) (36,760) (46,109) (6,066) (9,795)
Capital expenditures...................... 786 2,311 1,050 211 587
Dividends(a)(b)........................... 20,808 36,660 45,989 6,036 9,775
Depreciation and amortization............. 727 902 1,036 362 202
Ratio of earnings to fixed charges (c).... 56.0x 96.3x 115.4x 90.1x 92.4x
</TABLE>
- ------------------------
See footnotes below.
15
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following table sets forth the summary unaudited pro forma condensed
combined income statement data for the year ended December 31, 1997 and the
three months ended March 31, 1998, and summary unaudited pro forma condensed
combined balance sheet data as of March 31, 1998. The unaudited pro forma
condensed combined income statement data gives effect to the Old Notes Offering,
the Acquisition Facility and the Reorganization as if such transactions had
occurred at the beginning of the fiscal year presented. The unaudited pro forma
condensed combined balance sheet data gives effect to these transactions as if
they had occurred on March 31, 1998. The data presented below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Historical and Pro Forma Financial Data"
and the Historical Financial Statements, which are included elsewhere in this
Prospectus. The summary unaudited pro forma financial data 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 been consummated
as of the date and for the period indicated and are not intended to project the
financial position or results of operations for any future period. The Company
and each of its subsidiaries are S corporations and, accordingly, all federal
and a majority of state income taxes are paid directly by the shareholders.
<TABLE>
<CAPTION>
PRO FORMA (D) PRO FORMA (D)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------- -------------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
STATEMENT OF INCOME DATA:
Sales...................................................................... $ 182,385 $ 46,842
Cost of sales.............................................................. 117,733 32,124
------------- --------
Gross profit............................................................. 64,652 14,718
Selling, general and administrative expenses............................... 26,702 6,707
------------- --------
Operating income........................................................... 37,950 8,011
Interest income (expense), net............................................... (25,998) (6,497)
------------- --------
Income before state income taxes............................................. 11,952 1,514
State income taxes(a)........................................................ 384 23
------------- --------
Net income(a)................................................................ $ 11,568 $ 1,491
------------- --------
------------- --------
BALANCE SHEET DATA:
Cash and cash equivalents.................................................. $ 16,179
Working capital............................................................ 15,761
Total assets............................................................... 181,847
Total debt................................................................. 219,892
Shareholders' equity (deficit)............................................. (54,501)
</TABLE>
- ------------------------
See footnotes on following page.
16
<PAGE>
- ------------------------
(a) The Company has elected S corporation status for federal and state income
tax purposes, and other than a 1.5% state tax, income tax is paid by the
Company's shareholders. The shareholders' effective combined federal and
state tax rate for 1997 was approximately 45%. The Company has historically
distributed as a dividend to its shareholders amounts sufficient for the
shareholders to pay their required taxes. In accordance with this practice,
the Company distributed to those persons that were shareholders at the time
of the Reorganization, all net income generated by the Company from January
1, 1998 through the Original Issue Date in excess of $2.0 million, in order
for such shareholders to pay such taxes for the period from January 1, 1998
through the Original Issue Date. On a pro forma basis for 1997 giving effect
to the Old Notes Offering and the Reorganization, the distribution related
to the tax payment would have been approximately $11.4 million, representing
the sum of 45% of pro forma net income of $12.5 million and 45% of pro forma
amortization of intangibles of $12.9 million, which will not be deductible
for income tax purposes.
(b) EBITDA is defined as net income before interest income (expense), income
taxes and depreciation and amortization. Management believes that EBITDA and
EBITDA margin are measures commonly used by analysts and investors to
determine a company's ability to service and incur debt. Accordingly, this
information has been presented to permit a more complete analysis. However,
EBITDA as reported may not be comparable to similarly titled measures used
by other companies. EBITDA margin is computed by dividing EBITDA by sales.
EBITDA should not be considered a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting principles
(which is also presented in the accompanying table) or as a measure of
profitability or liquidity.
(c) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense (which includes amortization of deferred financing costs)
and one-third of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest. On a pro forma
basis, after giving effect to the Old Notes Offering, the Acquisition
Facility and the Reorganization, the ratio of earnings to fixed charges for
the year ended December 31, 1997 and the quarter ended March 31, 1998 would
have been 1.5x and 1.2x, respectively.
(d) The pro forma adjustments give effect to the Old Notes Offering, the
Acquisition Facility and the Reorganization. See "Unaudited Pro Forma
Condensed Combined Financial Statements."
17
<PAGE>
RISK FACTORS
EACH HOLDER OF OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK
FACTORS IN ADDITION TO OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE
ACCEPTING THE EXCHANGE OFFER, ALTHOUGH THE RISK FACTORS SET FORTH BELOW ARE
GENERALLY APPLICABLE TO THE OLD NOTES AS WELL AS THE NEW NOTES.
SUBSTANTIAL LEVERAGE
As a result of the Old Notes Offering, the Company has, for the first time,
significant debt service obligations. As of March 31, 1998, after giving effect
to the Acquisition Facility, the Old Notes Offering and the application of the
net proceeds therefrom, the Company and its subsidiaries would have had
approximately $219.9 million (net of original issue discount) of total
indebtedness outstanding and a deficit in shareholders' equity of approximately
$54.0 million. See "Capitalization." In addition, the Company entered into the
Acquisition Facility in connection with the consummation of the Old Notes
Offering which will allow the Company to borrow, on the terms and conditions
specified therein, an additional $48.5 million in indebtedness. Any outstanding
indebtedness under the Acquisition Facility will mature prior to the maturity
date of the Notes. See "Description of Acquisition Facility."
The degree to which the Company is leveraged could have important
consequences to the holders of the Notes, including, but not limited to: (i)
limiting the Company's ability to obtain additional financing for working
capital, capital expenditures or acquisitions, (ii) causing the Company to
dedicate a substantial portion of cash flow from operations to the payment of
interest on its indebtedness, thereby reducing funds available for investments
and (iii) increasing the Company's vulnerability to general economic downturns
and limiting its ability to withstand competitive pressures. The Company's
ability to make scheduled payments of interest on, or to refinance, its
indebtedness will depend on its future operating performance and cash flow,
which are subject to prevailing economic conditions, prevailing interest rate
levels, and financial, competitive, business and other factors, many of which
are beyond its control.
The Company believes that, based upon current levels of operations, it will
be able to meet its debt service obligations, including payments of interest on
the Notes when due. If, however, the Company cannot generate sufficient cash
flow to meet its debt service obligations, then the Company may be required to
refinance its indebtedness and may be forced to adopt an alternative strategy
that could include actions such as reducing or delaying capital expenditures,
selling assets, restructuring its indebtedness or seeking additional equity
capital. There is no assurance that refinancing would be permitted by the terms
of the Acquisition Facility or the Indenture or, along with the alternative
strategies, could be effected on a timely basis or on satisfactory terms. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HOLDING COMPANY STRUCTURE
The Company is a holding company that conducts all of its operations through
its subsidiaries and whose only material asset is its equity interests in such
subsidiaries. As a result, the Company's ability to make debt service payments
is dependent upon the earnings and cash flows of the operations of its
subsidiaries and its ability to receive dividends and distributions from such
subsidiaries. The ability to receive such dividends and distributions is subject
to restrictions under the Acquisition Facility. There can be no assurance that
its subsidiaries will generate sufficient earnings and cash flows to pay
dividends or distribute funds to the Company to enable the Company to pay its
expenses and meet its obligations to pay interest on the Notes.
In addition, the Company's obligations under the Acquisition Facility are
secured by substantially all of the Company's assets, including the capital
stock of its existing and future subsidiaries. If an event of default under the
Acquisition Facility occurs, the lenders under the Acquisition Facility could
seek to enforce their rights against the collateral securing such facility,
including the capital stock of such subsidiaries. Moreover, any right of the
Company and its creditors, including holders of the Notes, to
18
<PAGE>
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors and the
lenders under the Acquisition Facility.
SUBORDINATION OF GUARANTEES
The Subsidiary Guarantors, including Global Sub which is the borrower under
the Acquisition Facility, have delivered the Guarantees to unconditionally
guarantee the payment of principal and interest on the Notes when due. The
Subsidiary Guarantors other than Global Sub have also unconditionally guaranteed
the Company's obligations under the Acquisition Facility. The Guarantees of the
Subsidiary Guarantors will be subordinated in right of payment to all existing
and future Guarantor Senior Debt, which includes the Acquisition Facility and
the guarantee on a senior secured basis by the Subsidiary Guarantors of all
obligations under the Acquisition Facility (and refinancings thereof). In the
event of bankruptcy, liquidation or reorganization of any of the Subsidiary
Guarantors, the assets of such Subsidiary Guarantor will be available to pay
obligations on the Guarantees only after the guarantees under the Acquisition
Facility have been paid in full, and there may not be sufficient assets
remaining to pay amounts due on the Guarantees. See "Description of Acquisition
Facility."
RESTRICTIVE COVENANTS
The Acquisition Facility and the Indenture contain numerous restrictive
covenants limiting the discretion of the Company's management with respect to
certain business matters. These covenants place significant restrictions on,
among other things, the ability of the Company to incur additional indebtedness,
to create liens or other encumbrances, to pay dividends or make certain other
payments, investments, loans and guarantees and to sell or otherwise dispose of
assets and merge or consolidate with another entity. The Acquisition Facility
contains a number of financial covenants requiring the Company to meet certain
financial ratios and financial condition tests. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Description of
Acquisition Facility" and "Description of the New Notes--Certain Covenants." The
Company's ability to meet these financial ratios and financial condition tests
can be affected by events beyond its control, and there can be no assurance that
the Company will meet such ratios or such tests. A failure to comply with the
obligations in the Acquisition Facility or the Indenture could result in an
event of default under the Acquisition Facility or an Event of Default (as
defined) under the Indenture which, if not cured or waived, could permit
acceleration of the relevant indebtedness. If the indebtedness under the
Acquisition Facility were to be accelerated, there can be no assurance that the
assets of the Company would be sufficient to repay in full that indebtedness and
the other indebtedness of the Company, including the Notes.
DEPENDENCE ON SIGNIFICANT CUSTOMER; SUPPLY AGREEMENTS
A significant percentage of the Company's historical sales has been to
Herbalife, which accounted for approximately 76%, 74% and 83% of the Company's
sales in 1997, 1996 and 1995, respectively. The loss of Herbalife as a customer
or a significant reduction in purchase volume by Herbalife, for any reason,
including if Herbalife were to incur financial difficulties, would have a
material adverse effect on the Company's results of operations and financial
condition. Additionally, EAS represented approximately 15.0% and 12.0% of the
Company's sales in 1997 and 1996, respectively. The loss of EAS as a customer or
a significant reduction in purchase volume by EAS for any reason, including if
EAS were to incur financial difficulties, could have a material adverse effect
on the Company's results of operations, financial condition and cash flows.
Since 1980, the Company has supplied substantially all of Herbalife's
dietary and nutritional supplement products under various arrangements. In
September 1997, each of D&F, Omni-Pak and Dynamic entered into new agreements
with Herbalife that, unless renewed, will terminate after three years. The new
agreements provide prices discounted from the previous arrangements. These price
revisions could have an
19
<PAGE>
adverse effect on the profitability margins of the Company with respect to its
sales to Herbalife. Herbalife is permitted, for the first time, under these new
agreements to purchase certain of its powder products, tablets, capsules,
liquids and other products from manufacturers other than the Company, subject to
minimum purchase requirements, and the Company is no longer obligated to
manufacture all of Herbalife's dietary and nutritional product requirements. In
addition, the new agreements transfer ownership of product formulations for
substantially all of Herbalife's dietary and nutritional products to Herbalife.
As a result, Herbalife has the ability under these agreements to use alternative
sources for particular dietary and nutritional supplement products. Herbalife
has the right to terminate any of these agreements if, without the prior written
consent of Herbalife, Mr. Marconi ceases to own more than 50% of the capital
stock of the Company or is no longer an executive officer of the Company and
responsible for the day-to-day operations and management of the Company. In
addition, Herbalife may terminate any agreement if the Company fails to meet
certain service level requirements specified therein. See "Business--Sales and
Distribution."
Mr. Mark Hughes, Chairman and Chief Executive Officer of Herbalife, was
formerly a 20% shareholder of Dynamic and a 33% shareholder of Omni-Pak. A
portion of the proceeds of the Old Notes Offering was used to purchase all of
Mr. Hughes' shares of common stock of Dynamic and Omni-Pak. The Company cannot
predict whether its relationship with Herbalife will be affected as a result of
Mr. Hughes no longer being a shareholder of the Company or any of its
subsidaries.
CONTROL BY PRINCIPAL SHAREHOLDER
Mr. Marconi owns 94% of the Company's outstanding shares of capital stock.
As a result, Mr. Marconi has the ability to determine the outcome of all
corporate actions requiring shareholder approval, including, among other things,
the election of the Board of Directors, mergers, consolidations and the sale of
all, or substantially all, of the Company's assets. There can be no assurance
that the interests of Mr. Marconi, as the principal equity owner of the Company,
will not conflict with the interests of the holders of the Notes.
KEY PERSONNEL
The Company believes that its continued success depends to a significant
extent on the management and other skills of Mr. Marconi, as well as its ability
to retain other key employees and to attract skilled personnel in the future to
manage the growth of the Company. In connection with the consummation of the Old
Notes Offering, the Company entered into a five-year employment agreement with
Mr. Marconi. If Mr. Marconi ceases to be an executive officer of the Company and
responsible for the day-to-day operations and management of the Company,
Herbalife would have the right to terminate its supply agreements with the
Company. See "Business--Sales and Distribution." In connection with the
consummation of the Old Notes Offering, the Company entered into employment
agreements with Mr. Paul M. Buxbaum and Mr. Donald J. Lewis to become the
Company's new Chief Executive Officer and Chief Financial Officer, respectively.
Mr. Buxbaum and Mr. Lewis assumed the duties previously performed by Mr. Siegel.
As of June 1, 1998, the Company entered into an employment agreement with Mr.
Howard Simon to become Chief Operating Officer of the Company. See "Management."
The loss or unavailability of Mr. Marconi or the inability of Messrs. Buxbaum,
Lewis or Simon to successfully perform their duties could have a material
adverse effect on the Company. See "Management--Employment and Consulting
Agreements."
FUTURE ACQUISITIONS
One of the Company's business strategies is to pursue acquisitions that are
compatible with its strategic goals. Management is unable to predict whether or
when any prospective acquisition candidates will become available or the
likelihood of any transaction being completed should any negotiations
20
<PAGE>
commence. Future acquisitions could be financed by internally generated funds,
borrowings under the Acquisition Facility or another facility, public offerings
or private placements of equity or debt securities, or a combination of the
foregoing. There can be no assurance that the Company will be able to make
acquisitions on terms favorable to the Company and that such funds to finance an
acquisition will be available or permitted under the Company's financing
instruments. See "Description of the New Notes" and "Description of Acquisition
Facility." If the Company completes acquisitions, it will encounter various
associated risks, including the possible inability to integrate an acquired
business into the Company's operations, the possible failure to realize
anticipated synergies or benefits, diversion of management's attention and
unanticipated problems or liabilities, some or all of which could have a
material adverse effect on the Company's results of operations and financial
condition. See "Business--Business Strategy."
COMPETITION
The business of developing, manufacturing and selling dietary and
nutritional supplements is highly competitive. Certain of the Company's
competitors are larger than the Company, have resources greater than those of
the Company and are more vertically integrated. See "Business--Competition."
AVAILABILITY OF RAW MATERIALS
Substantially all of the Company's products contain ingredients and raw
materials that are harvested by and obtained from third-party suppliers, and
many of the ingredients are harvested internationally and/ or on a seasonal
basis. Although the Company currently utilizes several suppliers for these
ingredients and such ingredients are generally available from numerous sources,
an unexpected interruption of supply, such as a harvest failure or poor weather
conditions, could have a material adverse effect on the Company's results of
operations and financial condition.
PRODUCT LIABILITY
The Company, like other manufacturers of products that are ingested, faces
the risk of exposure to product liability claims in the event that the use of
its products results in injury. The Company has recently been named as a
defendant in an action originally filed against Herbalife and certain other
defendants in which the plaintiff alleges that the Thermojetics-TM- Green tablet
manufactured by the Company for Herbalife was defective and unsafe for its
intended use. The plaintiff is seeking damages for personal injury, pain and
suffering, lost wages and is also seeking punitive damages. There can be no
assurance that the Company will not be held liable for damages under such
lawsuit or whether additional lawsuits will be filed against the Company as a
result of products manufactured by the Company for Herbalife or other customers.
See "Business--Litigation." Although the Company has never been a party to a
product liability claim which had a material adverse effect on the Company's
results of operations or financial condition, there can be no assurance that
additional claims in the future will not have such a material adverse effect.
The Company maintains product liability insurance. There can be no assurance
that such insurance will continue to be available at a reasonable cost or, if
available, will be adequate to cover future liabilities, if any.
ENVIRONMENTAL LIABILITIES AND REGULATIONS
The Company's manufacturing operations are subject to extensive federal,
state and local environmental laws and regulations, including those relating to
the discharge and disposal of hazardous substances and the remediation of
environmental contamination. The Company believes that it is in material
compliance with such laws and is not subject to any material liabilities under
environmental law. Although the Company has never been party to an
administrative or judicial proceeding relating to environmental matters that had
a material adverse effect on its results of operations or financial condition,
there can be no assurance as to whether the Company will be subject to
environmental claims in the future. In addition, the Company cannot predict what
environmental legislation or regulations will be enacted in the future,
21
<PAGE>
how existing or future laws or regulations will be administered or interpreted
or what unknown environmental conditions may be found to exist on its
properties. Compliance with more stringent laws or regulations could require
additional expenditures by the Company.
GOVERNMENT REGULATION; ADVERSE PUBLICITY
The manufacturing, processing, formulating, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the U.S. Food and Drug Administration (the "FDA"),
the Federal Trade Commission (the "FTC") and the Environmental Protection Agency
(the "EPA"). The Company's activities are also regulated by various agencies of
the states, localities and foreign countries to which the Company's products are
distributed and in which the Company's products are sold.
The composition and labeling of dietary supplements, which comprise a
substantial portion of the Company's products, are most actively regulated by
the FDA under the provisions of the Federal Food, Drug, and Cosmetic Act (the
"FFDC"). The FFDC has been revised in recent years by the Nutrition Labeling and
Education Act of 1990 (the "NLEA") and the Dietary Supplement Health and
Education Act of 1994 (the "DSHEA"). In the judgment of the Company these
regulatory changes are generally favorable to the dietary supplement industry.
The Company exercises significant control over certain aspects of the labeling
of its customers' dietary and nutritional supplement products and may have some
regulatory responsibility for such labeling. See "Business--Regulatory Matters."
The FDA recently finalized regulations implementing certain labeling
provisions of the DSHEA. In addition, further labeling requirements may be
proposed by the FDA in response to a report issued in November 1997 by the
presidentially-appointed Commission on Dietary Supplement Labels. The Company
cannot determine what effect such regulations, if promulgated, will have on its
business in the future.
The DSHEA authorizes the FDA to promulgate good manufacturing practices
("GMPs") with respect to the manufacture of dietary supplements, which are to be
modeled after the current GMPs applicable to food products. The Company has
received, on a number of occasions following customary FDA inspections, notices
from the FDA citing GMP deficiencies. See "Business--Regulatory Matters."
The Company has attempted to promptly remedy any such deficiencies and these
actions have not had a material adverse effect on the Company's results of
operations or financial condition. There can be no assurance that the Company
will not receive additional deficiency notices from the FDA in the future, the
remedy for which, or the failure to remedy, could have a material adverse effect
on the Company's results of operations or financial condition.
The FDA frequently publishes advance notices of proposed rulemaking and
promulgates new regulations which affect or could affect the Company's business.
In 1997, for example, the FDA published an advance notice of proposed rulemaking
regarding GMP regulations for dietary supplements and issued final regulations
requiring dietary supplements to maintain 100% of the declared value of added
vitamins and minerals for the entire shelf life of the product. See
"Business--Regulatory Matters." There can be no assurance that such proposed
regulations will be promulgated, and if promulgated, will not require
manufacturing changes to comply with GMP regulations, the recall, reformulation
or discontinuance of certain products, or require additional recordkeeping,
warnings, expanded or different labeling, advertising and/or scientific
substantiation regarding ingredients. In addition, there can be no assurance
that these recent new regulations or future laws, regulations, interpretations
or applications, when and if promulgated, or disparate federal, state and local
regulatory schemes would not require similar actions by the Company. Any or all
of such requirements could have a material adverse effect on the Company's
results of operations and financial condition. Moreover, governmental
regulations in foreign countries where the Company plans to commence or expand
sales may prevent or delay entry into the market or prevent or delay the
introduction, or require the reformulation, of certain of the Company's
products.
22
<PAGE>
Certain of the Company's products include a Chinese herb known as "Ma Huang"
which contains naturally-occurring ephedrine. The Company estimates that these
products accounted for approximately 6% of the Company's sales for the fiscal
year ended December 31, 1997. Ma Huang has been the subject of certain adverse
publicity in the United States and other countries relating to alleged harmful
or adverse effects, including the deaths of several individuals. On April 10,
1996, the FDA issued a statement warning consumers of the significant health
risks of dietary supplements containing Ma Huang and advising them not to
purchase or consume such supplements. In June 1997, the FDA published a proposed
regulation that would establish relatively low levels (less than 8 milligrams
per single serving) of ephedrine that may lawfully be used in dietary supplement
products. The proposed regulation would prohibit: a recommendation of 24
milligrams or more of ephedrine per day; a combination of ephedrine with a known
stimulant; and a recommendation for long term use or sale with body building or
weight loss programs. The proposed regulation would also require labeling
against use of any product containing ephedrine for more than seven days and a
warning that taking more than the recommended serving may cause heart attack,
stroke, seizure or death. No final regulation has been promulgated. The
Company's products containing Ma Huang may become subject to further federal,
state, local or foreign laws or regulations which could require the Company to
reformulate or relabel its products with different warnings or revised
directions for use. While the Company believes that its Ma Huang products could
be reformulated and/or relabeled, there can be no assurance in that regard or
that reformulation and/or relabeling would not have a material adverse effect on
sales of such products. See "Business--Regulatory Matters."
ORIGINAL ISSUE DISCOUNT CONSEQUENCES OF NOTES
The Old Notes were issued at a discount from their principal amount at
maturity. Original issue discount (the difference between the aggregate
principal amount at maturity and the issue price of the Old Notes) will accrue
from the issue date of the Old Notes. Consequently, purchasers of Old Notes and
New Notes generally will be required to include amounts in gross income for
United States federal income tax purposes in advance of their receipt of the
cash payments to which the income is attributable. Such amounts in the aggregate
will be equal to the difference between the stated redemption price at maturity
and the issue price of the Old Notes. See "Certain United States Federal Income
Tax Consequences" for a more detailed discussion of the federal income tax
consequences of the purchase, ownership and disposition of the Notes.
CHANGE OF CONTROL
Upon a Change of Control, each holder of the Notes will have the right to
require the Company to purchase all or a portion of such holder's Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. There can be no assurance that sufficient
funds will be available to the Company at the time of any Change of Control to
make any required repurchase of Notes tendered. See "Description of the New
Notes--Change of Control."
FRAUDULENT CONVEYANCE AND RELATED CONSIDERATIONS
The obligations of the Company under the Notes, and of the Subsidiary
Guarantors under the Guarantees, may be subject to review under relevant federal
and state fraudulent conveyance laws if a bankruptcy case or a lawsuit
(including in circumstances where bankruptcy is not involved) is commenced by or
on behalf of any unpaid creditor of the Company, its subsidiaries or a
representative of the Company's or its subsidiaries' creditors. If a court in
such a lawsuit were to find that, at the time the Company issued the Notes, the
Subsidiary Guarantors delivered the Guarantees or as a consequence of the
Reorganization, the Company or the Subsidiary Guarantors (i) intended to hinder,
delay or defraud any existing or future creditor or contemplated insolvency with
a design to prefer one or more creditors to the exclusion, in whole or in part,
of others or (ii) did not receive fair consideration or reasonably equivalent
value for issuing the Notes or delivering the Guarantees, as the case may be,
and the Company
23
<PAGE>
or any Subsidiary Guarantor (a) was insolvent, (b) was rendered insolvent, (c)
was engaged or about to be engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital to carry on its business
or (d) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court could void the Notes or
the Guarantees and the Company's and such Subsidiary Guarantor's obligations
thereunder, and direct the return of any amounts paid thereunder to the Company
or such Subsidiary Guarantor or to a fund for the benefit of its creditors.
Alternatively, in such event, claims of the holders of the Notes could be
subordinated to claims of the other creditors of the Company or the Subsidiary
Guarantors.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction that is being applied. Generally, however, a
company would be considered insolvent if the sum of its debts, including
contingent liabilities, is greater than all of its property at a fair valuation
or if the present fair saleable value of its assets is less than the amount that
will be required to pay its probable liability on its existing debts as they
become absolute and mature.
The consummation of the Reorganization may also be subject to review under
relevant state dividend laws if a lawsuit is commenced by or on behalf of any
creditor of the Company and its subsidiaries that was a creditor at the time of
the Reorganization and did not consent to the Reorganization. If a court were to
determine that the Reorganization violated any such applicable laws, it could
attempt to subordinate the claims of the holders of the Notes to such other
creditors of the Company.
The Company did not obtain any independent reports as to its solvency, or
the solvency of the Subsidiary Guarantors, either prior to, or after giving
effect to, the Old Notes Offering and the Reorganization. The Company believes,
however, that, based upon forecasts and other financial information and after
giving effect to the Old Notes Offering and the Reorganization, each of the
Company and the Subsidiary Guarantors is and will continue to be solvent, each
will have sufficient capital to carry on its business and each will be, and will
continue to be, able to pay its debts as they mature. In addition, the Company
believes the Reorganization will not violate state dividend laws. There can be
no assurance that a court passing on such questions would reach the same
conclusions. In rendering their opinions in connection with the Old Notes
Offering and the Reorganization, counsel for the Company and counsel for the
initial purchaser of the Old Notes did not express any opinion as to the
applicability of federal or state fraudulent transfer or conveyance laws, or
state dividend laws.
RESTRICTIONS ON RESALE AND ABSENCE OF A PUBLIC MARKET
Prior to the exchange of the New Notes offered hereby, there has been no
public market for any of the Notes, and there can be no assurance as to (i) the
liquidity of any such market that may develop, (ii) the ability of the holders
of New Notes to sell their New Notes or (iii) the price at which the holders of
New Notes will be able to sell their New Notes. If such market were to exist,
the New Notes could trade at prices that may be higher or lower than their
principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar notes, and the financial
performance of the Company. The Company does not intend to list the New Notes on
any securities exchange or to seek approval for quotations through any automated
quotation system and no active market for the New Notes is currently
anticipated. There is no assurance as to the liquidity of the trading market for
the New Notes. Citicorp Securities, Inc. has advised the Company that it
currently anticipate making a secondary market for the New Notes, but it is not
obligated to do so, and there is no assurance that an active or liquid public
trading market will develop for the New Notes.
EXCHANGE OFFER PROCEDURE
Issuance of the New Notes in exchange for Old Notes pursuant to the Exchange
Offer will be made only after a timely receipt by the Exchange Agent of
certificates for such Old Notes or a timely Book-Entry Confirmation (as defined)
of such Old Notes into the Exchange Agent's account at the Book-Entry
24
<PAGE>
Transfer Facility, a properly completed and duly executed Letter of Transmittal
(or an Agent's Message in lieu thereof) and all other required documents. All
questions as to the validity, form, eligibility (including time of receipt) and
acceptance of Old Notes tendered for exchange will be determined by the Company
in its sole discretion, which determination will be final and binding on all
parties. Therefore, holders of Old Notes desiring to tender such Old Notes in
exchange for the New Notes should allow sufficient time to ensure timely
delivery. Old Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof and the Company will have no further
obligation to provide for the registration under the Securities Act of such Old
Notes except as described herein. See "The Exchange Offer--Purpose and Effect."
In addition, any holder of Old Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. Each broker-dealer
that receives New Notes for its own account in exchange for Old Notes, where
such Old Notes were acquired by such broker-dealer as a result of market-making
activities or under trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Old Notes could be adversely affected. The Company does not intend to extend the
Exchange Offer although it reserves the right to do so. See "The Exchange
Offer."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of D&F and the combined
capitalization of D&F and Omni-Pak and Affiliates as of March 31, 1998, as
adjusted to give effect to the Reorganization, the Old Notes Offering and the
Acquisition Facility and the application of the net proceeds therefrom. The
information presented below should be read in conjunction with the financial
statements of D&F, the combined financial statements of Omni-Pak and Affiliates
and the combined financial statements of D&F, Omni-Pak and Affiliates
(collectively, the "Historical Financial Statements") and the Unaudited Pro
Forma Condensed Combined Financial Statements, each of which is included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------
ACTUAL
----------------------
D&F COMBINED AS ADJUSTED
--------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents(1)................................... $ 5,581 $ 12,377 $ 16,179
--------- ----------- -----------
--------- ----------- -----------
Long-term debt (including current portion):
Existing debt.............................................. $ 400 $ 400 $ --
Acquisition Facility(2).................................... -- -- 1,500
Notes offered hereby....................................... -- -- 218,392
--------- ----------- -----------
Total long-term debt..................................... $ 400 400 219,892
--------- ----------- -----------
Shareholders' equity (deficit):
Capital stock.............................................. 1,026 1,235 508
Retained earnings (deficit)................................ 8,333 16,417 (54,475)
--------- ----------- -----------
Total shareholders' equity (deficit)..................... 9,359 17,652 (53,967)
--------- ----------- -----------
Total capitalization..................................... $ 9,759 $ 18,052 $ 165,925
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) In accordance with past practice, the Company distributed to those persons
that were shareholders at the time of the Reorganization, all net income
generated by the Company from January 1, 1998 through the Original Issue
Date in excess of $2.0 million, primarily in order for such shareholders to
pay their required state and federal income taxes for the period from
January 1, 1998 through the Original Issue Date. Such distributions
aggregated $11.9 million and have been reflected in the As Adjusted column.
(2) Simultaneously with the consummation of the Old Notes Offering, the Company
received an initial advance under the Acquisition Facility of $1.5 million
to repay all existing indebtedness outstanding at the time of the Old Notes
Offering. After giving effect to such initial advance, the Company has
undrawn availability of $48.5 under the Acquisition Facility, of which $10.0
million may be used for working capital and general corporate purposes. The
entire facility may be used for future permitted acquisitions. See
"Description of Acquisition Facility."
26
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
SELECTED D&F FINANCIAL DATA
The following table sets forth selected D&F financial data as of and for
each of the five years ended December 31, 1997 and the three months ended March
31, 1998 and 1997. The balance sheet data presented below as of December 31,
1996 and 1997 and the statement of income data for each of the three years in
the period ended December 31, 1997 have been derived from the D&F Financial
Statements included elsewhere herein. The D&F Financial Statements were audited
by Deloitte & Touche LLP, independent auditors, as set forth in their report
also included herein. The selected balance sheet data as of December 31, 1993,
1994 and 1995 and the selected income statement data for the years ended
December 31, 1993 and 1994 have been derived from audited D&F Financial
Statements not presented herein. The information set forth below should be read
in conjunction with the "Unaudited Pro Forma Condensed D&F Financial
Statements," "Management Discussion and Analysis of Financial Condition and
Results of Operations" and the Historical Financial Statements, each of which is
included elsewhere in this Prospectus. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales............................... $ 56,211 $ 68,679 $ 52,164 $ 73,523 $ 85,191 $ 18,921 $ 22,372
Cost of sales....................... 34,682 44,337 34,895 47,958 55,020 12,134 15,595
--------- --------- --------- --------- --------- --------- ---------
Gross profit...................... 21,529 24,342 17,269 25,565 30,171 6,787 6,777
Selling, general and administrative
expenses.......................... 5,593 9,325 5,462 6,347 7,088 1,536 1,750
--------- --------- --------- --------- --------- --------- ---------
Operating income.................... 15,936 15,017 11,807 19,218 23,083 5,251 5,027
Interest income (expense), net........ 60 63 76 56 82 33 38
--------- --------- --------- --------- --------- --------- ---------
Income before state income taxes...... 15,996 15,080 11,883 19,274 23,165 5,284 5,065
State income taxes(a)................. 417 257 137 280 350 78 76
--------- --------- --------- --------- --------- --------- ---------
Net income(a)......................... $ 15,579 $ 14,823 $ 11,746 $ 18,994 $ 22,815 $ 5,206 $ 4,989
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 5,277 $ 1,791 $ 4,474 4,571 3,768 5,552 5,581
Working capital..................... 6,137 2,696 3,258 4,048 5,612 6,094 7,114
Total assets........................ 13,027 11,693 11,948 13,670 16,736 16,455 18,698
Total debt.......................... 880 770 640 540 420 510 400
Shareholders' equity (deficit)...... 7,196 4,639 5,170 6,328 7,596 8,309 9,359
OTHER DATA(B):
EBITDA.............................. $ 16,095 $ 15,268 $ 12,256 $ 19,722 $ 23,606 $ 5,326 $ 5,132
EBITDA margin....................... 28.6% 22.2% 23.5% 26.8% 27.7% 28.1% 22.9%
Cash flows provided by:
Operating activities.............. $ 16,338 $ 16,143 $ 14,447 $ 18,905 $ 21,090 $ 4,237 $ 5,426
Investing activities.............. (463) (2,139) (420) (871) (226) -- (367)
Financing activities.............. (12,840) (17,490) (11,344) (17,936) (21,667) (3,255) (3,246)
Capital expenditures................ 333 1,134 420 871 226 -- 367
Dividends(a)(b)..................... 12,720 17,380 11,214 17,836 21,547 3,224 3,225
Depreciation and amortization....... 159 251 449 504 523 79 105
Ratio of earnings to fixed charges
(c)............................... 68.0x 56.6x 43.3x 75.2x 88.1x 78.7x 69.5x
</TABLE>
- ------------------------
See footnotes below.
27
<PAGE>
SELECTED SUPPLEMENTAL COMBINED FINANCIAL DATA
The following table sets forth selected Combined Financial Data as of and
for each of the five years ended December 31, 1997 and the three months ended
March 31, 1998 and 1997. The balance sheet data presented below as of December
31, 1996 and 1997 and the statement of income data for each of the three years
in the period ended December 31, 1997 have been derived from the Combined
Financial Statements included elsewhere herein. The Combined Financial
Statements were audited by Deloitte & Touche LLP, independent auditors, as set
forth in their report also included herein. The selected combined balance sheet
data as of December 31, 1993, 1994 and 1995, the selected combined income
statement data for the years ended December 31, 1993 and 1994 and the financial
statement data for the quarters ended March 31, 1997 and 1998 have been derived
from unaudited Combined Financial Statements which, in the opinion of management
have been prepared on the same basis as the audited Combined Financial
Statements necessary for a fair presentation of the results of operations for
the periods presented. The information set forth below should be read in
conjunction with the "Unaudited Pro Forma Condensed Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Historical Financial Statements, each of which is
included elsewhere in this Prospectus. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the results to be
expected for the full fiscal year.
<TABLE>
<CAPTION>
QUARTER ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
-------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- ---------- --------- ---------- ---------- --------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Sales.................................... $ 85,518 $ 116,173 $ 85,264 $ 144,735 $ 182,385 $ 39,117 $ 46,842
Cost of sales............................ 51,940 71,246 55,382 94,758 117,733 25,979 32,124
--------- ---------- --------- ---------- ---------- --------- ---------
Gross profit........................... 33,578 44,927 29,882 49,977 64,652 13,138 14,718
Selling, general and administrative
expenses............................... 7,320 12,322 8,246 11,203 13,019 2,973 3,286
--------- ---------- --------- ---------- ---------- --------- ---------
Operating income......................... 26,258 32,605 21,636 38,774 51,633 10,165 11,432
Interest income (expense), net............. 128 80 144 162 279 55 72
--------- ---------- --------- ---------- ---------- --------- ---------
Income before state income taxes........... 26,386 32,685 21,780 38,936 51,912 10,220 11,504
State income taxes(a)...................... 678 521 283 567 778 145 173
--------- ---------- --------- ---------- ---------- --------- ---------
Net income(a).............................. $ 25,708 $ 32,164 $ 21,497 $ 38,369 $ 51,134 $ 10,075 $ 11,331
--------- ---------- --------- ---------- ---------- --------- ---------
--------- ---------- --------- ---------- ---------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 8,006 $ 4,065 $ 8,155 $ 7,079 $ 8,957 $ 10,625 $ 12,377
Working capital.......................... 9,411 5,972 6,601 6,901 12,032 11,091 13,059
Total assets............................. 19,347 18,710 21,047 23,783 31,505 29,621 34,438
Total debt............................... 915 770 640 540 420 510 400
Shareholders' equity (deficit)........... 11,502 9,102 9,789 11,498 16,643 15,537 17,652
OTHER DATA(B):
EBITDA (b)............................... $ 26,487 $ 33,084 $ 22,363 $ 39,676 $ 52,669 $ 10,527 $ 11,634
EBITDA margin (b)........................ 31.0% 28.5% 26.2% 27.4% 28.9% 26.9% 24.8%
Cash flows provided by:
Operating activities (b)............... $ 26,906 $ 33,477 $ 25,814 $ 37,995 $ 49,037 $ 10,174 $ 13,802
Investing activities................... (646) (2,650) (786) (2,311) (1,050) (211) (587)
Financing activities................... (19,440) (31,065) (20,939) (36,760) (46,109) (6,066) (9,795)
Capital expenditures..................... 982 1,728 786 2,311 1,050 211 587
Dividends(a)(b).......................... 20,726 34,565 20,808 36,660 45,989 6,036 10,321
Depreciation and amortization............ 229 479 727 902 1,036 132 202
Ratio of earnings to fixed charges (c)... 82.9x 92.7x 56.0x 96.3x 115.4x 90.1x 92.4x
</TABLE>
- ------------------------
See footnotes on the following page.
28
<PAGE>
(a) The Company has elected S corporation status for federal and state income
tax purposes, and other than a 1.5% state tax, taxable income is passed
through to the Company's shareholders. The shareholders' effective combined
federal and state tax rate for 1997 was approximately 45%. The Company has
historically distributed as a dividend to its shareholders amounts
sufficient for the shareholders to pay their required taxes. In accordance
with this practice, the Company distributed to those persons that were
shareholders at the time of the Reorganization, all net income generated by
the Company from January 1, 1998 through the Original Issue Date in excess
of $2.0 million, in order for such shareholders to pay such taxes for the
period from January 1, 1998 through the Original Issue Date.
(b) EBITDA is defined as net income before interest income (expense), income
taxes and depreciation and amortization. Management believes that EBITDA and
EBITDA margin are measures commonly used by analysts and investors to
determine a company's ability to service and incur debt. Accordingly, this
information has been presented to permit a more complete analysis. However,
EBITDA as reported may not be comparable to similarly titled measures used
by other companies. EBITDA margin is computed by dividing EBITDA by sales.
EBITDA should not be considered a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting principles
(which is also presented in the accompanying table) or as a measure of
profitability or liquidity.
(c) In calculating the ratio of earnings to fixed charges, earnings consist of
income before income taxes plus fixed charges. Fixed charges consist of
interest expense (which includes amortization of deferred financing costs)
and one-third of rental expense, deemed representative of that portion of
rental expense estimated to be attributable to interest. On a pro forma
basis, after giving effect to the Old Notes Offering, the Acquisition
Facility and the Reorganization, the ratio of earnings to fixed charges for
the year ended December 31, 1997 and the quarter ended March 31, 1998 would
have been 1.5x and 1.2x, respectively.
29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Condensed Combined Balance Sheet gives
effect to the Old Notes Offering, the Acquisition Facility and the
Reorganization as if such transactions had occurred on March 31, 1998. The
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1997 and the three months ended March 31, 1998 gives effect
to the Old Notes Offering, the Acquisition Facility and the Reorganization as if
such transactions had occurred at the beginning of the periods presented. As
part of the Reorganization, Mr. Marconi increased his ownership interest in the
Company to 94%. In addition, the Company and its predecessors, D&F, Omni-Pak,
West Coast and Dynamic, are S corporations, and other than a 1.5% state tax,
income tax is paid by the shareholders. The shareholders' combined federal and
state tax rate in 1997 was approximately 45%. The Company has historically
distributed as a dividend to its shareholders amounts sufficient for the
shareholders to pay their required income taxes. In accordance with this
practice, the Company distributed to those persons that were shareholders at the
time of the Reorganization, all net income generated by the Company from January
1, 1998 through the Original Issue Date in excess of $2.0 million, in order for
such shareholders to pay such taxes for the period from January 1, 1998 through
the Original Issue Date. On a pro forma basis for 1997 giving effect to the Old
Notes Offering and the Reorganization, the distribution related to the tax
payment would have been approximately $11.4 million in calendar 1997 and $2.2
million for the quarter ended March 31, 1998. Such amounts represent the sum of
45% of pro forma net income and 45% of pro forma amortization of intangibles,
which will not be deductible for income tax purposes. These amounts are not
included as income tax expense in the accompanying Unaudited Pro Forma Condensed
Combined Statement of Operations.
The Unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with "Capitalization," "Selected Historical and Pro Forma
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Historical Financial Statements, each of
which appears elsewhere in this Prospectus. The pro forma data do not purport to
represent what the Company's actual results of operations or financial position
would have been had the Old Notes Offering, the Acquisition Facility and the
Reorganization occurred on such dates. The Unaudited Pro Forma Condensed
Combined Statement of Operations data also do not purport to project the results
of operations of the Company for the current year or for any other period.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OMNI-PAK
D&F AND
INDUSTRIES AFFILIATES PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................... $ 5,581 $ 6,796 $ 3,802(2) $ 16,179
Accounts receivable, net of allowances...................... 3,114 3,367 -- 6,481
Inventories................................................. 7,414 3,034 -- 10,448
Prepaid expenses and other current assets................... 344 265 -- 609
----------- ------------ ----------- -----------
Total current assets........................................ 16,453 13,462 3,802 33,717
Property and equipment, net................................. 2,245 2,348 -- 4,593
Intangibles and other assets................................ -- -- 143,537(3) 143,537
----------- ------------ ----------- -----------
TOTAL ASSETS $ 18,698 $ 15,810 147,339 $ 181,847
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable and accrued expenses....................... $ 8,939 $ 7,517 -- $ 16,456
Line of credit.............................................. 400 -- 1,100(4) 1,500
----------- ------------ ----------- -----------
Total current liabilities................................... 9,339 7,517 1,100 17,956
Long-term debt, less current installments................... -- -- 218,392(2) 218,392
Stockholders' Equity (Deficit)
Common stock................................................ 1,026 209 (727)(5) 508
Retained earnings (deficit)................................. 8,333 8,084 (71,426)(5) (55,009)
----------- ------------ ----------- -----------
Total stockholders' equity (deficit)........................ 9,359 8,293 (72,153) (54,501)
----------- ------------ ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)........ $ 18,698 $ 15,810 $ 147,339 $ 181,847
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OMNI-PAK
D&F AND
INDUSTRIES AFFILIATES PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
----------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Net Sales.................................................. $ 85,191 $ 98,587 $ (1,393)(6) $ 182,385
Cost Of Sales.............................................. 55,020 64,106 (1,393)(6) 117,733
----------- ------------ -------------- -----------
Gross Profit............................................. 30,171 34,481 -- 64,652
Selling, general and administrative expenses............... 7,088 5,931 13,683(7) 26,702
----------- ------------ -------------- -----------
Operating income......................................... 23,083 28,550 (13,683) 37,950
Interest income (expense), net............................. 82 197 (26,277)(8) (25,998)
----------- ------------ -------------- -----------
Income before state taxes.................................. 23,165 28,747 (39,960) 11,952
State income taxes......................................... 350 428 (394)(9) 384
----------- ------------ -------------- -----------
Net income............................................... $ 22,815 $ 28,319 $ (39,568) $ 11,568
----------- ------------ -------------- -----------
----------- ------------ -------------- -----------
</TABLE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
OMNI-PAK
D&F AND
INDUSTRIES AFFILIATES PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
----------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Net Sales.................................................. $ 22,372 $ 24,847 $ (377)(6) $ 46,842
Cost Of Sales.............................................. 15,595 16,906 $ (377)(6) 32,124
----------- ------------ ------- -----------
Gross Profit............................................. 6,777 7,941 -- 14,718
Selling, general and administrative expenses............... 1,750 1,536 3,421(7) 6,707
----------- ------------ ------- -----------
Operating income......................................... 5,027 6,405 (3,421) 8,011
Interest income (expense), net............................. 38 34 (6,569)(8) (6,497)
----------- ------------ ------- -----------
Income before state taxes.................................. 5,065 6,439 (9,990) 1,514
State income taxes......................................... 76 97 (150)(9) 23
----------- ------------ ------- -----------
Net income............................................... $ 4,989 $ 6,342 $ (9,840) $ 1,491
----------- ------------ ------- -----------
----------- ------------ ------- -----------
</TABLE>
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
(IN THOUSANDS)
(1) The unaudited pro forma condensed combined financial statements give effect
to the Old Notes Offering, the Acquisition Facility and the Reorganization,
including the recapitalization of D&F, the Company's predecessor (the
"Recapitalization"), and the acquisition by the Company of Omni-Pak, Dynamic
and West Coast (collectively "Omni-Pak and Affiliates"). See "Prospectus
Summary--The Reorganization."
(2) Acquisition: The Acquisition will be accounted for under the purchase method
of accounting. The purchase price consists of $136,867 of cash and $1,000 of
estimated transaction costs and will be allocated to Omni-Pak and
Affiliates' net assets acquired based on their respective fair values as of
the closing date. Although the final allocation has not been determined, the
following sets forth certain preliminary allocations:
<TABLE>
<S> <C> <C> <C>
Goodwill and other intangibles............................... $ 136,294
Net assets of Omni-Pak and Affiliates at estimated fair
value........................................................ $ 1,573
Cash......................................................... $ 137,867
Prior to the completion of the allocation, the Company must determine the final
allocation of the purchase price. The Company believes that substantially all of the
purchase price over the net assets acquired will be allocated to goodwill and other
intangibles.
Recapitalization: The Recapitalization will result in the repurchase of 543,026 shares
of common stock at a total price of $58,700. This amount is allocated as a reduction of
stockholders' equity (deficit) as follows:
Common Stock................................................. $ 727
Retained earnings (deficit).................................. $ 57,973
Cash......................................................... $ 58,700
Issuance of the Old Notes: On April 23, 1998, $225,000 in aggregate principal amount of
the Old Notes were issued at 97.063% of face value.
Cash......................................................... $ 218,392
Old Notes Discount........................................... $ 6,608
Old Notes Payable............................................ $ 225,000
Debt Issue Costs............................................. $ 7,243
Cash......................................................... $ 7,243
Acquisition Facility: Concurrent with the issuance of the Old Notes, the Company
entered into a $50 million credit facility of which up to $10 million can be used for
working capital and other general corporate purposes. The Company borrowed $1,500, of
which $400 was used to repay the existing line of credit (see Note 4).
</TABLE>
33
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<S> <C> <C> <C>
The following summarizes the cash flows from the Recapitalization, the Offering and the
Acquisition:
Offering proceeds............................................ $ 218,392
Borrowing under working capital line......................... 1,500
Consideration paid for the Recapitalization.................. (58,700)
Consideration paid for the Acquisition....................... (137,867)
Transaction fees and expenses................................ (7,243)
Repay line of credit......................................... (400)
April distributions to shareholders.......................... (11,880)
-----------
Change in cash............................................... $ 3,802
-----------
-----------
</TABLE>
(3) Intangibles and other assets: The following represents the change in
intangibles and other assets resulting from the Offering and the
Acquisition:
<TABLE>
<S> <C> <C>
Excess of purchase price over net assets acquired..................... $ 136,294
Deferred debt costs................................................... 7,243
-----------
Total intangibles and other assets.................................... $ 143,537
-----------
-----------
</TABLE>
(4) Line of Credit: Reflects the incremental borrowing from the Acquisition
Facility:
<TABLE>
<S> <C> <C>
Total amount borrowed................................................. $ 1,500
Repay existing debt................................................... (400)
-----------
Change in line of credit.............................................. $ 1,100
-----------
-----------
</TABLE>
(5) Stockholders' equity (deficit):
<TABLE>
<S> <C> <C> <C>
Recapitalization:
Common Stock............................................. $ (727)
Retained earnings (deficit).............................. (57,973) $ (58,700)
-----------
Omni-Pak and Affiliates:
Net assets acquired...................................... $ (1,573)
April 1998 distributions................................. (6,720) (8,293)
-----------
D&F April 1998 distributions............................. (5,160)
-----------
Change in stockholders' equity........................... $ (72,153)
-----------
-----------
</TABLE>
(6) Elimination entries: Reflects elimination of intercompany sales and related
cost of sales between D&F and Omni-Pak and Affiliates.
(7) Selling, general and administrative expenses: Reflects amortization of
intangibles over 10 years.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
(8) Interest income (expense), net: Reflects adjustments to interest expense as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
12/31/97
-------------
<S> <C> <C>
Interest on Old Notes at an effective rate of 11.5%..................................... $ 25,115
Amortization of deferred financing fees on Old Notes over 10 years...................... 624
Interest on Acquisition Facility........................................................ 88
Amortization of Acquisition Facility fees over 5 years.................................. 200
Fee for unused Acquisition Facility..................................................... 250
-------------
Adjustment to interest expense.......................................................... $ 26,277
-------------
-------------
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
3/31/98
-------------
<S> <C> <C>
Interest on Old Notes at an effective rate of 11.5%..................................... $ 6,279
Amortization of deferred financing fees on Old Notes over 10 years...................... 156
Interest on Acquisition Facility........................................................ 22
Amortization of Acquisition Facility fees over 5 years.................................. 50
Fee for unused Acquisition Facility..................................................... 62
-------------
Adjustment to interest expense.......................................................... $ 6,569
-------------
-------------
</TABLE>
As the only additional cost incurred in connection with the issuance of the
New Notes is the cost of registration under the Securities Act, the effective
interest rate associated with the New Notes is substantially the same as the
interest rate of the Old Notes. The Notes bear interest at an annual contractual
rate of 11%. The effective interest rate of the Notes, net of original issue
discount, is 11.5% per annum.
(9) Provision for state income taxes: Reflects the adjustment to state income
taxes at 1.5% on the deductible portion of the adjustment to interest
expense. The Company is an S Corporation for Federal and California income
tax purposes; accordingly, income tax is paid by the Company's shareholders.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE HISTORICAL
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
The Company, founded in 1978 by Mr. Marconi and Mr. Siegel, is one of the
world's leading developers and custom manufacturers of dietary and nutritional
supplements. The Company develops specialty products for branded distribution
companies, branded retailers, television marketing companies and network
marketing organizations who then distribute such products throughout the world.
Prior to the Reorganization, the Company's operations were conducted by four
S corporations: D&F, Omni-Pak, Dynamic and West Coast. These companies were
reorganized in the Reorganization to consolidate related and complementary
business activities under one holding company, Global Health Sciences, Inc.
(formerly D&F). These companies historically operated under common management
and had a high degree of common ownership, customers and systems, including
similar accounting and financial reporting systems. As S corporations, all
federal and state income taxes (other than a minimum state income tax of 1.5%)
for each of such corporations are paid directly by the shareholders. The Company
makes quarterly distributions to its shareholders in order for such shareholders
to pay their state and federal income taxes. In 1997, the effective income tax
rate for the Company's shareholders was approximately 45%. The Company has
historically distributed, and intends to continue to distribute, as a dividend
to its shareholders amounts sufficient for the shareholders to pay their
required income taxes. On a pro forma basis for 1997 giving effect to the Old
Notes Offering and the Reorganization, the distribution related to the tax
payment would have been approximately $11.4 million, representing the sum of 45%
of pro forma net income of $12.5 million and 45% of pro forma amortization of
intangibles of $12.9 million, which will not be deductible for income tax
purposes.
In connection with the consummation of the Old Notes Offering, (i) D&F
changed its name to Global Health Sciences, Inc., (ii) Global Health Sciences,
Inc. formed Global Sub, (iii) Global Sub formed D&F Sub, Omni-Pak Merger Sub,
Dynamic Merger Sub and West Coast Merger Sub, (iv) Global Health Sciences, Inc.
transferred to D&F Sub all of its assets and liabilities except for its
obligation under the Notes and the capital stock of Global Sub, (v) Global
Health Sciences, Inc. acquired Omni-Pak and Affiliates for approximately $137.9
million in cash and expenses, in transactions accounted for under the purchase
method of accounting, pursuant to the mergers of Omni-Pak Merger Sub and
Omni-Pak (with Omni-Pak as the surviving corporation), Dynamic Merger Sub and
Dynamic (with Dynamic as the surviving corporation), and West Coast Merger Sub
and West Coast (with West Coast as the surviving corporation) and (vi) the
shareholders of Global Health Sciences, Inc. received approximately $58.7
million in cash in exchange for the cancellation of approximately 50% of the
outstanding capital stock of Global Health Sciences, Inc.
The Company's historical growth in sales and EBITDA has been primarily
attributable to increased sales to Herbalife, the Company's largest customer.
Sales to Herbalife have increased from approximately $70.5 million in fiscal
year 1995, representing approximately 83% of the Company's sales in that year,
to approximately $137.6 million in fiscal year 1997, representing approximately
76% of the Company's sales in that year. Due to the significant percentage of
the Company's sales attributable to Herbalife, fluctuations in Herbalife's
inventory levels or inaccurate sales forecasting by Herbalife have had adverse
effects on Company sales in the past and could have adverse effects in the
future. The Company and Herbalife recently entered into new three-year supply
agreements. See "Risk Factors--Dependence on Significant Customer; Supply
Agreements."
The Company's cost of sales consists primarily of labor costs, materials and
manufacturing overhead. The Company's selling, general and administrative
expenses consist primarily of salaries and wages, sales
36
<PAGE>
commissions, professional fees and rent. The Company does not anticipate that,
as a percentage of sales, future selling, general and administrative expenses
incurred in connection with implementing its growth strategy will be materially
different from historical percentages. There can be no assurance, however, in
this regard.
In addition to the historical financial information and accompanying
discussion and analysis regarding D&F presented below, supplemental combined
historical financial information and accompanying discussion and analysis are
also presented because, in the opinion of management, such information provides
a more meaningful representation of the Company's underlying business and cash
flows.
D&F
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
SALES. In the first quarter of 1998, sales increased by $3.5 million or
18.5 %, to $22.4 million compared to $18.9 million in the first quarter of 1997.
This increase in sales primarily resulted from an increase of (i) approximately
$2.1 million or 12.8%, to $18.5 million, in sales to Herbalife arising from
Herbalife's continued growth in foreign markets, particularly Japan and an
increase in its inventory levels to support such growth and (ii) approximately
$1.3 million, or 50.0%, in sales to other customers, particularly in the sports
and performance nutrition segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $3.5 million, or
28.9%, to $15.6 million in the first quarter of 1998 compared to $12.1 million
in the first quarter of 1997, while cost of sales as a percentage of sales
increased to 69.7% in the first quarter of 1998 compared to 64.1% in the first
quarter of 1997, thereby reducing the gross margin in the first quarter of 1998
to 30.3% from 35.9% in the first quarter of 1997. The increase in cost of sales
resulted from an increase in sales in the first quarter of 1998 compared to the
first quarter of 1997. The reduction in gross margin principally resulted from
price reductions given to Herbalife as a result of the new supply agreement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.3 million, or 20.0%, to $1.8 million in
the first quarter of 1998 compared to $1.5 million in the first quarter of 1997.
As a percentage of sales, selling, general and administrative expenses decreased
to 7.8% in the first quarter of 1998 compared to 8.1% in the first quarter of
1997. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale as sales volume increased.
NET INCOME. Net income decreased by $0.2 million, or 4.2%, to $5.0 million
in the first quarter of 1998 compared to $5.2 million in the first quarter of
1997. This decrease resulted primarily from a decrease in the gross margin on
sales to Herbalife as a result of the new supply agreement.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. In 1997, sales increased by $11.7 million, or 15.9%, to $85.2
million compared to $73.5 million in 1996. This increase in sales primarily
resulted from the increase in sales to Herbalife arising from Herbalife's
continued growth, particularly in Japan and Taiwan, and to an increase in
Herbalife's inventory levels to support such growth.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $7.1 million, or
14.7%, to $55.0 million in 1997 compared to $48.0 million in 1996, while cost of
sales as a percentage of sales decreased to 64.6% in 1997 compared to 65.2% in
1996, thereby improving the gross margin in 1997 to 35.4% from 34.8% in 1996.
The increase in cost of sales resulted from the increase in sales in 1997
compared to 1996, and the improvement in gross margin principally resulted from
efficiency improvements in manufacturing operations.
37
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.7 million, or 11.7%, to $7.1 million in
1997 compared to $6.3 million in 1996. As a percentage of sales, selling,
general and administrative expenses decreased to 8.3% in 1997 compared to 8.6%
in 1996. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale, as the Company's general and administrative
expenses remained relatively constant despite the increase in sales.
NET INCOME. Net income increased by $3.8 million, or 20.1%, to $22.8
million in 1997 compared to $19.0 million in 1996. This increase resulted
primarily from the 15.9% increase in sales and a slight improvement in gross
margin in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. In 1996, sales increased by $21.4 million, or 40.9%, to $73.5
million compared to $52.2 million in 1995. This increase in sales primarily
resulted from the increase in sales to Herbalife arising from Herbalife's
continued growth, particularly in Japan, Russia and Brazil, and the increase in
sales to other customers.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $13.1 million,
or 37.4%, to $48.0 million in 1996 compared to $34.9 million in 1995, while cost
of sales as a percentage of sales decreased to 65.2% in 1996 compared to 66.9%
in 1995, thereby improving the gross margin in 1996 to 34.8% from 33.1% in 1995.
The increase in cost of sales resulted from the increase in sales in 1996
compared to 1995, and the improvement in gross margin principally resulted from
efficiency improvements in manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.9 million, or 16.2%, to $6.3 million in
1996 compared to $5.5 million in 1995. As a percentage of sales, selling,
general and administrative expenses decreased to 8.6% in 1996 compared to 10.5%
in 1995. The increase in selling, general and administrative expenses primarily
resulted from growth in sales, particularly commissions relating thereto. The
reduction in selling, general and administrative expenses as a percentage of
sales primarily resulted from economies of scale.
NET INCOME. Net income increased by $7.2 million, or 61.7%, to $19.0
million in 1996 compared to $11.7 million in 1995. This increase resulted
primarily from the 40.9% increase in sales, a slight improvement in gross margin
in 1995, and a decrease in selling, general and administrative costs as a
percentage of sales to 8.6% in 1996 from 10.5% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
D&F's primary cash needs are working capital and capital expenditures. Prior
to the Reorganization, D&F financed its cash requirements through internally
generated cash flow. D&F currently expects that its primary source liquidity
will be cash flow from operations and the Acquisition Facility. The Acquisition
Facility is secured by all of the assets of the Company and has a five-year
term. It includes a $10.0 million sublimit for working capital and general
corporate purposes while all undrawn amounts will be available for acquisitions
permitted by the terms thereof. As of March 31, 1998, D&F had cash and cash
equivalents of approximately $5.6 million.
Cash provided by operating activities for the years ended December 31, 1997,
1996, and 1995 was $21.1 million, $18.9 million and $14.4 million, respectively.
The major operating uses for these periods resulted from changes in accounts
receivable, inventories and prepaid expenses and other current assets. The most
significant of these changes was the increase of $3.7 million in inventories for
the year ended December 31, 1997, which was primarily attributable to the
purchase of additional raw materials for the
38
<PAGE>
production of a RoseOx based product that did not meet its sales forecast. For
the quarter ended March 31, 1998 there were no significant changes except for a
reduction of inventory of $0.6 million.
Cash used in investing activities for the years ended December 31, 1997,
1996 and 1995 was $0.2 million, $0.9 million and $0.4 million, respectively.
Investing activities consisted of purchases of property and equipment.
Cash used by D&F in financing activities for the years ended December 31,
1997, 1996 and 1995 was $21.7 million, $17.9 million and $11.3 million,
respectively. The principal component of these financing activities for the
years ended December 31, 1997, 1996 and 1995 was cash dividends paid to
shareholders in the amount of $21.5 million, $17.8 million and $11.2 million,
respectively.
Cash increased by $1.8 million in the quarter ended March 31, 1998 compared
to $1.0 million in the quarter ended March 31, 1997. Cash provided by operations
was $5.4 million and $4.2 million in the first quarter of 1998 and the first
quarter of 1997, respectively. Distributions to shareholders were $3.2 million
in both the first quarter of 1998 and the first quarter of 1997. Additions to
property and equipment were $.4 million and $0 million in the first quarter of
1998 and the first quarter of 1997, respectively.
RAVEN INDUSTRIES D/B/A/ OMNI-PAK INDUSTRIES AND AFFILIATES
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
SALES. In the first quarter of 1998, sales increased by $4.6 million or
22.7 %, to $24.8 million compared to $20.3 million in the first quarter of 1997.
This increase in sales primarily resulted from an increase of (i) approximately
$2.0 million or 16.8%, to $13.9 million, in sales to Herbalife arising from
Herbalife's continued growth in foreign markets, particularly Japan, and an
increase in its inventory levels to support such growth and (ii) approximately
$2.6 million, or 44.5%, in sales to EAS.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $3.0 million, or
21.6%, to $16.9 million in the first quarter of 1998 compared to $13.9 million
in the first quarter of 1997, while cost of sales as a percentage of sales
decreased to 68.1% in the first quarter of 1998 compared to 68.5% in the first
quarter of 1997, thereby increasing the gross margin in 1998 to 31.9% from 31.6%
in the first quarter of 1997. The increase in cost of sales resulted from an
increase in sales in the first quarter of 1998 compared to the first quarter of
1997. The gross margin increased principally as a result of the large increase
in EAS sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were effectively unchanged from the prior year. Selling,
general and administrative expenses were $1.5 million in both the first quarter
of 1998 and the first quarter of 1997. As a percentage of sales, selling,
general and administrative expenses decreased to 6.0% in the first quarter of
1998 compared to 7.4% in the first quarter of 1997, due to the increase in
sales.
NET INCOME. Net income increased by $1.5 million, or 30.1%, to $6.3 million
in the first quarter of 1998 compared to $4.9 million in the first quarter of
1997. This increase resulted primarily from the 22.7% increase in sales, a
slight improvement in gross margin in the first quarter of 1998 and a decrease
in selling, general and administrative costs as a percentage of sales.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. In 1997, sales increased by $25.2 million or 34.3 %, to $98.6
million compared to $73.4 million in 1996. This increase in sales primarily
resulted from an increase in sales to Herbalife arising from Herbalife's
continued growth in foreign markets, particularly Japan and Taiwan and an
increase in its inventory levels to support such growth and in sales to other
customers, particularly in the sports and performance nutrition segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $15.1 million,
or 30.8%, to $64.1 million in 1997 compared to $49.0 million in 1996, while cost
of sales as a percentage of sales decreased to 65.0% in
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1997 compared to 66.8% in 1996, thereby improving the gross margin in 1997 to
35.0% from 33.2% in 1996. The increase in cost of sales resulted from an
increase in sales in 1997 compared to 1996. The improvement in gross margin
principally resulted from the efficiency improvements in manufacturing
operations and the ability to pass through increases in raw material costs to
its customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.1 million, or 22.4%, to $5.9 million in
1997 compared to $4.9 million in 1996. As a percentage of sales, selling,
general and administrative expenses decreased to 6.0% in 1997 compared to 6.7%
in 1996. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale as sales volume increased.
NET INCOME. Net income increased by $8.9 million, or 45.9%, to $28.3
million in 1997 compared to $19.4 million in 1996. This increase resulted
primarily from the 34.3% increase in sales, a slight improvement in gross margin
in 1997 and a decrease in selling, general and administrative costs as a
percentage of sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. In 1996, sales increased by $38.9 million or 112.8%, to $73.4
million compared to $34.5 million in 1995. This increase in sales primarily
resulted from an increase in sales to Herbalife arising from Herbalife's
continued growth in foreign markets and in sales to other customers,
particularly in the sports and performance nutrition segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $27.1 million,
or 123.7%, to $49.0 million in 1996 compared to $21.9 million in 1995, while
cost of sales as a percentage of sales increased to 66.8% in 1996 compared to
63.5% in 1995, thereby reducing the gross margin in 1997 to 33.2% from 36.5% in
1995. The increase in cost of sales resulted from an increase in sales in 1996
compared to 1995. The reduction in gross margin principally resulted from raw
material price increases that were not passed through to customers until 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $2.1 million, or 75.0%, to $4.9 million in
1996 compared to $2.8 million in 1995. As a percentage of sales, selling,
general and administrative expenses decreased to 6.7% in 1996 compared to 8.1%
in 1995. The increase in selling, general and administrative expenses primarily
resulted from (i) commissioned sales, (ii) personnel costs to support growth in
sales and (iii) product development costs. The reduction in selling, general and
administrative expenses as a percentage of sales primarily resulted from
economies of scale, as general and administrative expenses did not grow
proportionately to the increase in sales.
NET INCOME. Net income increased by $9.6 million, or 98.0%, to $19.4
million in 1997 compared to $9.8 million in 1996. This increase resulted
primarily from the 112.8% increase in sales, a slight improvement in gross
margin in 1997 and a decrease in selling, general and administrative costs as a
percentage of sales.
LIQUIDITY AND CAPITAL RESOURCES
Omni-Pak and Affiliates primary cash needs are working capital and capital
expenditures which are financed through internally generated cash flow. As of
March 31, 1998, Omni-Pak and Affiliates had cash and cash equivalents of
approximately $6.8 million.
Cash provided by operating activities for the years ended December 31, 1997,
1996, and 1995 was $27.9 million, $19.1 million and $11.1 million respectively.
The major operating uses for these periods resulted from changes in accounts
receivable, inventories and prepaid expenses and other current assets.
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Cash used in investing activities for the years ended December 31, 1997,
1996 and 1995 was $0.8 million, $1.4 million and $0.2 million, respectively.
Investing activities consisted of purchases of property and equipment.
Cash used by Omni-Pak in financing activities for the years ended December
31, 1997, 1996 and 1995 was $24.4 million, $18.8 million and $9.6 million,
respectively. The principal component of these financing activities for the
years ended December 31, 1997, 1996 and 1995 was cash dividends paid to
shareholders in the amount of $24.4 million, $18.8 million and $9.6 million,
respectively.
Cash increased by $1.6 million in the quarter ended March 31, 1998 compared
to $2.6 million in the quarter ended March 31, 1997. Cash provided by operations
was $8.4 million and $5.4 million in the first quarter of 1998 and the first
quarter of 1997, respectively. Distributions to shareholders were $6.6 million
and $2.8 million in the first quarter of 1998 and the first quarter of 1997,
respectively. Additions to property and equipment were $.2 million and $0
million in the first quarter of 1998 and the first quarter of 1997,
respectively.
COMBINED D&F, OMNI-PAK AND AFFILIATES
QUARTER ENDED MARCH 31, 1998 COMPARED TO QUARTER ENDED MARCH 31, 1997
SALES. In the first quarter of 1998, sales increased by $7.7 million or
19.7%, to $46.8 million compared to $39.1 million in the first quarter of 1997.
This increase in sales primarily resulted from an increase of (i) approximately
$3.3 million or 11.2%, to $32.7 million, in sales to Herbalife arising from
Herbalife's continued growth in foreign markets, particularly Japan, and an
increase in its inventory levels to support such growth, (ii) approximately $3.2
million, or 55.2%, in sales to EAS arising from EAS's continued growth, and
(iii) $1.1 million in sales to other customers.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $6.1 million, or
23.5%, to $32.1 million in the first quarter of 1998 compared to $26.0 million
in the first quarter of 1997, while cost of sales as a percentage of sales
increased to 68.6% in the first quarter of 1998 compared to 66.5% in the first
quarter of 1997, thereby decreasing the gross margin in the first quarter of
1998 to 31.4% from 33.5% in the first quarter of 1997. The increase in cost of
sales resulted from an increase in sales in the first quarter of 1998 compared
to the first quarter of 1997. The reduction in gross margin principally resulted
from price reductions given to Herbalife as a result of the new supply
agreements.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $0.3 million, or 10.0%, to $3.3 million in
the first quarter of 1998 compared to $3.0 million in the first quarter of 1997.
As a percentage of sales, selling, general and administrative expenses decreased
to 7.1% in the first quarter of 1998 compared to 7.7% in the first quarter of
1997. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale as sales volume increased.
NET INCOME. Net income increased by $1.2 million, or 11.9%, to $11.3
million in the first quarter of 1998 compared to $10.1 million in the first
quarter of 1997. This increase resulted primarily from the 19.7% increase in
sales and a decrease in selling, general and administrative costs as a
percentage of sales to 7.1% from 7.7%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
SALES. In 1997, sales increased by $37.7 million, or 26.1%, to $182.4
million compared to $144.7 million in 1996. This increase in sales primarily
resulted from an increase of (i) approximately $30.7 million or 28.8%, to $137.6
million, in sales to Herbalife arising from Herbalife's continued growth in
foreign markets, particularly Japan and Taiwan, and an increase in its inventory
levels to support such growth and
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(ii) approximately $7.0 million, or 18.3%, in sales to other customers,
particularly in the sports and performance nutrition segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $23.0 million,
or 24.2%, to $117.7 million in 1997 compared to $94.8 million in 1996, while
cost of sales as a percentage of sales decreased to 64.6% in 1997 compared to
65.5% in 1996, thereby improving the gross margin in 1997 to 35.4% from 34.5% in
1996. The increase in cost of sales resulted from the Company's increase in
sales in 1997 compared to 1996. The improvement in the Company's gross margin
principally resulted from efficiency improvements in manufacturing operations.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $1.8 million, or 16.2%, to $13.0 million in
1997 compared to $11.2 million in 1996. As a percentage of sales, selling,
general and administrative expenses decreased to 7.1% in 1997 compared to 7.7%
in 1996. The increase in selling, general and administrative expenses primarily
resulted from an increase in (i) commissioned sales, (ii) personnel costs to
support growth in sales and (iii) product development costs. The reduction in
selling, general and administrative expenses as a percentage of sales primarily
resulted from economies of scale, as the Company's general and administrative
expenses remained relatively constant despite the increase in sales.
NET INCOME. Net income increased by $12.8 million, or 33.3%, to $51.1
million in 1997 compared to $38.4 million in 1996. This increase resulted
primarily from the 26.1% increase in sales, a slight improvement in gross margin
in 1997 and a decrease in selling, general and administrative costs as a
percentage of sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. In 1996, sales increased by $59.5 million, or 69.8%, to $144.7
million compared to $85.3 million in 1995. This increase in sales primarily
resulted from an increase of (i) approximately $36.4 million, or 51.6%, to
$106.9 million in sales to Herbalife arising primarily from Herbalife's
continued growth in foreign markets, particularly in Japan, Russia and Brazil,
and (ii) approximately $23.1 million in sales to other customers, particularly
in the sports and performance nutrition segment.
COST OF SALES AND GROSS PROFIT. Cost of sales increased by $39.4 million,
or 71.1%, to $94.8 million in 1996 compared to $55.4 million in 1995, while cost
of sales as a percentage of sales increased to 65.5% in 1996 compared to 65.0%
in 1995, resulting in a decrease in gross margin in 1996 to 34.5% from 35.0% in
1995. The increase in cost of sales resulted from the Company's increase in
sales in 1996 compared to 1995. The decrease in the Company's gross profit
margin principally resulted from a change in product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $3.0 million or 35.9%, to $11.2 million in
1996 compared to $8.2 million in 1995. As a percentage of sales, selling,
general and administrative expenses decreased to 7.7% in 1996 compared to 9.7%
in 1995. The increase in selling, general and administrative expenses primarily
resulted from growth in sales, particularly commissions relating thereto. The
reduction in selling, general and administrative expenses as a percentage of
sales primarily resulted from economies of scale.
NET INCOME. Net income increased by $16.9 million, or 78.6%, to $38.4
million in 1997 compared to $21.5 million in 1996. This increase resulted
primarily from the 69.8% increase in sales and a decrease in selling, general
and administrative costs as a percentage of sales to 7.7% from 9.7% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash needs are working capital and capital
expenditures. Prior to the Reorganization, the Company financed its cash
requirements through internally generated cash flow. The Company currently
expects that its primary source of liquidity will be cash flow from operations
and the
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$50.0 million Acquisition Facility. The Acquisition Facility is secured by all
of the assets of the Company and its subsidiaries and has a five-year term. It
includes a $10.0 million sublimit for working capital and general corporate
purposes while all undrawn amounts will be available for acquisitions permitted
by the terms thereof. As of December 31, 1997, the Company had cash and cash
equivalents of approximately $9.0 million.
Cash provided by operating activities for the years ended December 31, 1997,
1996 and 1995 was $49.0 million, $38.0 million and $25.8 million, respectively.
The major operating uses for these periods resulted from changes in accounts
receivable, inventories and prepaid expenses and other current assets. The most
significant of these changes was the increase of $3.7 million in inventories for
the year ended December 31, 1997, which was primarily attributable to the
purchase of additional raw materials for the production of a RoseOx-based
product that did not meet its sales forecast.
Cash used by the Company in investing activities for the years ended
December 31, 1997, 1996 and 1995 was $1.0 million, $2.3 million and $0.8
million, respectively. The Company's investing activities consisted of purchases
of property and equipment.
Cash used by the Company in financing activities for the years ended
December 31, 1997, 1996 and 1995 was $46.1 million, $36.8 million and $20.9
million, respectively. The principal component of the Company's financing
activities for the years December 31, 1997, 1996 and 1995 was cash dividends
paid to the Company's shareholders in the amount of $46.0 million, $36.7 million
and $20.8 million, respectively. The Company has elected S Corporation status
for federal and state tax purposes, and other than a 1.5% state tax, income tax
is paid by the Company's shareholders. The Company distributes cash dividends to
shareholders to pay federal and state taxes, which were approximately 45% of net
income for 1996 and 1997.
The Company estimates that its aggregate capital expenditure requirements
for the year ended December 31, 1998 will be approximately $4.0 million. Under
the Indenture, the Company may purchase shares from its stockholders in an
amount not to exceed $4.0 million. At December 31, 1997, the Company's
consolidated indebtedness was $0.4 million, which consisted of one short-term
bank loan.
Cash increased by $3.4 million in the quarter ended March 31, 1998 compared
to $3.9 million in the quarter ended March 31, 1997. Cash provided by operations
was $13.8 million and $10.2 million in the first quarter of 1998 and the first
quarter of 1997, respectively. Distributions to shareholders were $9.8 million
and $6.0 million in the first quarter of 1998 and the first quarter of 1997,
respectively. Additions to property and equipment were $.6 million and $.2
million in the first quarter of 1998 and the first quarter of 1997,
respectively.
As of June 1, 1998, the Company's only debt, other than trade payables, is
the $218.4 million aggregate principal amount of the Notes (net of original
issue discount). After giving pro forma effect to the consummation of the Old
Notes Offering and the Reorganization, the Company would have had approximately
$16.2 million of cash on a pro forma basis as of March 31, 1998. The Company
believes that its available cash, internally generated cash flow and the
availability of undrawn amounts under the Acquisition Facility will be
sufficient to meet its working capital, capital expenditure and debt service
requirements in the foreseeable future.
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BUSINESS
OVERVIEW
The Company is one of the world's leading developers and custom
manufacturers of dietary and nutritional supplements. The Company develops and
manufactures vitamins, minerals, herbs, teas and other supplements in tablet,
capsule and powder form in a variety of shapes, sizes, colors, flavors and
textures designed to meet its customers' specifications. The Company supplies
specialty products for branded distributors, branded retailers, television
marketing companies and network marketing organizations who then distribute
these products around the world. The Company controls the entire development
process for the vast majority of its products from the initial market
identification stage through formulation, manufacturing, label design and
distribution to its customers. The Company believes that it has distinguished
itself during its 20 years in the industry through its ability to develop
products in anticipation of market trends, its superior customer service and its
ability to produce a large variety of high quality products. According to
Packaged Facts, domestic retail sales in the dietary and nutritional supplement
industry reached $6.5 billion in 1996 and are estimated to grow to $12.3 billion
by 2001. The Company believes that it is well positioned to capitalize on this
forecasted growth. For the fiscal year ended December 31, 1997, the Company's
sales increased by 26.1% to $182.4 million from $144.7 million for the same
period in 1996 and EBITDA increased by 32.7% to $52.7 million from $39.7 million
for the same period in 1996. During the three months ended March 31, 1998, sales
increased 19.7% to $46.8 million from $39.1 million in the same period in 1997,
net income increased 12.5% to $11.3 million from $10.1 million in the same
period in 1997 and EBITDA increased by 10.5% to $11.6 million from $10.5 million
in the first quarter of 1997. In addition, the ratio of earnings to fixed
charges increased from 101.5x in the first quarter of 1997 to 115.0x in the
first quarter of 1998 and cash flows from operations increased 35.7% to $13.8
million from $10.2 million in the same period in 1997. Uses of cash flow from
investing and financing activities were principally purchases of equipment of
$0.6 million in the first quarter of 1998 and $0.2 in the first quarter of 1997,
and cash dividends paid to stockholders of $9.8 in the first quarter of 1998 and
$6.0 in the first quarter of 1997.
The Company's products are sold to over 60 customers, including Herbalife,
EAS and Metagenics, who then distribute these products in over 35 countries.
Herbalife, the Company's largest customer, and one of the largest network
marketing companies specializing in a wide range of nutritional, weight
management and personal care products, reported retail sales of approximately
$1.5 billion and net sales of $782.5 million in 1997. For the fiscal year ended
December 31, 1997, sales to Herbalife represented approximately 76% of the
Company's total sales. See "Sales and Distribution."
COMPETITIVE STRENGTHS
ABILITY TO INTRODUCE NEW AND INNOVATIVE PRODUCTS. A key to the Company's
success has been its ability to quickly develop and market new and innovative
products. The Company believes it has been an industry leader in the
introduction of new products that utilize new scientific and medical findings
and which anticipate customer demand. The Company's seven-member product
development team, led by Mr. Marconi, who has over 40 years of experience in the
pharmaceutical and dietary and nutritional supplement industries, keeps abreast
of new developments by maintaining and building its extensive database and
library, reviewing a wide variety of scientific and medical journals and
attending industry seminars and conferences. The Company believes that its
ability to create new products, reformulate existing products and quickly
introduce these products to the marketplace will attract new customers and
places the Company in a position to capitalize on the strong anticipated growth
in the dietary and nutritional supplement industry.
FOCUS ON CUSTOMER SERVICE. The Company believes that its commitment to
customer service is its defining characteristic and has contributed to its
strong and loyal relationships with its customers. The Company's superior level
of customer service includes a flexible and responsive manufacturing process
that can accommodate simultaneous new product launches and unexpected customer
demand. Furthermore, the Company, at a customer's request, will assist such
customer with its foreign regulatory compliance
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process and coordinate its global marketing efforts. The Company's ability to
design, develop and manufacture new products has enabled it to be a "one-stop
shop" for most of its customers, alleviating the necessity of current and
potential customers to seek out multiple manufacturers to fulfill all of their
product needs. This capability also creates a synergy between the Company and
its customers in the development and enhancement of a customer's products or
product lines. The Company believes that its high level of customer service is a
competitive advantage and it plans to aggressively market its focus on customer
service to attract new customers.
HIGH PRODUCT QUALITY. The Company believes that its products meet the
highest quality standards in the industry. The Company believes that its
knowledge and expertise allow it to operate its manufacturing facilities in a
low-cost, highly efficient manner that provides the Company with a competitive
advantage. Utilizing technologically advanced laboratory equipment, the
Company's products are subject to product quality standards that include testing
each raw material for quality, physical conformity, cleanliness and, in the case
of botanicals, the absence of microorganisms. During the manufacturing process,
each tablet product is periodically tested for hardness, friability, thickness
and weight, and powder products are tested and sampled for proper mix and "taste
and mouth-feel" to ensure correct color and consistency. The Company believes
that these standards, developed over its 20 years in the industry, have earned
the Company a reputation for manufacturing high-quality products.
EXTENSIVE EXPERIENCE WITH START-UPS. Since its inception, the Company has
placed significant emphasis on working with new companies in the dietary and
nutritional supplement industry to develop products and strategies that will
help these companies achieve their goals and will enable the Company to
establish loyal and profitable customer relationships. In 1980, the Company
worked with Herbalife, then a start-up company, to develop products that would
fit Herbalife's long-term objectives. Herbalife is now not only the Company's
largest customer but also one of the largest network marketing companies in the
dietary and nutritional supplement industry. The Company also worked with EAS
when it began operations in 1994 to help the company create sports nutrition
products that would meet EAS's high standards and help EAS realize its
objectives in one of the fastest growing segments in the industry. For the year
ended December 31, 1997, sales to EAS totalled approximately $27.2 million.
Through these and other relationships, including manufacturing products for
Rockwood Cosmetics, Bally's Total Fitness and American Health Sciences, Inc.,
the Company has developed an expertise in developing and manufacturing products
for start-up companies and other companies attempting to break into the growing
dietary and nutritional supplement industry.
BUSINESS STRATEGY
EXPAND CUSTOMER BASE. The Company intends to increase sales by
significantly expanding its sales force, attracting new customers and developing
outlets for its products. As the dietary and nutritional supplement industry
grows, the Company plans to take advantage of new opportunities, such as sales
through health maintenance organizations, mail order companies and increased
sales to network marketing organizations. The Company also intends to expand its
presence in the health food/retail market through customers such as EAS, in the
direct television market through customers such as The Good Doctors and in
direct sales to fitness centers through Bally's Total Fitness. Management also
plans to attract new customers in the United States and the growing markets of
Europe, Latin America and Asia.
INCREASE PRODUCTION CAPACITY TO MEET GROWING INDUSTRY DEMAND. According to
estimates by Packaged Facts, the dietary and nutritional supplement industry
will grow at a compound annual growth rate of 13.6% between 1996 and 2001, and
the herbal supplement segment of the industry will grow at a compound annual
growth rate of 16.4% between 1997 and 2002. Management believes that this
projected growth provides the Company with a significant opportunity to increase
sales and profits. The Company plans to make modest capital expenditures to
upgrade its information systems and increase production capacity in order to
address increasing demand. The Company also intends to purchase equipment and
expand its operations to new facilities as necessary to meet this demand.
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SUPPLEMENT INTERNAL GROWTH THROUGH STRATEGIC ACQUISITIONS. The dietary and
nutritional supplement industry is highly fragmented and the Company believes
that the industry is in a favorable position for consolidation. Many of the
Company's competitors are private companies that produce and/or distribute only
a single line of products and would complement the Company's current business,
if acquired. Furthermore, as one of the industry's largest developers and
manufacturers of dietary and nutritional supplements, the Company believes that
there are significant opportunities to acquire companies that distribute these
products, many of which are smaller than the Company and lack their own
manufacturing capability. Certain of these companies also have distribution
channels not presently utilized by the Company's larger customers, including
direct mail, direct television marketing and distribution to health maintenance
organizations. Management believes that the Company is strategically positioned
to participate in the anticipated consolidation of the dietary and nutritional
supplement industry and intends to aggressively pursue acquisition opportunities
that would complement, enhance or vertically integrate existing operations. The
Company is currently engaged in preliminary discussions with several acquisition
candidates. In addition, on August 7, 1998, the Company entered into a
non-binding letter of intent to acquire for approximately $30 million certain
assets of another manufacturer of dietary and nutritional supplements whose
products would complement the Company's current business. This acquisition is
subject to, among other conditions, satisfactory completion of the Company's due
diligence and the execution of a definitive agreement. There can be no assurance
that a definitive agreement will be entered into with such manufacturer or if
such acquisition will be completed. Moreover, there can be no assurance that any
definitive agreement will be entered into with other potential acquisition
candidates or if any such other acquisition will be completed.
INDUSTRY
According to PACKAGED FACTS, the domestic retail market for vitamins,
minerals and dietary supplements has grown at a compound annual growth rate of
15.0% from $3.7 billion in 1992 to $6.5 billion in 1996. By the year 2001,
domestic retail sales in the vitamins, minerals and dietary supplements market
are expected to exceed $12.3 billion, representing a compound annual growth rate
of 13.6% since 1996. The herbal supplement segment has been the fastest-growing
segment in the industry, having grown at a compound annual growth rate of 16.7%
between 1993 and 1997 to an estimated $2.0 billion in 1997. PACKAGED FACTS
expects this growth to continue, as herbal supplement sales are projected to
increase at a compound annual growth rate of 16.4% from $2.0 billion in 1997 to
over $4.2 billion in 2002.
Vitamins, minerals and dietary supplements are sold domestically primarily
through six channels of distribution: health and natural food stores,
drugstores, supermarkets, discount stores, mail order and direct sales
organizations. According to Packaged Facts, in 1996, mass market retailers
(e.g., drug stores, supermarkets and discount stores) accounted for
approximately 45.8% of sales, health and natural food stores accounted for
approximately 38.2% of sales, direct selling (including network marketing
organizations) accounted for approximately 12.6% of sales and mail order and
internet sales accounted for approximately 3.4% of sales.
PACKAGED FACTS estimates that a number of factors will continue to
contribute to the growth in the dietary and nutritional supplement industry,
including (i) the general trend toward preventive medicine and self-care, (ii)
an aging population interested in "living longer, living well," (iii) the impact
of the DSHEA and a generally positive industry and regulatory environment, (iv)
expanded mainstream distribution of dietary and nutritional supplement products,
(v) the expected introduction of new products, (vi) increased interest in
natural medicines, (vii) favorable research studies supporting the public
interest in dietary supplements, (viii) increased acceptance by the traditional
medical community and (ix) the fact that nearly half of the U.S. adult
population does not currently use dietary and nutritional supplements.
An important trend in the United States noted by Packaged Facts is the
growing acceptance of alternative approaches to good health. This trend has been
fueled by increasing health care costs, greater consumer awareness and
increasing demand for alternatives to traditional medicine. An example of this
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trend is the recent decision by Oxford Health Plans, a large health maintenance
organization, to extend insurance coverage for certain practitioners of
alternative approaches to good health.
According to industry sources, 54.0% of the U.S. adult population, or 103.7
million consumers, used vitamins, minerals or dietary supplements in 1996, an
increase from 42.5% in 1993. According to Packaged Facts, persons over 45 are
more likely to use dietary supplements than any other age group, and the
population segment aged 45-64 is expected to increase by 32.0% from 1990 to
2000.
The Company believes that the passage of the DSHEA is a favorable event for
the dietary and nutritional supplement industry. Under the DSHEA, for the first
time, persons are allowed to make concise scientific claims ("structure/function
statements") on product labels and in company literature. In addition, the DSHEA
allows for the use of independent, third-party literature to support vitamin,
minerals and dietary supplement sales which can be a significant sales tool. The
Company believes that a manufacturers' ability to better communicate the health
benefits of vitamins has had a significant impact on the growing trend toward
self-care and the increased sales of vitamin products. See "Regulatory Matters."
PRODUCTS
The Company manufactures on demand and on a large scale to its customers'
specifications a highly diversified array of products in tablet, capsule, powder
and liquid form. As a result of the Company's focus on custom manufacturing, it
is difficult to place each of the Company's products into one product category.
Management, however, estimates that the Company's products and their
corresponding percentage of 1997 sales may be divided in the following manner:
<TABLE>
<CAPTION>
<S> <C>
PRODUCT CATEGORY % OF 1997 SALES
- -------------------------------------------------------------- -----------------
Herbal products............................................... 30%
Weight control................................................ 27%
Sports and performance nutrition.............................. 17%
Special products.............................................. 26%
---
100%
---
---
</TABLE>
HERBAL PRODUCTS. Herbal products may be subdivided into herbal
supplements and herbal teas.
HERBAL SUPPLEMENTS. The Company's herbal supplements are sold to a
number of the Company's customers and are intended to address certain
physiological conditions such as bone and joint function, aging, visual
acuity and prostate health. The Company's herbal supplements are sold
primarily in the form of tablets and capsules. The Company also sells a
number of aloe-based products primarily as liquids and gels. All liquid and
gel products are subcontracted to other manufacturers. Common herbs used in
the Company's formulations include St. John's wort, ginkgo biloba,
echinacea, saw palmetto, garlic, schizandra berry extract, valerian root,
kava kava, ginseng and lutein.
HERBAL TEAS. The Company manufactures herbal teas in a variety of
flavors and with a number of different ingredients, including black (pekoe)
or green tea, ginseng, guarana and other herbs for toning and cleansing,
such as cardamon. These products are packaged primarily in jars.
WEIGHT CONTROL. The Company's weight control products consist primarily of
meal-replacement powders and various other dietary supplements designed to
satisfy certain nutritional needs and to aid in appetite and weight control. The
Company's weight control products provide a natural alternative for consumers
who demand all-natural products in their dietary weight control regimen. Weight
control products are sold primarily to Herbalife as well as to a number of other
customers. The meal-replacement powders come in different flavors and combine
any of various proteins, vitamins and minerals, polyunsaturated fats,
carbohydrates, dietary fibers and herbs. Weight control products are also sold
in the form of tablets and capsules and contain a variety of herbs, amino acids,
natural fibers and nutrients. Many of the Company's products are bundled
together as part of a full weight control program.
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SPORTS AND PERFORMANCE NUTRITION. The Company's sports and performance
nutrition products represent the fastest-growing product segment for the
Company. These products are formulated for and targeted to athletes, body
builders and others who desire to improve their physical performance, physique,
mental alertness and general well-being in conjunction with a fitness program.
The products are sold to customers such as EAS and Bally's Total Fitness and
consist of a variety of high protein powders, including those combined with
carbohydrates and proper fats and/or enhanced with creatine or hydroxy methyl
butyrate. Sports and performance nutrition products also include powders high in
carbohydrates for rehydration, weight gain and quick energy, as well as tablets
containing ginseng and other ingredients.
SPECIAL PRODUCTS. The Company's special products represent a broad range of
products and may be subdivided into the following categories:
VITAMINS, MINERALS AND AMINO ACIDS. The Company manufactures and sells
to a majority of its customers a number of vitamins, minerals and amino
acids primarily in tablet and capsule form. The most common of such products
is the Company's multivitamins/minerals, which provide a range of essential
vitamins and minerals. The Company also manufactures natural multivitamins,
such as water-soluble B-complex and various vitamin C sources, and
multiminerals containing minerals such as calcium, magnesium, potassium,
zinc, chromium and various trace minerals. The Company's amino acid products
come in tablets, capsules and powders and consist of amino acids such as
tyrosine, lysine and arginine and combinations thereof, and peptide specific
peptidase, which is taken to increase the utilization of certain amino
acids.
COMBINATION PRODUCTS. A distinguishing characteristic of the Company is
its ability to develop innovative products by adding herbs to various other
ingredients to create products that combine the benefits of vitamins,
minerals and herbal supplements. This practice allows the Company to meet a
wide range of customer needs. The Company sells these combination products
to a majority of its customers. These products generally come in tablets and
capsules and represent a growing portion of the Company's sales.
OTHER PRODUCTS. The Company manufactures other products in order to meet
the specific requirements of certain customers including pet products and
products intended to aid in the treatment of poisonings. These products
currently account for a small but growing percentage of the Company's sales.
The Company also manufactures over-the-counter ("OTC") drugs and pet
products in solid and powder form. The Company subcontracts to other
manufacturers its liquid, ointment and gel products, including aloe drinks,
acne and arthritis creams, herbal shampoos and fish oil capsules.
PRODUCT DEVELOPMENT
The Company believes that its ability to anticipate market trends, identify
target groups, develop new and innovative products and formulate these products
for the marketplace provides significant internal growth potential and places
the Company in a position to capitalize on the growth in the dietary and
nutritional supplement industry. The Company continually monitors new and
developing health and nutrition trends to anticipate its customers' needs and to
introduce new products and reformulate existing ones. The Company's ability to
design, develop and manufacture new products has enabled it to be a "one-stop
shop" for most of its customers, alleviating the necessity of current and
potential customers to seek out multiple manufacturers to fulfill product needs.
This approach also creates a synergy between the Company and its customers in
the development and enhancement of a customer's products or product lines. As a
percentage of sales, research and development expenses have accounted for less
than 1% of sales in each of the last three fiscal years.
The Company will often begin its development process by identifying target
groups with certain physiological needs (e.g., weight control or prostate
health) and then develop a dietary supplement product to respond to such
conditions. The Company also develops a product based on a newly discovered or
unique raw material or on a new application of an existing raw material. After
either identifying a target group or a new raw material, the Company will then
develop a product in its pilot laboratory. The Company refines the new product
in the pilot laboratory to ensure that it contains the proper mix of
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ingredients to respond to the physiological problem for which it has been
designed or that it makes proper use of the new raw material. The Company also
ensures that the new product can be manufactured on a large scale, in an
economical and efficient manner and with satisfactory size, shape, color,
solubility and shelf life. After developing the product, the Company will
present the product to an appropriate customer who will, if interested, enter
into an agreement with the Company for the right to, in most instances,
exclusively distribute the new product in return for the obligation on the part
of the customer to exclusively purchase such product from the Company.
Another method of product development is the formulation of new or modified
products in response to a customer's request. Customers will often approach the
Company to request a product containing particular ingredients or a product
designed for a specific condition. In response, the product development team
will then develop a product for that customer that meets its particular
specifications using the same development techniques discussed above.
The Company's seven-member product development team, led by Mr. Marconi,
includes a former NASA scientist who assisted in the development of a nutrition
program for early space flights and a former member of the USDA's Human
Nutrition Institute. The team is responsible for new product formulations,
herbal and nutritional ingredient use and formulation safety. The Company
maintains an extensive collection of literature on herbal remedies and products
and the product development team keeps abreast of new developments by reviewing
a wide variety of scientific and medical journals and attending industry, FDA,
United States Pharmacopoeia Convention, Inc. ("USP") and other scientific
seminars and conferences. The Company also maintains consulting arrangements
with a number of well-respected scientists and other experts, some of whom
participated in the drafting and passage of the DSHEA. These scientists and
other experts are also consulted periodically in order to identify new health
trends prior to and during the development of new products.
MANUFACTURING AND PRODUCT QUALITY
The Company believes that it has distinguished itself within the dietary and
nutritional supplement industry through consistently manufacturing high quality
products. All of the Company's products are manufactured and packaged at
facilities located in Orange County, California, all of which are located within
a ten-mile radius.
The facilities include a 17,500 square foot facility that contains the
Company's granulation plant and administrative offices. Equipment at the
granulation plant includes wall ovens, fluid bed dryers and wet granulators.
Equipment at the Company's 60,000 square foot tablet and capsule facility
includes high speed tablet presses, encapsulating machines, large capacity
blenders, a large hammermill, miscellaneous mills and oscillators and various
coating machines and pans. The tablet and capsule facility also contains
production offices and warehousing and receiving departments. Tablets and
capsules manufactured by the Company are then packaged at a 38,000 square foot
packaging facility. The Company's powder products are manufactured and packaged
at a 44,000 square foot production facility that contains blending equipment
consisting of three dual head can-filling lines, two dual head small
bottle-filling lines and four automatic packeting lines. Raw materials for the
Company's powder products are received and prepared for blending at a 50,800
square foot facility from which the finished products are shipped to the
Company's customers. The Company also maintains an additional warehousing
facility totalling 22,000 square feet. The 44,000 square foot powder production
and packaging facility previously housed both the production and corporate sales
offices for Omni-Pak, but with the construction of the 50,800 square foot
facility, it can now be expanded for increased manufacturing capability. The
Company conducts its operations at separate facilities to help prevent
interruption in production.
The Company's manufacturing facilities are capable of producing over one
billion capsules and tablets and over six million pounds of blended powder per
month. These facilities are also capable of filling on a monthly basis
approximately 1.2 million cans and large bottles, approximately 1.2 million
small bottles and approximately 4.3 million packets. The Company custom
manufactures all of its products to meet its customers' specifications and, as a
result, maintains a very low finished goods inventory. The Company
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normally operates two work shifts, but has the capability to run three, if
necessary, to meet its customers' needs.
The Company owns all of the equipment housed in its manufacturing
facilities. The Company's flexible manufacturing lines enable it to service its
equipment without materially interrupting production by shifting output among
various lines. Equipment servicing is generally completed in-house by employees
of the Company. The Company has also designed modifications to its equipment to
produce better quality products.
The Company purchases its raw materials from several foreign and domestic
third-party suppliers, one of which accounted for more than 10% of the Company's
total purchases in 1997. Several of these raw materials are harvested on a
seasonal basis. See "Risk Factors--Availability of Raw Materials." The Company's
raw material needs are readily available from multiple suppliers and the Company
is not dependent on any single supplier.
The Company maintains a quality control department at each production
facility, led by individuals with backgrounds in pharmacology and nutrition.
Each product undergoes comprehensive quality control testing procedures in the
Company's on-site quality control laboratories from the receipt of all incoming
raw materials through the distribution of the finished product. Each laboratory
contains equipment such as computerized liquid chromatographs, automatic
spectrometers, dissolutioned testers, disintegration testers and each laboratory
has complete microbiological testing capabilities. Incoming raw materials are
subjected to numerous testing procedures, including liquid chromatography and
infrared spectrophotometry, to ensure that the product is unadulterated and
labeled correctly. Moreover, in order to easily identify the origin of the
ingredients contained in its products and ensure traceability, the Company
tracks each ingredient by assigning it a commodity number and lot number. Tablet
products are frequently tested during the manufacturing process for friability,
thickness, hardness and weight. In addition, periodically throughout production,
quality control personnel will take samples to perform product assays. After a
product is manufactured, it is subjected to stability, dissolution and potency
tests. The Company's powder products are tested and sampled in the laboratory
for proper mix and "taste and mouth-feel" to ensure correct color and
consistency.
SALES AND DISTRIBUTION
The Company's products are sold throughout the United States, Europe and
Asia by over 60 customers, including Herbalife, EAS, Metagenics, Bally's Total
Fitness, Rockwood Cosmetics and Nature's Life. Herbalife, which has been a
customer of the Company since its formation in 1980, is the Company's largest
customer. Products manufactured for Herbalife are specially formulated and
packaged only for Herbalife's distribution channel and are not available through
retailers. Sales to Herbalife represented 76%, 74% and 83% of the Company's
total sales in 1997, 1996 and 1995, respectively. Additionally, sales to EAS
represented approximately 15.0% and 12.0% of the Company's sales in 1997 and
1996, respectively. Since 1995, sales to non-Herbalife customers have grown from
$14.8 million to $44.8 million in 1997. The Company intends to expand its
presence in the health food/retail market through such customers as EAS, in the
growing direct television market through such customers as The Good Doctors, and
in direct sales to fitness centers through Bally's Total Fitness. In addition,
the Company plans to expand its sales in international markets by developing new
customers and by supplying the needs of its existing customers in the growing
markets of Europe, Latin America and Asia. See "Business Strategy."
In September 1997, D&F, Omni-Pak and Dynamic entered into separate
three-year agreements with Herbalife replacing their previous agreements.
Pursuant to these new agreements, Herbalife is required to purchase from each of
D&F, Omni-Pak and Dynamic, respectively, any combination of products in an
aggregate dollar amount equal to at least the sum of (i) 80% of the aggregate
dollar amount of all purchases made by Herbalife of nutritional supplement
products manufactured by the Company and by another supplier in accordance with
a product formula developed by the Company and (ii) 40% of the aggregate dollar
amount of all purchases made by Herbalife of independent nutritional supplement
products manufactured by suppliers other than the Company. The agreements cover
all products currently
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manufactured for Herbalife for distribution in the countries in which Herbalife
currently distributes such products. The prices for the products purchased by
Herbalife are fixed, subject to adjustment in the event of a variation (upwards
or downwards) in excess of five percent in the aggregate actual cost of the raw
materials used to manufacture the products supplied to Herbalife. The agreements
also provide the Company with a right of first refusal to become the primary
manufacturing source for Herbalife for certain new products developed by
Herbalife for distribution in the countries in which Herbalife distributes
products currently manufactured by the Company. Pursuant to the agreements, the
Company transferred to Herbalife those formulas owned by the Company for all
products manufactured by the Company exclusively for Herbalife at January 1998.
In the event of a material breach of the agreement by either party, the
breaching party has 60 days to cure such breach. If such breach is not cured
within such period, the non-breaching party can terminate each agreement with 60
days' prior written notice. In addition, Herbalife may terminate any agreement
if the Company fails to meet certain service level requirements or immediately
following a change in control. A change in control is triggered in the event
that, among other things, without the prior written consent of Herbalife, Mr.
Marconi ceases to own more than 50% of the capital stock of the Company or if
Mr. Marconi is no longer an executive officer of the Company and responsible for
the day-to-day operations and management of the Company.
A portion of the proceeds of the Old Notes Offering was used by the Company
to purchase all outstanding shares of common stock of Omni-Pak and Dynamic owned
by Mr. Hughes, Chairman of the Board and Chief Executive Officer of Herbalife.
Mr. Hughes previously owned 33% of the common stock of Omni-Pak and 20% of the
common stock of Dynamic. See "Prospectus Summary--The Reorganization," "Certain
Related Party Transactions" and "Risk Factors--Dependence on Significant
Customer; Supply Agreements."
COMPETITION
The dietary and nutritional supplement industry is highly fragmented. The
industry includes (i) companies that produce products for specialty health and
natural food stores, (ii) companies that manufacture products for the mass
retail market and (iii) direct sales and mail order companies. The Company
competes on the basis of customer service, product quality, pricing and
marketing support. There are numerous dietary and nutritional supplement
manufacturers of general products, including Twin Laboratories, Inc., NBTY,
Inc., Rexall Sundown, Inc. and Leiner Health Products Group Inc., some of which
are larger and have resources greater than the Company.
REGULATORY MATTERS
The manufacturing, packaging, labeling, advertising, distribution and sale
of the Company's products are subject to regulation by one or more federal
agencies, including the FDA, the FTC and the EPA, and various agencies of the
states, localities and foreign countries in which the Company's products are
sold. The FDA, pursuant to the FFDC, regulates the production, packaging,
labeling and distribution of dietary and nutritional supplements. The FTC
regulates the advertising of such products.
The FFDC was recently amended by the DSHEA. The DSHEA created a new
statutory framework governing the composition and labeling of dietary
supplements. Under the DSHEA, "dietary supplements" are defined as any product
(except tobacco) intended to supplement the diet that contains at least one of
the following dietary ingredients: (i) a vitamin, (ii) a mineral, (iii) an herb
or botanical, (iv) an amino acid, (v) other dietary ingredients for human use to
supplement the diet or (vi) concentrates, metabolites, extracts or combinations
of (i) through (v) above. Dietary ingredients meeting this definition are
excluded from regulation as a food additive.
Under the DSHEA, dietary ingredients that were on the market in the United
States prior to October 15, 1994 may be sold without the FDA's pre-market
approval and without notifying the FDA. The marketing of a product containing a
new dietary ingredient (one not on the market prior to October 15, 1994)
requires that: (i) it has been used as an article of food without being
chemically altered or (ii) there is evidence of a history of use or other
evidence of safety establishing that it is reasonably expected to be
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safe and such evidence is supplied to the FDA at least 75 days before the
initial use of any new dietary ingredient. There can be no assurance that the
FDA will accept the evidence of prior use or safety presented for any new
dietary ingredient that the Company may decide to use in the future and the
FDA's refusal to accept any such evidence could result in a determination that
either the product is adulterated or the product must be regulated as a food
additive, which requires FDA approval prior to marketing. Under the DSHEA, the
burden of proving the safety of the dietary supplement is shifted from the
manufacturers to the FDA. The FDA may object only if a product or ingredient
presents a "significant and unreasonable risk of illness or injury" or poses an
imminent safety hazard.
The DSHEA provides for specific nutrition labeling requirements for dietary
supplements. The DSHEA permits the manufacturer of a dietary supplement to make
substantiated, truthful and non-misleading "statements of nutritional support"
with respect to the product, including an accurate description of how a nutrient
affects the structure or function of the human body and a general description of
well-being resulting from consumption of a dietary ingredient. The claim must be
accompanied by a disclaimer stating that the product has not been evaluated by
the FDA. There can be no assurance that the FDA will not determine that a given
statement of nutritional support is not adequately substantiated, or is an
unapproved drug claim rather than a statement of nutritional support. Either
determination may entail costly and time-consuming clinical studies and may
entail the deletion or modification of such statement. The FDA has finalized
certain regulations to implement the labeling provisions of the DSHEA. Further
FDA regulations may be proposed by the FDA in response to a report issued in
November 1997 by the Commission on Dietary Supplement Labels which was
established to provide recommendations on labeling claims for dietary
supplements.
The Company exercises significant control over the labeling of its
customers' nutritional and dietary supplement products. The Company designs the
"Nutrition Facts" box required by the NLEA for its powdered products. The
Company performs some review of the proposed structure/function claims made on
the labels of the dietary supplement products for compliance with the DSHEA.
Submission of these claims as required by the FFDC is the obligation of the
Company's customers, but the Company does submit to the FDA labels for many of
the dietary supplements that contain structure/function claims. Maintaining the
substantiation for such claims as required under the FFDC is the obligation of
the Company's customers. Similarly, the Company's customers are responsible for
making the required submissions to the FDA for any new dietary ingredients.
A number of the products sold by the Company, including some protein powders
and any products labeled for meal replacement, are conventional foods as opposed
to dietary supplements. The NLEA dictates the labeling claims permissible for
such products, which are more limited in scope than those for dietary
supplements. Some of the Company's products will require label revisions to
comply.
The DSHEA also allows the dissemination of third party literature to promote
the sale of dietary supplements to consumers at retail or by mail order. Such
literature, if distributed, must (i) not be false or misleading; (ii) not
promote a particular manufacturer or brand; (iii) present a balanced view of the
available information; and (iv) be physically separated from supplement products
if displayed in a store.
The DSHEA authorizes the FDA to promulgate GMPs with respect to the
manufacture of dietary supplements, to be modeled after the current GMPs
applicable to food products. On February 6, 1997, the FDA published an advance
notice of proposed rulemaking ("ANPR") in which it requested public comment
concerning whether to adopt GMP regulations for dietary supplements. The ANPR
reprinted and requested comments on a draft regulatory framework prepared by the
dietary supplement industry addressing the appropriate scope and content for
dietary supplement GMP regulations. The comment period for this ANPR closed on
May 7, 1997. The Company cannot predict in what form such regulations, if
adopted, would be enacted. As with any new regulations, if adopted, the Company
will take all necessary steps to attempt to comply with such new regulations.
On September 23, 1997, the FDA issued final regulations reiterating the
FDA's position that dietary supplements must maintain 100% of the declared value
of added vitamins and minerals for the entire shelf
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life of the product. As with any new regulations, the Company will take all
necessary steps to attempt to comply with such new regulations. During the past
ten years, the Company has received four Form 483 notices following customary
FDA inspections. These notices cited numerous GMP deficiencies including those
relating to product labeling, product validation and testing, equipment and
facility cleanliness and maintenance, personnel training, and recordkeeping. The
FDA also previously issued two Warning Letters to the Company stating that
products manufactured by the Company were adulterated because they were not
manufactured in accordance with GMPs. In 1994, the Company paid $75,000 in
settlement of a claim brought by a California state agency which concerned
alleged violations of California food and drug laws. The Company believes that
it is currently in material compliance with the California food and drug laws
related to such claim.
The NLEA prohibits the use of any health claim describing the relationship
between a nutrient and a disease or health-related condition for foods,
including dietary supplements, unless the claim is supported by significant
scientific agreement and is approved by the FDA by regulation. Regulations
promulgated by the FDA to date allow the use of health claims for dietary
supplements only in connection with osteoporosis and the use of folic acid for
neural tube defects. The NLEA also prohibits the use of most nutrient content
descriptors ("high" or "low") unless the specific descriptor complies with the
FDA regulations governing nutrient content claims. Under the recently enacted
Food and Drug Administration Modernization Act of 1997, both health claims and
nutrient claims are permitted to be made on the basis of authoritative
statements of governmental bodies other than the FDA, so long as the FDA is
notified of the claim and the authoritative statement and is presented with a
balanced representation of the scientific literature concerning such claim.
Certain of the Company's products are regulated as pet foods. The claims
permitted by the FFDC for such products are more limited than those for human
foods or dietary supplements, and such products are not included within the
purview of the NLEA or the DSHEA. A company marketing such products must
register its labels with state authorities. Other products sold by the Company
are OTC drugs or veterinary drugs. The Company must register with the FDA and
the State of California, provide drug listings annually and comply with current
GMP requirements in the manufacture and record keeping relating to these
products. To the extent that certain of the Company's products are sold with
drug claims on their labels, those products would require inclusion as OTC
drugs. The Company will be required to relabel and register some of its products
accordingly. The Company also sells products regulated by the FDA as cosmetics,
which must meet specified labeling requirements and minimum safety standards.
The Company is also subject to regulation under various foreign, state and
local laws that include provisions regulating, among other things, the marketing
of dietary supplements and the operations of direct sales programs.
The Company may be subject to additional laws or regulations administered by
the FDA or other federal, state or foreign regulatory authorities, the repeal of
laws or regulations favorable to the industry (such as the DSHEA), or more
stringent interpretations of current laws or regulations. The FTC, for example,
has actively investigated the dietary and nutritional supplement industry in the
past few years, and certain of the Company's customers have signed consent
orders which could, in the future, affect the volume of product that the
customers will order from the Company. The Company cannot determine what effect
future laws, regulations, guidance or policy of the FDA, when and if
promulgated, will have on its business in the future. Such regulations may,
however, among other things, require changes in manufacturing, expanded or
different labeling for the Company's dietary and nutritional supplements,
require the recall, reformulation, or discontinuance of certain products, or
require scientific substantiation regarding ingredients, product claims or
safety. See "Risk Factors--Government Regulation; Adverse Publicity."
The USP is a non-governmental, voluntary standard-setting organization. Its
drug standards are incorporated by reference into the FFDC as the standards that
must be met for the listed drugs, unless compliance with those standards is
specifically disclaimed. USP standards exist for most prescription and
non-prescription pharmaceuticals.
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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. Inaccurate 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 dietary supplements products for which no
USP standards have been adopted) are formulated to comply with existing USP
standards.
Certain of the Company's products contain a Chinese herb known as "Ma
Huang," which contains naturally occurring ephedrine. The Company estimates that
these products accounted for approximately 6% of the Company's sales in the
fiscal year ended December 31, 1997. Ma Huang has been the subject of certain
adverse publicity in the United States and other countries relating to alleged
harmful or adverse effects, including the deaths of several individuals.
On April 10, 1996, the FDA issued a statement warning consumers not to
purchase or consume dietary supplements containing ephedrine with labels
portraying the products as apparent alternatives to illegal street drugs. None
of the Company's products which contain Ma Huang are marketed for such purpose.
The FDA explained that the products portrayed as alternatives to illegal street
drugs pose significant health risks to consumers--dizziness, headache,
gastrointestinal distress, irregular heartbeat, heart palpitations, heart
attack, strokes, seizures and death, and that the labels on such product claim
or imply that they produce such effects as euphoria, increased sexual
sensations, heightened awareness, increased energy and other effects. In August
1996, the FDA sent warning letters to several companies marketing such products
as alternatives to street drugs, indicating that enforcement action with respect
to such products may be initiated.
In August 1996, the FDA convened a Food Advisory Committee meeting to review
and make recommendations concerning the safety and appropriate labeling of
dietary supplements containing Ma Huang. The FDA, after considering the
differing views expressed at the Committee meeting, proposed regulations in June
of 1997 that would require reduced dosages coupled with strict manufacturing
standards, labeling restrictions and a prohibition against combining Ma Huang
with body building or weight loss products and with other central nervous system
stimulants such as caffeine. There can be no assurance that such regulations
will not prohibit either the sale of dietary supplements containing Ma Huang in
combination with any other ingredients or the sale of all dietary supplements
containing any Ma Huang. The promulgation of such regulations could require the
Company to reformulate and relabel substantially all of its Ma Huang products.
There can be no assurance as to the final form or content of any FDA regulations
concerning dietary supplements containing Ma Huang or as to the effect that any
attendant adverse publicity or resulting reformulation and relabeling of the
Company's products would have on the sale of such products.
A number of foreign, state and local governmental entities limit ephedrine
levels and require appropriate warnings on product labels, regulate products
containing ephedrine as controlled substances or prohibit sales of products
which contain Ma Huang by individuals other than licensed pharmacists. There are
also federal, state and local proposals to broaden the regulation of, or
otherwise limit or prohibit, the sale of products containing ephedrine.
The Company's products containing Ma Huang may become subject to further
federal, state, local or foreign laws or regulations, which could require the
Company to: (i) reformulate its products with reduced ephedrine levels or with a
substitute for Ma Huang and/or (ii) relabel its products with different warnings
or revised directions for use. Even in the absence of further laws or
regulations, the Company may elect to reformulate and/or relabel its products
which contain Ma Huang. While the Company believes that its Ma
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Huang products could be reformulated and relabeled, there can be no assurance in
that regard or that reformulation and/or relabeling would not have a material
adverse effect on sales of such products.
PROPERTIES
The Company leases the following facilities in Orange County, California:
(i) a 38,000 square foot tablet and capsule packaging facility; (ii) a 60,000
square foot tablet and capsule manufacturing facility; (iii) a 17,500 square
foot facility that includes a granulation plant and administrative offices; (iv)
a 44,000 square foot powder production and packaging facility; (v) a 22,000
square foot warehouse; and (vi) a 50,800 square foot facility which contains
receiving, shipping and administrative departments.
The Company's leases have terms of three to ten years. In 1997, the Company
paid an aggregate of approximately $1.2 million in rent on its facilities.
The Company believes that its facilities and equipment are maintained in
good operating condition.
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
1999, and does not currently anticipate any material disruption of 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.
EMPLOYEES
At June 1, 1998, the Company employed approximately 375 persons. Of these
employees, 97 are in executive or administrative capacities with the remaining
employees in manufacturing, shipping and packaging positions. None of the
Company's employees are represented by a labor union. The Company considers its
relationship with its employees to be good.
At June 1, 1998, the Company also utilized approximately 402 temporary
employees. These employees are supplied to the Company by two temporary agencies
that maintain offices at the Company's manufacturing facilities. This enables
the Company to utilize temporary employees to adjust staffing levels on a daily
basis in response to fluctuations in demand or an unexpected increase in sales
volume.
LITIGATION
On March 31, 1998, the Company was named as a defendant in an action
originally filed by John W. Rowles in the Contra Costa County Superior Court on
June 13, 1997 against Mr. Mark Hughes, Herbalife and an Herbalife distributor.
The plaintiff alleges that Thermojetics-TM- Green tablets manufactured by the
Company for Herbalife, which contain ephedrine, was defective and unsafe for its
intended use and caused the plaintiff to suffer an acute myocardial infarction.
Plaintiff is claiming an unspecified amount of damages for personal injury, pain
and suffering, lost wages and is also seeking punitive damages.
The lawsuit is in its preliminary stages of discovery and an estimate of the
range of loss, if any, cannot be made at this time. The Company believes,
however, that liability, if any is incurred, will not be material to the
Company's results of operations or financial condition. In addition, the Company
believes that if it incurs any liability in this action, it would be insured
against such liability under its product liability insurance. The Company has
approximately $2.0 million in available product liability insurance. The
Company's insurance carrier has acknowledged coverage for this lawsuit, under
its standard reservation of rights. There can be no assurance that the Company
will not be subject to additional lawsuits alleging injuries caused by products
of the Company or if insurance will be available to cover any liabilities
related thereto. See "Risk Factors--Product Liability."
The Company is not currently involved in any litigation which it believes
would have a material adverse effect on the Company's results of operations or
financial condition.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY PERSONNEL
The following table identifies each of the directors, executive officers and
key personnel of the Company. Each director is elected at the annual meeting of
shareholders to serve until the next annual meeting or until his successor is
elected or appointed.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Mr. Richard D. Marconi............................... 63 Chairman of the Board and President
Mr. Paul M. Buxbaum.................................. 43 Chief Executive Officer and Director
Mr. Donald J. Lewis.................................. 47 Chief Financial Officer, Senior Vice President and
Director
Mr. Howard Simon..................................... 54 Chief Operating Officer
Mr. Steve Kochen..................................... 44 Vice President, Operations
Dr. William Wheeler.................................. 49 Director of Sales, Technical Services
Dr. Sat Paul Dewan................................... 61 Technical Director
Sen. Dennis DeConcini................................ 60 Director
Mr. Brad Gates....................................... 59 Director
</TABLE>
MR. RICHARD D. MARCONI co-founded the Company in 1978 and is the Chairman of
the Board of Directors and President. Mr. Marconi has been in the food
supplement and pharmaceutical industries for 40 years. Mr. Marconi is a director
of American Health Sciences, Inc. and is Chairman of the Marconi Foundation for
Kids.
MR. PAUL M. BUXBAUM became Chief Executive Officer of the Company upon
consummation of the Old Notes Offering. Since 1993, Mr. Buxbaum has been owner
and principal executive officer of The Buxbaum Group, a consumer products
consulting group, specializing in asset evaluations for lending institutions,
crisis management services, inventory acquisitions and bankruptcy liquidations.
Mr. Buxbaum will devote his full time to his duties as Chief Executive Officer
of the Company. Since 1993, Mr. Buxbaum has served as Chairman of the Board of
Ames Department Stores, Inc. of Rocky Hill, Connecticut, and since 1995 he has
served as a director of Richmond Gordman 1/2 Price Stores of Omaha, Nebraska.
From 1991 through 1996, Mr. Buxbaum served on the Board of Directors of
Herbalife and in 1997 served as Chairman of the Board of Jay Jacobs Stores of
Seattle, Washington. In April 1998, Mr. Buxbaum was appointed a director of
Lamont Apparel Inc.
MR. DONALD J. LEWIS entered into a consulting arrangement with the Company
in February 1998 and became Chief Financial Officer and Senior Vice President
upon consummation of the Old Notes Offering. Prior to joining the Company, Mr.
Lewis was Chief Financial Officer of Visy Industries (U.S.A.), Inc. from 1995 to
1998 and was an audit partner with Arthur Andersen & Co. from 1984 to 1995.
MR. HOWARD SIMON became Chief Operating Officer of the Company in June 1998.
Prior thereto, Mr Simon served first as Chief Operating Officer and then as
President of Cosmetic Group USA, from 1993 to 1998.
MR. STEVE KOCHEN joined the Company in February 1993 and since that time has
served as its Vice President of Operations and Chief Legal Counsel. Prior
thereto, Mr. Kochen was President and Chief Executive Officer of Arbonne
International (USA) from 1990-1992. Mr. Kochen was also President and Chief
Executive officer of Biogenics, Inc. from 1986-1990. Mr. Kochen is currently
serving on the Board of Directors of the Marconi Foundation for Kids.
DR. WILLIAM WHEELER has been the Director of Sales, Technical Services since
1994. Dr. Wheeler is responsible for new product research and development and
technical support and is also responsible for new product formulations, herbal
and nutritional ingredient use, formulation safety and nutritional and
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OTC product evaluations. Prior to 1994, Dr. Wheeler was general manager at SPI
Nutritionals, a division of ICN Pharmaceuticals, and director of technical
services at Kemin Industries. Dr. Wheeler was also staff nutritionist for
President Carter from 1978 to 1980 and for the 1996 Olympic Decathlon Team. In
addition, Dr. Wheeler is currently a member of three professional societies, the
American Dietetics Association, the American Institute of Nutrition and the
American Society of Clinical Nutrition and a former member of the USDA Human
Nutrition Institute.
DR. SAT PAUL DEWAN has been the Technical Director of the Company since
1978. Dr. Dewan supervises all quality control and quality assurance-related
functions including product assays, physical testing and microbiological
testing. Dr. Dewan is responsible for completing validations and stability
studies for new products. Dr. Dewan is a former NASA scientist who assisted in
the development of a nutritional program for early space flights.
SENATOR DENNIS DECONCINI became a member of the Board of Directors of the
Company in connection with the consummation of the Old Notes Offering. From
January 1977 through January 1995, Senator DeConcini served as a United States
Senator from Arizona. During his senatorial term, Senator DeConcini served as a
member of the Appropriations Committee and the Judiciary Committee. Senator
DeConcini is a member of numerous boards of directors, including the Federal
Home Loan Mortgage Corporation, the Schuff Steel Company and RDL Commercial
Technologies Corporation.
MR. BRAD GATES became a member of the Board of Directors of the Company in
connection with the consummation of the Old Notes Offering. Since 1974, Mr.
Gates has served as Sheriff of Orange County, California. Mr. Gates currently
serves on the boards of directors of the Orange County Council of the Boy Scouts
of America and the Newport Sports Collection Foundation. In addition, Mr. Gates
is a member of various civic and professional organizations.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for the
fiscal year ended December 31, 1997 awarded to or earned by the Chief Executive
Officer and the other executive officers of the Company as of December 31, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------
<S> <C> <C> <C> <C>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- -------------------------------------------------------------------- --------- ------------ ----------- -------------
Fred E. Siegel...................................................... 1997 $ 2,000,000 -- $ 99,840(1)
Chief Executive Officer
Richard D. Marconi.................................................. 1997 2,000,000 -- 122,483(2)
President and Chairman
Steve Kochen........................................................ 1997 169,650 -- 8,350(3)
Vice President, Operations
Sat Paul Dewan...................................................... 1997 98,233 -- 4,954(4)
Technical Director
William Wheeler..................................................... 1997 108,400 -- --
Director of Sales, Technical Services
</TABLE>
- ------------------------
(1) Included in "Other Annual Compensation" for Mr. Siegel are: $4,750,
representing the Company's contribution to a 401(k) plan; $14,400,
representing an automobile allowance; $57,685, representing automobile lease
payments paid by the Company; and $23,005, representing insurance premiums
paid by the Company.
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(2) Included in "Other Annual Compensation" for Mr. Marconi are: $4,750,
representing the Company's contribution to a 401(k) plan; $14,400,
representing an automobile allowance; $52,580, representing automobile lease
payments paid by the Company; and $50,753, representing insurance premiums
paid by the Company.
(3) Included in "Other Annual Compensation" for Mr. Kochen are: $4,750,
representing the Company's contribution to a 401(k) plan; and $3,600,
representing an automobile allowance.
(4) Included in "Other Annual Compensation" for Mr. Dewan are: $2,554,
representing the Company's contribution to a 401(k) plan; and $2,400,
representing an automobile allowance.
In addition, each of the Company's subsidiaries paid dividends to its
shareholders in 1997. See "Selected Historical and Pro Forma Financial Data."
The directors of the Company do not receive compensation for their services as
such. No benefit plan or similar compensation existed for any of the persons
named above at December 31, 1997. The Company intends to adopt a share incentive
plan in order to provide incentives to attract, retain and motivate highly
competent persons as executive management, employees and directors of the
Company and of any affiliate thereof. This plan will provide such persons with
opportunities to acquire shares of common stock of Global Health, or to receive
monetary payments based on the value of such shares pursuant to certain
benefits. Benefits under the plan will be available for grant in any one or a
combination of stock options, stock appreciation rights, stock awards,
performance awards and stock units.
EMPLOYMENT AND CONSULTING AGREEMENTS
Upon consummation of the Reorganization, the Company entered into employment
agreements with Mr. Marconi, Mr. Paul M. Buxbaum and Mr. Donald J. Lewis to
serve as President, Chief Executive Officer and Chief Financial Officer and
Senior Vice President, respectively, of the Company and entered into a
consulting agreement with Mr. Fred E. Siegel. On June 1, 1998, the Company
entered into an employment agreement with Mr. Howard Simon to serve as Chief
Operating Officer of the Company.
The employment agreement with Mr. Marconi provides that he is employed as
President of the Company for a term of five years, renewable upon 90 days' prior
notice by the Company to Mr. Marconi. The agreement provides for a base salary
of $2 million and an annual bonus to be determined by the Board of Directors of
the Company to the extent the Company's EBITDA exceeds $50 million in any year
during the term of the Agreement, which amount can be up to 15% of the amount by
which EBITDA in such year exceeds $50 million. Upon a change of control (as
defined therein), Mr. Marconi has the right to terminate his employment. In such
event, the Company would be required to pay Mr. Marconi his pro rated base
salary and bonus (if one was received the year prior to termination) at the time
of termination plus one year severance pay equal to his annual salary. The
agreement also provides that Mr. Marconi will serve as Chairman of the Board of
Directors of the Company.
The employment agreement with Mr. Buxbaum provides that he is employed as
Chief Executive Officer of the Company for a term of three years, renewable upon
90 days' prior notice by the Company to Mr. Buxbaum. The agreement provides for
a base salary of $450,000 and an annual bonus to be determined by the Board of
Directors of the Company. Upon a change of control (as defined therein), Mr.
Buxbaum has the right to terminate his employment. In such event, the Company
would be required to pay Mr. Buxbaum his pro rated base salary and bonus (if one
was received the year prior to termination) at the time of termination plus one
year severance pay equal to his annual salary. In addition, Mr. Marconi has
agreed to grant to Mr. Buxbaum an option to acquire up to 20% of the common
stock of Global Health Sciences, Inc. owned by Mr. Marconi on the Original Issue
Date at the fair market value thereof as of the Original Issue Date. See
"Certain Related Party Transactions."
The employment agreements with Mr. Lewis and Mr. Simon provide that Mr.
Lewis is employed as Chief Financial Officer and Senior Vice President of the
Company and Mr. Simon as Chief Operating
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Officer, each for a term of three years, renewable upon 90 days' prior notice by
the Company to the executive. Each agreement provides for a base salary of
$225,000 and an annual bonus to be determined by the Board of Directors of the
Company. Upon a change of control (as defined therein), each executive has the
right to terminate his employment. In such event, the Company would be required
to pay such executive his pro rated base salary and bonus (if one was received
the year prior to termination) at the time of termination plus one year
severance pay equal to his annual salary.
The consulting agreement with Mr. Siegel engaged him to perform advisory and
consulting services to the Company, including post-Reorganization transition
matters, for a weekly fee of $20,000 for each week that Mr. Siegel provided such
services to the Company. The initial term of the agreement was 30 days and
expired (and was not renewed by the Company) at the end of May 1998.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the ownership of
the outstanding common stock of the Company (the "Common Stock"), as of June 1,
1998, by each person known to the Company to own beneficially more than 5% of
the Common Stock outstanding on that date. No other person owns any Common
Stock.(1)
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
NAME AND ADDRESS OF BENEFICIAL PERCENT OF TOTAL VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS POWER
- ------------------------------------ ------------------------------------ ----------- --------------- -----------------
<S> <C> <C> <C> <C>
Common Stock Richard D. Marconi 500,000 94% 94%
Global Health Sciences, Inc.
987 N. Enterprise Street
Orange, California 92867
Common Stock Fred E. Siegel 31,915 6% 6%
2475 South Coast Highway
Laguna Beach, California 92651
</TABLE>
- ------------------------
(1) As described above, Mr. Marconi has granted Mr. Buxbaum an option to acquire
up to 20% of the Common Stock owned by Mr. Marconi on the Original Issue
Date at the fair market value thereof on such date. This option will vest
over a period of years, the term of which has not yet been determined.
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<PAGE>
CERTAIN RELATED PARTY TRANSACTIONS
Mr. Hughes, the Chairman and Chief Executive Officer of Herbalife, owned
10,000 shares of common stock of Omni-Pak (which represented approximately 33%
of the then outstanding common stock) and 20,000 shares of common stock of
Dynamic (which represented approximately 20% of the then outstanding common
stock) prior to the consummation of the Old Notes Offering. Pursuant to the
Reorganization, Mr. Hughes received $43.0 million of the proceeds of the Old
Notes Offering in consideration for the Company's purchase of all outstanding
shares of Omni-Pak and Dynamic owned by Mr. Hughes. Herbalife accounted for 76%
of the Company's sales in 1997. See "Prospectus Summary--The Reorganization" and
"Business--Sales and Distribution."
The facility containing the Company's corporate headquarters and granulation
factory is leased by the Company pursuant to the terms of a three-year lease
agreement by and among the Company, Mr. Marconi, Mr. Siegel, Ms. Blossom Siegel
and Ms. Dorothy Marconi. The base rent is approximately $7,000 per month. Mr.
Marconi is Chairman of the Board and President of the Company. Prior to the
consummation of the Reorganization and the Old Notes Offering, Mr. Siegel was
Chief Executive Officer of the Company.
The Company has engaged BGA Consulting to perform certain consulting
services relating to the operation of the Company. The consulting agreement has
a three-year term and provides for an annual consulting fee of $400,000. In
addition, in consideration for its services to the Company in connection with
the Old Notes Offering and the Reorganization, BGA Consulting received directly
from the Company's shareholders at the time of the Reorganization, a fee equal
to approximately $2.4 million. See "Prospectus Summary--The Reorganization." Mr.
Buxbaum, Chief Executive Officer of the Company, is the President of BGA
Consulting.
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<PAGE>
DESCRIPTION OF ACQUISITION FACILITY
Concurrently with the Old Notes Offering, the Company entered into the
Acquisition Facility. The following is a summary description of the principal
terms of the Acquisition Facility and is subject to, and qualified in its
entirety by reference to, the definitive Acquisition Facility and related
documents. A copy of the Acquisition Facility has been filed as an Exhibit to
the Registration Statement of which this Prospectus is a part.
In connection with the consummation of the Old Notes Offering, the Company,
Citicorp USA, Inc., as Administrative Agent, Citibank, N.A. as Issuing Bank,
Bank of America NT&SA, as Documentation Agent and the financial institutions
party thereto acting as lenders, entered into an agreement to provide a five-
year, $50.0 million acquisition and working capital facility (the "Acquisition
Facility") to Global Sub, of which no more than $10.0 million is available for
working capital and other general corporate purposes of Global Sub and its
subsidiaries, including the issuance by Citibank, N.A. of letters of credit. All
undrawn amounts under the Acquisition Facility is available for acquisitions
permitted by the terms thereof. The Acquisition Facility is secured by the
assets, including the capital stock, of the Company and all of its subsidiaries
and is guaranteed by the Company and all of its subsidiaries.
The Acquisition Facility under certain circumstances, requires Global Sub to
make mandatory prepayments and commitment reductions. In addition, Global Sub is
permitted pursuant to the terms of the Acquisition Facility to make optional
prepayments and commitment reductions. Borrowings under the Acquisition Facility
bear interest at either a base rate or a eurodollar rate plus an applicable
margin based upon the ratio of consolidated net funded debt of the Company and
its subsidiaries to EBITDA of Global Sub and its subsidiaries (which margin will
not exceed 1.50% for base rate loans or 2.75% for eurodollar rate loans). Global
Sub will pay the lenders a fee of 50 basis points per annum on the unused
portion of the Acquisition Facility, and a letter of credit fee equal to the
applicable margin for eurodollar loans less 0.25%. In addition, Global Sub will
pay to the Issuing Bank a fee of 25 basis points per annum.
The loan documents for the Acquisition Facility contain certain covenants
that, among other things, restrict the ability of the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, incur
guarantee obligations, repay indebtedness or amend debt instruments, pay
dividends, create liens on assets, make investments, make acquisitions, engage
in mergers or consolidations, make capital expenditures, or engage in certain
transactions with subsidiaries and affiliates and otherwise restrict corporate
activities. In addition, the Acquisition Facility requires Global Sub and its
subsidiaries and the Company to comply with certain financial ratios and
maintenance tests. Borrowings under the Acquisition Facility to fund future
acquisitions are subject to additional conditions, including financial
conditions.
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<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Old Notes were sold by the Company on April 23, 1998 to Citicorp
Securities, Inc., Citibank Canada Securities Limited and Citibank International
plc (the "Initial Purchaser"). In connection therewith, the Company entered into
the Indenture and the Registration Rights Agreement, which agreements require
that the Company file a registration statement under the Securities Act with
respect to the New Notes and, upon the effectiveness of such registration
statement, offer to the holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes, which will be issued
without a restrictive legend and, except as set forth below, may be reoffered
and resold by the holders without registration under the Securities Act. Upon
the completion of the Exchange Offer, the Company's obligations with respect to
the registration of the Old Notes and the New Notes will terminate, except as
provided below. Copies of the Indenture and the Registration Rights Agreement
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part. As a result of the filing and the effectiveness of the
Registration Statement, certain prospective increases in the interest rate on
the Old Notes provided for in the Registration Rights Agreement will not occur.
Following the completion of the Exchange Offer, holders of Old Notes not
tendered will not have any further registration rights, except as provided
below, and the Old Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for the Old Notes could be
adversely affected upon completion of the Exchange Offer.
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with registration and prospectus
delivery provisions of the Securities Act; provided that such holder represents
to the Company that (i) such New Notes are acquired in the ordinary course of
business of such holder, (ii) such holder is not engaging in and does not intend
to engage in a distribution of such New Notes and (iii) such holder has no
arrangement or understanding with any person to participate in the distribution
of such New Notes. Any holder who tenders in the Exchange Offer for the purpose
of participating in a distribution of the New Notes cannot rely on such
interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, including the selling
securityholder information required by Item 507 of Regulation S-K. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
may be deemed a statutory underwriter for purposes of the Securities Act and, as
a result, it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such New Notes. See "Plan of
Distribution."
For each Old Note properly tendered and accepted pursuant to the Exchange
Offer, the holder of such Old Note will receive accrued interest thereon to, but
not including, the date of issuance of such New Notes, such interest to be
payable with the first interest payment on such New Notes. Holders whose Old
Notes are accepted for exchange will not receive any payment in respect of
interest thereon accrued after the issuance of the New Notes. The New Notes will
bear interest from and including their respective dates of issuance.
Each holder of the Old Notes who wishes to exchange the Old Notes for New
Notes in the Exchange Offer will be required to represent in the Letter of
Transmittal that (i) it is not an affiliate of the Company or Subsidiary
Guarantors, (ii) the New Notes to be received by it were acquired in the
ordinary course of its business, (iii) it is not engaging in and does not intend
to engage in a distribution of the New Notes and
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<PAGE>
(iv) it has no arrangement or understanding with any person to participate in
the distribution (within the meaning of the Securities Act) of the New Notes.
In the event that (i) applicable law or interpretations of the staff of the
Commission do not permit the Company to effect the Exchange Offer, (ii) in
certain circumstances, the Initial Purchaser so requests, (iii) any holder of
the Old Notes (other than the Initial Purchaser) is not eligible to participate
in the Exchange Offer, or (iv) for any reason the Exchange Offer is not
consummated by October 20, 1998, the Company and the Subsidiary Guarantors will,
at their cost, (a) as promptly as reasonably practicable, file a shelf
registration statement covering resales of the Old Notes (a "Shelf Registration
Statement"), (b) use their best efforts to cause such Shelf Registration
Statement to be declared effective under the Securities Act and (c) use their
best efforts to keep effective such Shelf Registration Statement until the
earlier of two years after the Original Issue Date and such time as all of the
applicable Old Notes have been sold thereunder. The Company and the Subsidiary
Guarantors will, in the event of the filing of a Shelf Registration Statement,
provide to each holder of the Old Notes copies of the prospectus which is a part
of such Shelf Registration Statement. A holder that sells its Old Notes pursuant
to a Shelf Registration Statement generally will be required to be named as a
selling securityholder 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 Agreements which are applicable to such
holder (including certain indemnification obligations).
If (A) the Exchange Offer has not been consummated by October 20, 1998 or
(B) the Commission shall have issued a stop order suspending the effectiveness
of the Registration Statement or the Shelf Registration Statement at a time when
either of such is required to be kept effective by the Company and the
Subsidiary Guarantors, then the liquidated damages (the "Additional Amounts")
will accrue on the Old Notes over and above the stated interest at a rate of
0.25% per annum for the first 90 days commencing on (x) October 20, 1998 with
respect to clause (A) above, or (y) the date the Registration Statement or the
Shelf Registration Statement ceases to be effective in the case of (B) above,
the rate of such Additional Amounts increasing by an additional 0.25% per annum
at the beginning of each subsequent 90-day period; PROVIDED, HOWEVER, that the
Additional Amounts payable on the Old Notes may not exceed in the aggregate 1.0%
per annum; and PROVIDED FURTHER, that upon the consummation of the Exchange
Offer in the case of clause (A) above, or upon the effectiveness of the
Registration Statement or Shelf Registration Statement which had ceased to
remain effective in the case of clause (B) above, the Additional Amounts
accruing on the Old Notes as a result of such clause (or the relevant subclause
thereof), as the case may be, shall cease to accrue.
CONSEQUENCES OF FAILURE TO EXCHANGE
Following the completion of the Exchange Offer holders of Old Notes not
tendered will not have any further registration rights, except as set forth
above, and the Old Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for a holder's Old Notes
could be adversely affected upon completion of the Exchange Offer if such holder
does not participate in the Exchange Offer.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., San Francisco time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $1,000 principal amount of outstanding Old Notes accepted
in the Exchange Offer. Holders may tender some or all of their Old Notes
pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000 in principal amount.
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The form and terms of New Notes are the same as the form and terms of the
Old Notes, except that the New Notes have been registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes and will be issued pursuant
to, and entitled to the benefits of, the Indenture pursuant to which the Old
Notes were issued and will be deemed one issue of notes, together with the Old
Notes.
As of the date of this Prospectus, $225,000,000 aggregate principal amount
of the Old Notes were outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders and to others believed to
have beneficial interests in the Old Notes. The Company intends to conduct the
Exchange Offer in accordance with the applicable requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as, and if the Company has given oral (promptly confirmed in writing) or
written notice thereof to the Exchange Agent. The Exchange Agent will act as
agent for the tendering holders for the purpose of receiving the New Notes from
the Company. If any tendered Old Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, except as set forth below under
"--Transfer Taxes," transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"--Fees and Expenses" below.
EXPIRATION DATE; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., San Francisco time, on
September 11, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer (in which case the term "Expiration Date" shall mean the later
date and time to which the Exchange Offer is extended). The Company does not
intend to extend the Exchange Offer although it reserves the right to do so by
giving oral (promptly confirmed in writing) or written notice of such extension
to the Exchange Agent and by giving each registered holder notice by means of a
press release or other public announcement of any extension, in each case, prior
to 9:00 a.m., New York City time, on the next business day after the scheduled
Expiration Date. The Company also reserves the right, in its sole discretion,
(i) to delay accepting any Old Notes or, if any of the conditions set forth
below under "--Conditions" shall not have been satisfied or waived, to terminate
the Exchange Offer or (ii) to amend the terms of the Exchange Offer in any
manner, by giving oral (promptly confirmed in writing) or written notice of such
delay or termination to the Exchange Agent, and by complying with Rule 14e-1(d)
promulgated under the Exchange Act to the extent such Rule applies. The Company
acknowledges and undertakes to comply with the provisions of Rule 14e-1(c)
promulgated under the Exchange Act, which requires the Company to pay the
consideration offered, or return the Old Notes surrendered for exchange,
promptly after the termination or withdrawal of the Exchange Offer. Any such
extension, termination or amendment will be followed as promptly as practicable
by a notice to holders of Old Notes.
PROCEDURES FOR TENDERING
Only a registered holder of Old Notes may tender such Old Notes in the
Exchange Offer. To tender in the Exchange Offer, a registered holder (except
those holders delivering an Agent's Message) 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
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Transmittal or such facsimile to the Exchange Agent prior to the Expiration
Date. In addition, either (i) certificates for such Old Notes must be received
by the Exchange Agent along with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old
Notes, if such procedure is available, 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 (iii) the registered holder must
comply with the guaranteed delivery procedures described below. To be tendered
effectively, the Letter of Transmittal (or an Agent's Message in lieu thereof)
and other required documents must be received by the Exchange Agent at the
address set forth below under "Exchange Agent" prior to the Expiration Date.
The tender by a registered holder which is not withdrawn prior to the
Expiration Date will constitute an agreement between such holder and the Company
in accordance with the terms and subject to the conditions set forth herein and
in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES, OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company, or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangements to register ownership of
the Old Notes in such beneficial owner's name or obtain a properly completed
bond power from the registered holder. The transfer of registered ownership may
take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
(A) Old Notes tendered pursuant hereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Registration Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution and (B) the box entitled "Special
Registration Instructions" on the Letter of Transmittal has not been completed.
In the event that signatures on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a financial institution (including most banks, savings and loan
associations and brokerage houses) that is a participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion Program
or the Stock Exchanges Medallion Program (each an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power and signed by such registered
holder as such registered holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers 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 so indicate when signing, and unless waived by the Company
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
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All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Old Notes will be determined by
the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to particular Old Notes. The Company'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, defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Company shall determine. Although the Company intends to notify
holders of defects or irregularities with respect to tenders of Old Notes,
neither the Company, the Exchange Agent nor any other person shall incur any
liability for failure to give such notification. Tenders of Old Notes will not
be deemed to have been made until such defects or irregularities have been cured
or waived. Any Old Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for, or to offer New Notes for, any Old Notes that
remain outstanding subsequent to the Expiration Date or, as set forth below
under "Conditions," to terminate the Exchange Offer and, to the extent permitted
by applicable law, purchase Old 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.
By tendering, each holder will represent to the Company that, among other
things, (i) the New Notes acquired pursuant to the Exchange Offer are being
acquired in the ordinary course of business of such holder, (ii) the holder is
not engaging in and does not intend to engage in a distribution of such New
Notes, (iii) the holder does not have an arrangement or understanding with any
person to participate in the distribution of such New Notes and (iv) the holder
is not an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company or any Subsidiary Guarantor.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of certificates for such Old Notes or a timely Book-Entry
Confirmation of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility, a properly completed and duly executed Letter of
Transmittal (or an Agent's Message in lieu thereof) and all other required
documents. If any tendered Old Notes are not accepted for any reason set forth
in the terms and conditions of the Exchange Offer or if Old Notes are submitted
for a greater principal amount than the holder desires to exchange, such
unaccepted or non-exchanged Old Notes (or Old Notes in substitution therefor)
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Old Notes will be credited to
such tendering holder's 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 Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after receipt of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old 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, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or
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facsimile thereof, with any required signature guarantees (unless an Agent's
Message is transmitted in lieu thereof) and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the address
set forth below under "Exchange Agent" on or prior to the Expiration Date or the
guaranteed delivery procedures described below must be complied with.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has
received an express acknowledgment from a participant tendering Old Notes that
are the subject of such Book-Entry Confirmation that such participant has
received and agrees to be bound by the Letter of Transmittal and that the
Company may enforce such agreement against such participant.
The term "Holder" or "holder" with respect to the Exchange Offer means any
person in whose name Old Notes are registered on the books of the Company or any
person who has obtained a properly completed bond power from the registered
holder or any participant in the Book-Entry Transfer Facility whose name appears
on a security position listing as the holder of Old Notes (which for the purpose
of the Exchange Offer, include beneficial interests in the Old Notes held by
direct or indirect participants in the Book-Entry Transfer Facility and Old
Notes held in definitive form).
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
such Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure 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) on or prior to 5:00 p.m., San Francisco
time, on the Expiration Date, the Exchange Agent receives from such Eligible
Institution a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission (if available to such holder), mail or hand delivery), setting
forth the name and address of the holder of Old Notes and the amount of Old
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, the certificates for all
physically tendered Old Notes, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, the Letter of Transmittal (or facsimile
thereof or an Agent's Message in lieu thereof) and any other documents required
by the Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent, and (iii) the certificates for all physically tendered Old
Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, the Letter of Transmittal (or facsimile thereof or an Agent's Message in
lieu thereof) 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 RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., San
Francisco time, on the Expiration Date.
For a withdrawal of a tender of Old Notes to be effective, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth below under "Exchange Agent" prior to 5:00 p.m.,
San Francisco time, on the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes, or, in the case of Old Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited),
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Old Notes were
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tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee register the transfer of
such Old Notes into the name of the person withdrawing the tender, and (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor. All questions as to the validity, form, and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender, or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following one
of the procedures described under "Procedures for Tendering" above at any time
on or prior to 5:00 p.m., San Francisco time, on the Expiration Date.
CONDITIONS
Notwithstanding any other provision of the Exchange Offer and subject to its
obligations pursuant to the Registration Rights Agreement, the Company shall not
be required to accept for exchange, or to issue New Notes in exchange for, any
Old Notes and may terminate or amend the Exchange Offer, if at any time before
the acceptance of such New Notes for exchange any of the following events shall
occur:
A. any injunction, order or decree shall have been issued by any court
or any governmental agency that would prohibit, prevent or otherwise
materially impair the ability of the Company to proceed with the Exchange
Offer; or
B. the Exchange Offer shall violate any applicable law or any
applicable interpretation of the staff of the Commission.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and such right shall be deemed an ongoing right which may be asserted at
any time and from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes, if
at such time any stop order shall be threatened by the Commission or be in
effect with respect to the Registration Statement of which this Prospectus is a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended.
The Exchange Offer is not conditioned on any minimum principal amount of Old
Notes being tendered for exchange.
ASSISTANCE
All executed Letters of Transmittal should be directed to the Exchange
Agent. Questions and requests for assistance may be directed to the Exchange
Agent as provided below under "Exchange Agent."
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EXCHANGE AGENT
Chase Manhattan Bank and Trust Company, National Association has been
appointed as Exchange Agent for the Exchange Offer. Questions, requests for
assistance and requests for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be directed to the Exchange Agent
addressed as follows:
BY REGISTERED OR CERTIFIED MAIL, BY HAND
OR BY OVERNIGHT COURIER:
Chase Manhattan Bank and Trust Company, National Association
101 California Street, Suite 2725
San Francisco, California 94111
<TABLE>
<S> <C>
By Facsimile: By Telephone:
(415) 693-8850 (415) 954-9507
</TABLE>
The Exchange Agent also acts as trustee under the Indenture.
FEES AND EXPENSES
The Company will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The principal solicitation is
being made by mail; however, additional solicitations may be made in person or
by telephone by officers and employees of the Company.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
approximately $275,000 which includes fees and expenses of the Exchange Agent,
accounting, legal, printing and related fees and expenses.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct the
Company to register New Notes in the name of, or request that Old Notes not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering holder will be responsible for the payment of any
applicable transfer tax thereon.
ACCOUNTING TREATMENT
The Company will not recognize any gain or loss for accounting purposes upon
the consummation of the Exchange Offer. The expense of the Exchange Offer will
be amortized by the Company over the term of the New Notes under generally
accepted accounting principles.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued under an indenture dated as of April 23, 1998 (the
"Indenture") between the Company, the Subsidiary Guarantors and Chase Manhattan
Bank and Trust Company, National Association, as trustee (the "Trustee"). A copy
of the Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The New Notes also will be issued under the
Indenture, which will be qualified under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act") upon the effectiveness of the Registration
Statement. The form and terms of the New Notes and the Old Notes are the same
except that the New Notes have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof. As used
herein the term "Notes" means the New Notes and the Old Notes treated as a
single class.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act, and to all of the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part of the Indenture by reference to the Trust Indenture Act. The
definitions of certain capitalized terms used in the following summary are set
forth below under "Certain Definitions."
GENERAL
The New Notes will be issued only in registered form, without coupons, in
denominations of $1,000 principal amount and integral multiples thereof.
Principal of and interest on the New Notes will be payable, and the New Notes
will be transferable, at the corporate trust office or agency of the Trustee in
the City of New York maintained for such purposes. No service charge will be
made for any registration of transfer or exchange of the New Notes, except for
any tax or other governmental charge that may be imposed in connection
therewith.
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the New Notes issued in connection with the Exchange Offer,
will be treated as a single class of securities under the Indenture.
MATURITY, INTEREST AND PRINCIPAL
The Notes will be unsecured senior obligations of the Company. The
securities issuable under the Indenture are limited in aggregate principal
amount to $325,000,000, of which $225,000,000 were issued in the Old Notes
Offering. The Notes will mature on May 1, 2008. Additional securities may be
issued in one or more series from time to time subject to the limitations set
forth under "--Certain Covenants-- Limitation on Additional Indebtedness" and
restrictions under the Acquisition Facility. Interest on the Notes will accrue
at a rate of 11% per annum and be payable in cash semi-annually in arrears on
each May 1 and November 1 (each, an "Interest Payment Date"), commencing
November 1, 1998 to Holders of record of the Notes at the close of business on
the April 15 and October 15 preceding the applicable Interest Payment Date.
Interest will accrue from the most recent Interest Payment Date to which
interest has been paid or duly provided for or, if no interest has been paid or
duly provided for, from the date of original issuance. Interest will be computed
on the basis of a 360-day year of twelve 30-day months. Interest on overdue
principal and (to the extent permitted by law) on overdue installments of
interest will continue to accrue at the above rate.
REDEMPTION
OPTIONAL REDEMPTION. The Notes are redeemable, in whole or in part, at the
option of the Company, at any time on or after May 1, 2003, at the redemption
prices (expressed as percentages of principal
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amount) set forth below plus accrued and unpaid interest to the redemption date,
if redeemed during the 12-month period beginning on May 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 105.500%
2004.............................................................................. 103.667%
2005.............................................................................. 101.833%
2006 and thereafter............................................................... 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS. At any time on or prior
to May 1, 2001, the Company may, at its option, use the Net Proceeds of one or
more Public Equity Offerings (as defined below) to redeem up to 35% of the
principal amount of the Notes at a redemption price equal to 111% of the
principal amount thereof plus accrued and unpaid interest to the redemption
date; provided, however, that at least 65% of the principal amount of Notes
originally issued remain outstanding immediately after any such redemption (it
being expressly agreed that for purposes of determining whether this condition
is satisfied, Notes owned by the Company or any of its Affiliates shall be
deemed not to be outstanding). In order to effect the foregoing redemption with
the proceeds of any Public Equity Offering, the Company shall make such
redemption not more than 90 days following the consummation of any Public Equity
Offering.
As used in the preceding paragraph, "Public Equity Offering" means any
public offering of Common Stock (other than Disqualified Capital Stock) of the
Company which is undertaken pursuant to a registration statement filed with and
declared effective by the Commission in accordance with the Securities Act.
SELECTION AND NOTICE. In the event that less than all of the Notes are to
be redeemed at any time, selection of Notes for redemption will be made by the
Trustee 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 national securities exchange, on a pro rata basis, by lot or by such method
as the Trustee shall deem fair and appropriate; provided that no Notes of $1,000
principal amount or less shall be redeemed in part. Notice of redemption shall
be mailed by first class mail at least 30 but not more than 60 calendar days
before the redemption date to each Holder of Notes to be redeemed at its
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. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. 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 upon the occurrence of a Change of Control (the
date of such occurrence being the "Change of Control Date") the Company will
notify the Holders in writing of such occurrence and will make an offer to
purchase (the "Change of Control Offer"), on a Business Day (the "Change of
Control Payment Date") not later than 60 Business Days following the Change of
Control Date, all Notes then outstanding at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the Change of Control Payment Date. All Notes properly tendered
pursuant to such Change of Control Offer and not withdrawn pursuant thereto will
be purchased on the Change of Control Payment Date. See "Risk Factors--Change of
Control."
Notice of a Change of Control Offer will be mailed by the Company to the
Holders not less than 30 calendar days nor more than 60 calendar days before the
Change of Control Payment Date. The Change of Control Offer is required to
remain open for at least 20 Business Days and until the close of business on the
Change of Control Payment Date.
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The Company will comply with any tender offer rules under the Exchange Act
which may then be applicable, including, but not limited to, Rule 14e-1
thereunder, and any other applicable laws, rules and regulations, in connection
with any Change of Control Offer.
RANKING AND SUBORDINATED GUARANTEES
The Indebtedness of the Company evidenced by the Old Notes is, and the New
Notes will be, senior obligations of the Company. The Notes will rank senior in
right of payment to all future subordinated Indebtedness of the Company and will
rank PARI PASSU in right of payment with all other existing or future
indebtedness of the Company that is not by its terms subordinate to the Notes.
The Old Notes are, and the New Notes will be, fully and unconditionally
guaranteed (the "Guarantees") on a general unsecured basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by the
Subsidiary Guarantors. The Guarantees will be subordinated to the prior payment
in full in cash of the Acquisition Facility and the Guarantor Senior Debt, which
includes the guarantees to be delivered by the Subsidiary Guarantors under the
Acquisition Facility, and will rank PARI PASSU in right of payment to all other
senior indebtedness of the Subsidiary Guarantors and senior in right of payment
to all subordinated obligations of the Subsidiary Guarantors.
Upon any payment or distribution of assets of the Subsidiary Guarantors of
any kind or character, whether in cash, property or securities, to creditors
upon any liquidation, dissolution, winding up, reorganization, assignment for
the benefit of creditors or marshaling of assets of the Subsidiary Guarantors or
in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Subsidiary Guarantors or their property, whether
voluntary or involuntary, all obligations due or to become due upon all
Guarantor Senior Debt shall first be paid in full in cash, before any payment or
distribution of any kind or character is made on account of any obligations on
the Guarantees, or for the acquisition of all or any part of any of the Notes or
Guarantees for cash or property or otherwise; and until all such obligations
with respect to all Guarantor Senior Debt are paid in full, in cash, any
distribution to which the holders of the Guarantees would be entitled but for
the subordination provisions will be made to the holders of Guarantor Senior
Debt as their interests may appear. If any default occurs and is continuing in
the payment when due, whether at maturity, upon any redemption, by declaration
or otherwise, of any principal of, premium and interest on, unpaid drawings for
letters of credit issued in respect of, or fees with respect to, or any other
obligation in respect of, any Guarantor Senior Debt, no payment of any kind or
character shall be made by or on behalf of the Subsidiary Guarantors or any
other Person on its or their behalf with respect to any obligations on the
Guarantees or to acquire any of the obligations covered by the Guarantees for
cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Guarantor Senior Debt, as such event of default is defined in the
instrument creating or evidencing such Guarantor Senior Debt, permitting the
holders of such Guarantor Senior Debt then outstanding to accelerate the
maturity thereof (or the obligations guaranteed thereby) and if the
Representative for the Guarantor Senior Debt gives written notice of the event
of default to the Trustee (a "Default Notice"), then, unless and until all
events of default have been cured or waived in writing or have ceased to exist
or the Trustee receives notice from the Representative for the respective
Guarantor Senior Debt terminating the Blockage Period (as defined below), during
the 180 days after the delivery of such Default Notice (the "Blockage Period"),
none of the Subsidiary Guarantors nor any other Person on their behalf shall (x)
make any payment of any kind or character with respect to any obligations
evidenced by the Guarantees or (y) acquire all or any part of the obligations
covered by the Guarantees for cash or property or otherwise. Notwithstanding
anything herein to the contrary, in no event will a Blockage Period extend
beyond 180 days from the date the payment on the Notes was due and only one such
Blockage Period may be commenced within any 360 consecutive days. No event of
default which existed or was continuing on the date of the commencement of any
Blockage Period with respect to the Guarantor Senior Debt shall be, or be made,
the basis for commencement of a second Blockage Period by the Representative of
such
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Guarantor Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured by the Subsidiary Guarantors
or waived for a period of not less than 90 consecutive days.
By reason of such subordination, in the event of the insolvency of the
Subsidiary Guarantors, creditors of the Subsidiary Guarantors who are not
holders of Guarantor Senior Debt, including the holders of the Guarantees, may
recover less, ratably, than holders of Guarantor Senior Debt.
Each Subsidiary Guarantor unconditionally guarantees, on a subordinated
basis as described above, jointly and severally, to each Holder and the Trustee,
the full and prompt performance of the Company's obligations under the Indenture
and the Notes, including the payment of principal of and interest on the Notes.
The obligations of each Subsidiary Guarantor are limited to the maximum amount
as will, after giving effect to all other contingent and fixed liabilities of
such Subsidiary Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Subsidiary Guarantor in respect of
the obligations of such other Subsidiary Guarantor under its Guarantee or
pursuant to its contribution obligations under the Indenture, result in the
obligations of such Subsidiary Guarantor under the Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under a Guarantee
shall be entitled to a contribution from each other Subsidiary Guarantor in a
pro rata amount based on the Adjusted Net Assets of each Subsidiary Guarantor.
A Subsidiary Guarantor shall be released from all of its obligations under
its Guarantee if all of its assets or Capital Stock is sold, in each case in a
transaction in compliance with the "Disposition of Proceeds of Asset Sales"
covenants below, or the Subsidiary Guarantor merges with or into or consolidates
with, or transfers all or substantially all of its assets in compliance with
"Certain Covenants--Limitation on Mergers and Certain Other Transactions" below,
and such Subsidiary Guarantor has delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent herein provided for relating to such transaction have been complied
with.
The Notes also will be effectively subordinated to all secured Indebtedness
of the Company's Subsidiaries (including all secured Indebtedness outstanding
under the Acquisition Facility and to all secured Guarantor Senior Debt of the
Subsidiary Guarantors) to the extent of the value of any assets securing such
Indebtedness. As of the Issue Date the Company will have no Subsidiaries other
than the Subsidiary Guarantors.
Separate financial statements for all of the Subsidiary Guarantors are not
included herein because such Subsidiary Guarantors are jointly and severally
liable with respect to the Company's obligations pursuant to the Notes, and the
aggregate net assets, earnings and equity of the Subsidiary Guarantors and the
Company are substantially equivalent to the net assets, earnings and equity of
the Company on a consolidated basis.
PROVISION FOR FINANCIAL INFORMATION
The Indenture, whether or not required by the rules and regulations of the
Commission, so long as the Notes are outstanding, provides that beginning with
the first fiscal quarter following the Issue Date (as defined herein) the
Company will deliver to the Trustee within 15 days after the filing of the same
with the Commission, copies of the quarterly and annual reports and of the
information, documents and other reports, if any, which the Company is required
to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act;
PROVIDED, HOWEVER, that the Company will deliver to the Trustee comparable
information with respect to the fiscal quarter preceding the Issue Date on or
prior to June 15, 1998. The Indenture further provides that, notwithstanding
that the Company may not be subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act, the Company will file with the Commission, to the
extent permitted, and provide the Trustee and Holders with such quarterly and
annual reports and such information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act. The Company will also make such
reports available to prospective investors, securities analysts and broker-
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dealers upon their request. In addition, for so long as any Notes remain
outstanding, the Company will furnish to the holders of Notes and to securities
analysts and prospective investors, upon their request, the information required
to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, and, to
any beneficial holder of Notes, if not obtainable from the Commission,
information of the type that would be filed with the Commission pursuant to the
foregoing provisions upon the request of any such holder. The Company will also
comply with the other provisions of Section 314(a) of the Trust Indenture Act.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are governed by the laws of the
State of New York, without regard to the principles of conflicts of law.
CERTAIN COVENANTS
Set forth below are certain covenants which are contained in the Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to, create, incur,
assume, issue, guarantee or in any manner become, directly or indirectly, liable
for or with respect to the payment of ("incur"), any Indebtedness, including,
without limitation, any Acquired Indebtedness, except for Indebtedness falling
within at least one of the following categories:
(a) Indebtedness under the Notes, the Guarantees and the Indenture, and
Indebtedness and Guarantees of such Indebtedness under the Indenture
properly incurred in clause (d) below;
(b) Indebtedness of the Company and its Subsidiaries outstanding on the
Issue Date after giving effect to the application of the proceeds from the
sale of the Notes;
(c) Indebtedness of the Company and the Subsidiary Guarantors under one
or more Acquisition Facilities in an aggregate principal amount at any one
time outstanding not to exceed $60,000,000;
(d) Indebtedness of the Company or any Subsidiary Guarantor (which
amount may, but need not be, incurred in whole or in part under the
Acquisition Facility), if at the time of incurrence and after giving effect
thereto, no Default or Event of Default exists and the Company's EBITDA
Coverage Ratio, would have been at least 2.0 to 1;
(e) obligations under Interest Rate Protection Obligations and Currency
Protection Obligations incurred in the ordinary course of business to the
extent that such obligations have been entered into for bona fide hedging
purposes and not for speculation or other purposes (which amount may, but
need not be, incurred in whole or in part under the Acquisition Facility);
provided that, with respect to Interest Rate Protection Obligations, the
notional principal amount of such Indebtedness does not exceed, at the time
of the incurrence of such Indebtedness, the principal amount of Indebtedness
to which such Interest Rate Protection Obligations relate;
(f) replacements, renewals, refinancings and extensions of the
Indebtedness incurred under the immediately preceding clauses (b) or (d);
provided that any such replacement, renewal, refinancing or extension (x) is
scheduled to mature either (a) no earlier than the Indebtedness being
replaced, renewed, refinanced or extended, or (b) after the maturity date of
the Notes, (y) the portion, if any, of such replacement, renewal,
refinancing or extension that is scheduled to mature on or prior to the
maturity date of the Notes has a weighted average life to maturity at the
time such Indebtedness is incurred that is equal to or greater than the
weighted average life to maturity of the portion of the Indebtedness being
replaced, renewed, refinanced or extended that is scheduled to mature on or
prior to the maturity date of the Notes, and (z) shall not exceed the
principal amount (plus accrued interest and prepayment premium, if any) of
the Indebtedness being replaced, renewed, refinanced or extended;
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(g) Purchase Money Indebtedness and Capitalized Lease Obligations of the
Company or any Subsidiary Guarantor in an aggregate amount which does not
exceed $2,500,000 at any time outstanding;
(h) Indebtedness of the Company owing to and held by any Wholly-Owned
Subsidiary of the Company or Indebtedness of a Wholly-Owned Subsidiary of
the Company owing to and held by the Company or any other Wholly-Owned
Subsidiary of the Company; PROVIDED, HOWEVER, that any subsequent transfer
or event which results in any such Wholly-Owned Subsidiary ceasing to be a
Wholly-Owned Subsidiary of the Company or any subsequent transfer of any
such Indebtedness (except to the Company or another Wholly-Owned Subsidiary
of the Company) would be deemed, in each case, to constitute the incurrence
of such Indebtedness by the issuer thereof;
(i) Indebtedness of the Company or a Wholly-Owned Subsidiary of the
Company in respect of performance bonds, bankers' acceptances, surety or
appeal bonds or similar instruments provided by the Company and its
Wholly-Owned Subsidiaries in the ordinary course of business and which do
not secure other Indebtedness; and
(j) other Indebtedness of the Company or any Subsidiary Guarantor (which
amount may be, but need not be, incurred in whole or in part under the
Acquisition Facility) not to exceed $10,000,000 at any time outstanding.
The Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, incur any Indebtedness which by its terms (or by the
terms of any agreement governing such Indebtedness) is subordinated in right of
payment to any other Indebtedness of the Company unless such Indebtedness is
also by its terms (or by the terms of any agreement governing such Indebtedness)
made expressly subordinate in right of payment to the Notes pursuant to
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are most favorable to
the holders of any other Indebtedness of the Company.
Indebtedness shall be deemed to have been incurred by the survivor of a
merger, at the time of such merger, and with respect to an acquired Subsidiary,
at the time of such acquisition.
LIMITATION ON INVESTMENTS, LOANS AND ADVANCES. The Indenture provides that
the Company will not, and will not permit any of its Subsidiaries to, make any
capital contributions, advances or loans to, or investments in (including by way
of guarantee), or purchases of Capital Stock or other securities of, any Person
(collectively, "Investments"), except: (i) Investments by the Company in or to
any Wholly-Owned Subsidiary and Investments or loans in or to the Company or a
Wholly-Owned Subsidiary by any Subsidiary (or a person who becomes a
Wholly-Owned Subsidiary as a result of such Investment or who merges or
consolidates into the Company or a Wholly-Owned Subsidiary of the Company); (ii)
Investments represented by accounts receivable created or acquired in the
ordinary course of business and Investments received in respect thereof upon the
insolvency of the payor; (iii) Investments under or pursuant to Interest Rate
Protection Obligations or Currency Protection Obligations in each case entered
into for hedging and not for speculative purposes; (iv) advances to employees in
the ordinary course of business not in excess of $1,000,000 at any one time
outstanding; (v) Investments, not exceeding $5,000,000 in the aggregate, in
joint ventures, partnerships or persons that are not Wholly-Owned Subsidiaries,
provided that such Investments are made solely for the purpose of acquiring
businesses or property reasonably related to the Company's business as of the
Issue Date, including reasonably related extensions thereof; (vi) Investments in
another Person which were received as consideration for an Asset Sale in
accordance with the "Disposition of Proceeds of Asset Sales" covenant; (vii)
Investments in Cash Equivalents; (viii) Investments the payment for which
consists exclusively of Capital Stock (excluding Disqualified Capital Stock) of
the Company; (ix) any transaction to the extent it constitutes an Investment
that is permitted by and made in accordance with the provisions of the second
paragraph of the covenant described under "--Limitations on Transactions with
Affiliates"; and (x) Investments permitted to be made in accordance with the
"Limitation on Restricted Payments" covenant.
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LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not cause or permit any of its Subsidiaries to, directly or
indirectly, make any Restricted Payment, unless:
(a) no Default or Event of Default will have occurred and be continuing
at the time of or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made after the Issue
Date does not exceed the sum of (1) 50% of (a) the Company's cumulative
Consolidated Net Income (or in the event such cumulative Consolidated Net
Income is a deficit, minus 100% of such deficit) minus (b) Permitted
Payments since the Issue Date made pursuant to (v)(b) below; provided that
Permitted Payments made pursuant to (v)(a) and (v)(c) below shall not count
in this calculation, (2) 100% of the aggregate Net Proceeds and the fair
market value of marketable securities and property received by the Company
from the issue or sale, after the Issue Date, of Capital Stock (other than
Disqualified Capital Stock) of the Company (excluding any such Net Proceeds
received from issuances and sales financed directly or indirectly using
funds borrowed from the Company or any Subsidiary of the Company, until and
to the extent such borrowing is repaid) or any Indebtedness or other
securities of the Company convertible into or exercisable for Capital Stock
(other than Disqualified Capital Stock) of the Company which has been so
converted, exercised or exchanged, as the case may be, and (3) $1,000,000;
and
(c) at the time of such Restricted Payment, the Company could incur
$1.00 of additional Indebtedness pursuant to clause (d) of the "Limitation
on Additional Indebtedness" covenant.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant will not prohibit the following (each, a
"Permitted Payment"): (i) the payment of any dividend within 60 calendar days
after the date of declaration thereof, if at such date of declaration such
payment would comply with the provisions of the Indenture; (ii) the payment,
defeasance, purchase, redemption, prepayment, acquisition or retirement of any
Capital Stock of the Company or Indebtedness of the Company that is subordinate
in right of payment to the Notes, by conversion into or by an exchange for,
Capital Stock of the Company that is not Disqualified Capital Stock or out of
the Net Proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Capital Stock (other than Disqualified
Capital Stock) of the Company; provided that such net cash proceeds shall not
count for purposes of the calculations in paragraph (b) above; (iii) the
redemption or retirement of Indebtedness of the Company that is subordinate in
right of payment to the Notes in exchange for, by conversion into, or out of the
Net Proceeds of, a substantially concurrent sale of Indebtedness of the Company
(other than to a Subsidiary of the Company) that is contractually subordinated
in right of payment to the Notes and that is permitted to be incurred in
accordance with clause (f) of the "Limitation on Additional Indebtedness"
covenant; (iv) purchases of Capital Stock deemed to occur upon the exercise of
stock options if such Capital Stock represents a portion of the exercise price
thereof; (v) (a) the payment to shareholders of the Company pursuant to the
Reorganization Agreement consistent with past practices for the purpose of
distributing net income generated by the Company for the period of January 1,
1998 through the Issue Date; (b) so long as the Company remains an S
Corporation, the payment of distributions to shareholders of the Company to the
extent necessary to permit such shareholders to pay federal and state income tax
liabilities arising from income of the Company allocable to such shareholders
and attributable to them solely as a result of the Company being an S
Corporation for federal and state income tax purposes and (c) the purchase of
additional shares from the Company's shareholders in an amount not to exceed
$4,000,000; and (vi) payments to purchase Capital Stock of the Company from
management or employees of the Company or any of its Subsidiaries, or their
authorized representatives, upon the happening of an event which provides for
payment under any applicable plan, or upon the death, disability or termination
of employment of such employees, in aggregate amounts under this clause (vi) not
to exceed $500,000 in any fiscal year of the Company.
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In determining the amount of Restricted Payments permissible under clause
(b) above, amounts expended pursuant to clauses (i), (iv) and (vi) in the
preceding paragraph shall be included as Restricted Payments.
LIMITATION ON LIENS. The Indenture provides that the Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien (other than a Permitted Lien) of any
kind upon any of its property or assets now owned or hereafter acquired by it
unless the Notes are equally and ratably secured by such Lien; provided that if
the Indebtedness secured by such Lien is subordinate or junior in right of
payment to the Notes then the Lien securing such Indebtedness shall be
subordinate or junior in priority to the Lien securing the Notes at least to the
same extent as such Indebtedness is subordinate or junior to the Notes.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to, enter into,
renew or extend any Sale-Leaseback Transaction unless (i) (a) after giving
effect to such Sale-Leaseback Transaction on a pro forma basis, the Company is
in compliance with the "Limitation on Liens" covenant and could incur
Indebtedness pursuant to the "Limitation on Additional Indebtedness" covenant at
least equal in amount to the Attributable Debt associated with such
Sale-Leaseback Transaction, and (b) the sale price in such Sale-Leaseback
Transaction is at least equal to the Fair Market Value of such property, and the
Company or such Wholly-Owned Subsidiary shall apply the Net Asset Sale Proceeds
of such sale in the manner provided under the "Disposition of Proceeds of Asset
Sales" covenant below, or (ii) the lease is between the Company and a
Wholly-Owned Subsidiary of the Company or between Wholly-Owned Subsidiaries of
the Company.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any of its Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective or enter into any agreement with
any Person that would cause any consensual encumbrance or restriction of any
kind on the ability of any Subsidiary of the Company to (a) pay dividends, in
cash or otherwise, or make any other distributions on its Capital Stock or any
other interest or participation in, or measured by, its profits owned by the
Company or a Subsidiary of the Company, (b) make any loans or advances to or pay
any Indebtedness owed to, the Company or any Subsidiary of the Company or (c)
transfer any of its properties or assets to the Company or to any Subsidiary of
the Company, except for (i) encumbrances or restrictions existing under or
contemplated by or by reason of the Notes, the Indenture and the Guarantees,
(ii) encumbrances or restrictions existing under or contemplated by agreements
as in effect on the Issue Date, (iii) encumbrances or restrictions existing
under the Acquisition Facility, (iv) encumbrances or restrictions with respect
to a Person that is not a Subsidiary of the Company on the Issue Date, in
existence at the time such Person becomes a Subsidiary of the Company (but not
created in contemplation of such Person becoming such a Subsidiary), (v)
encumbrances or restrictions existing under or by reason of applicable law, (vi)
encumbrances or restrictions existing by reason of any Lien permitted under the
"Limitation on Liens" covenant, (vii) encumbrances or restrictions existing
under any agreement for the sale of assets of the Company or any Subsidiary of
the Company, or the Capital Stock of any Subsidiary of the Company, (viii)
customary provisions restricting subletting or assignment of leases entered into
in the ordinary course of business and consistent with past practices, (ix)
Purchase Money Indebtedness, but only to the extent such purchase money
obligation only imposes encumbrances and restrictions on the property so
acquired, and (x) encumbrances or restrictions existing under any agreement that
refinances, replaces, renews or extends an agreement containing a restriction
permitted by clauses (i), (ii), (iii) and (iv) above; provided that the terms
and conditions of any such restrictions are not materially less favorable to the
Holders (other than with respect to clause (iii) above, in the event the lenders
require additional security) than those under or pursuant to the agreement being
replaced or the agreement evidencing the Indebtedness refinanced as determined
by the Board of Directors of the Company in their reasonable and good faith
judgment.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, consummate any Asset Sale unless (i) the
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consideration received in respect of such Asset Sale is at least equal to the
Fair Market Value of the assets subject to such Asset Sale and (ii) at least 75%
of the value of the consideration therefrom received by the Company or such
Subsidiary is in the form of (A) cash or Cash Equivalents or (B) the assumption
by the Person acquiring the assets in such Asset Sale of Indebtedness of the
Company or any of its Subsidiaries with the effect that none of the Company or
any of its Subsidiaries will have any obligation with respect to such
Indebtedness. The Company or the applicable Subsidiary, as the case may be, will
either (w) within 360 calendar days of consummation of the Asset Sale apply the
Net Asset Sale Proceeds from such Asset Sale to permanently repay Indebtedness
under the Acquisition Facility (for purposes of this clause, a repayment of any
amount owing under the Acquisition Facility shall be deemed a permanent
repayment to the extent the amount represented by such repayment is not drawn
upon by any Subsidiary of the Company for a period of nine months following such
repayment), or (x) within 360 calendar days of such Asset Sale apply the Net
Asset Sale Proceeds from such Asset Sale to an investment in properties and
assets that replace the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in the business of the
Company and its Subsidiaries existing on the Issue Date or in businesses
reasonably related thereto, including reasonably related extensions thereof, or
(y) a combination of prepayment and investment permitted by the foregoing
clauses (w) and (x) or (z) apply any Net Asset Sale Proceeds from any Asset Sale
that are not applied pursuant to clause (w), (x) or (y) above (such amounts,
"Excess Proceeds") as provided below.
When the aggregate amount of Excess Proceeds equals or exceeds $5,000,000,
the Company will make an offer to purchase (an "Asset Sale Offer") ratably from
all Holders of the Notes, not more than 60 calendar days thereafter (the "Excess
Proceeds Payment Date") that portion of outstanding Notes purchasable with such
Excess Proceeds, at a price in cash equal to 100% of the principal amount
thereof plus accrued and unpaid interest, if any, thereon to the purchase date.
To the extent that the Asset Sale Offer is not fully subscribed, the Company may
use the unutilized portion of such Excess Proceeds for general corporate
purposes. If the aggregate principal amount, plus accrued and unpaid interest,
if any, thereon of Notes validly tendered and not withdrawn by Holders thereof
exceeds the Excess Proceeds, Notes to be purchased will be selected by the
Trustee on a pro rata basis based upon amounts tendered (with such adjustments
as may be deemed appropriate by the Trustee so that only Notes in denominations
of $1,000, or integral multiples thereof, shall be purchased). Upon completion
of such Asset Sale Offer, the amount of Excess Proceeds will be reset to zero.
Notice of an Asset Sale Offer will be mailed to the Holders as shown on the
register of Holders not less than 30 calendar days nor more than 60 calendar
days before the Excess Proceeds Payment Date, with a copy to the Trustee, and
will comply with the procedures set forth in the Indenture. Upon receiving
notice of the Asset Sale Offer, Holders may elect to tender their Notes in whole
or in part in integral multiples of $1,000 principal amount in exchange for
cash. An Asset Sale Offer shall remain open for a period of 20 Business Days or
such longer period as may be required by law.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under "Limitation on Mergers and Certain Other
Transactions" below, the Surviving Entity shall be deemed to have sold the
properties and assets of the Company and its Subsidiaries not so transferred for
purposes of the second paragraph of this covenant, and will comply with the
Asset Sale provisions of the Indenture with respect to such deemed sale as if it
were an Asset Sale. In addition, the Fair Market Value of such properties and
assets of the Company or its Subsidiaries deemed to be sold pursuant to this
paragraph will be deemed to be Net Asset Sale Proceeds for purposes of the Asset
Sale provisions of the Indenture.
If an offer is made to repurchase the Notes in an Asset Sale Offer, the
Company will comply with any tender offer rules under the Exchange Act,
including, but not limited to, Rule 14e-1 thereunder, and any other applicable
laws, rules and regulations in connection with any such offer.
LIMITATION ON CREATION OF SUBSIDIARIES. The Company will not create or
acquire, and will not permit any of its Subsidiaries to create or acquire, any
Subsidiary other than (i) a Subsidiary existing as of the
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Issue Date, or (ii) a Subsidiary that is acquired or created in connection with
the acquisition by the Company of a related business or asset; provided,
however, that each Subsidiary acquired or created pursuant to clause (ii) shall
have executed and delivered a supplemental indenture in accordance with the
terms of the Indenture (together with such other documentation relating thereto
as the Trustee shall require, including, without limitation, opinions of counsel
as to the enforceability of such supplemental indenture), pursuant to which such
Subsidiary will become a Subsidiary Guarantor; PROVIDED, FURTHER, HOWEVER,
subsidiaries created for the sole purpose of consummating a merger or
acquisition and having total assets with a book value less than $100,000 shall
not be required to comply with this clause (ii) until the merger or acquisition
is consummated and only to the extent such Subsidiary survives such merger or
until such Subsidiary's total assets exceed the above amount.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that
the Company will not, and will not cause or permit any of its Subsidiaries to,
directly or indirectly, enter into any transaction (including, without
limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service or the lending of any funds) with or for the benefit of
any of its Affiliates (each, an "Affiliate Transaction"), other than such
transactions as are entered into and conducted in good faith and which are on
terms that are fair to the Company or such Subsidiary and no less favorable to
the Company or such Subsidiary than those that could have been obtained in a
comparable transaction on an arm's-length basis from a Person that is not an
Affiliate. All Affiliate Transactions or series of Affiliate Transactions
involving aggregate payments or other market value in excess of $1,000,000 must
also be approved, prior to the consummation thereof, by a majority of the
disinterested members of the Board of Directors of the Company and evidenced by
a Board Resolution (or, if there is only one disinterested director, it must be
approved by such member). Any Affiliate Transaction or series of Affiliate
Transactions involving aggregate payments or other market value in excess of
$2,500,000, or as to which there are no disinterested directors, is also subject
to the further requirement that the Company obtain an opinion of an Independent
Financial Advisor with experience in appraising the terms and conditions of the
relevant type of transaction (or series of transactions) stating that the
transaction (or series of transactions) is fair, from a financial point of view,
to the Company or such Subsidiary.
The foregoing restrictions will not apply to (i) transactions between the
Company and any of its Wholly-Owned Subsidiaries or among its Wholly-Owned
Subsidiaries; (ii) agreements in effect on the Issue Date and amendments or
renewals thereof that are not more disadvantageous to the Holders in any
material respect than the original agreements as in effect on the Issue Date;
(iii) transactions permitted by, and complying with the provisions of the
covenant described under "Limitation on Mergers and Certain Other Transactions";
(iv) Restricted Payments made in accordance with the "Limitation on Restricted
Payments" covenant; (v) reasonable fees and compensation and indemnification and
similar arrangements with officers, directors and employees of the Company or
any of its Subsidiaries and payments thereunder as determined in good faith by
the Company's Board of Directors; and (vi) transactions with customers, clients,
joint venture partners or purchasers or sellers of goods or services, in each
case, in the ordinary course of business (including, without limitation,
pursuant to joint venture agreements) and otherwise in compliance with the terms
of the Indenture which are fair to the Company or its Subsidiaries, in the
reasonable determination of the Board of Directors of the Company or the senior
management thereof, or are on terms at least as favorable as might reasonably
have been obtained at such time from an unaffiliated party.
OWNERSHIP OF CAPITAL STOCK OF WHOLLY-OWNED SUBSIDIARIES. The Indenture
provides that the Company will at all times maintain and cause each Subsidiary
to maintain, record and beneficial ownership of all of the Capital Stock (other
than directors' qualifying shares or an immaterial amount of shares required to
be owned by other Persons pursuant to applicable law) of each Subsidiary of the
Company; provided, that a Wholly-Owned Subsidiary of the Company may provide for
earn out or other similar obligations in connection with the acquisition of a
business for the purpose of financing such acquisition, provided that the
Company at all times shall maintain ownership of at least 85% of the Capital
Stock of such Wholly-
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Owned Subsidiary. The provisions of this covenant shall not apply to the Capital
Stock of any such Subsidiary that shall be disposed of in its entirety or
consolidated or merged with or into the Company or a Subsidiary of the Company,
in accordance with the provisions described under "Disposition of Proceeds of
Asset Sales" above and "Limitation on Mergers and Certain Other Transactions"
below.
LIMITATION ON MERGERS AND CERTAIN OTHER TRANSACTIONS. The Indenture
provides that the Company will not, and will not permit any of its Subsidiaries
to, consolidate with or merge with or into or sell, assign, convey, lease or
transfer all or substantially all of the properties and assets of the Company or
any of its Subsidiaries as an entirety to any Person in a single transaction or
through a series of transactions, unless: (a) the Company or such Subsidiary
shall be the continuing Person or the resulting, surviving or transferee Person
(the "Surviving Entity") shall be a corporation, limited liability company or
partnership organized and existing under the laws of the United States of
America or any state thereof or the District of Columbia, (b) the Surviving
Entity shall expressly assume, by a supplemental indenture executed and
delivered to the Trustee, in form reasonably satisfactory to the Trustee, all of
the obligations of the Company or such Subsidiary, as the case may be, under the
Notes, the Guarantees and the Indenture; (c) immediately before and immediately
after giving effect to such transaction, or series of transactions (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default or Event of Default shall have occurred and be continuing; (d) the
Company or the Surviving Entity shall immediately after giving effect to such
transaction or series of transactions (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of the transaction or series of transactions) have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction or series of transactions; (e) immediately
after giving effect to such transaction or series of transactions, the Company
or the Surviving Entity could incur $1.00 of additional Indebtedness pursuant to
clause (d) of the "Limitation on Additional Indebtedness" covenant; and (f) the
Company or such Surviving Entity shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel stating that such consolidation,
merger, sale, assignment, conveyance, transfer or lease and, if a supplemental
indenture is required in connection with such transaction or series of
transactions, such supplemental indenture complies with the applicable
provisions of the Indenture and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(a) Default in the payment of any interest on the Notes when it becomes
due and continuance of such Default for a period of 30 calendar days;
(b) Default in the payment of the principal of, or premium, if any, on
the Notes when due;
(c) the failure of the Company to comply with any of the terms or
provisions of "Change of Control" or "Certain Covenants--Disposition of
Proceeds of Asset Sales";
(d) Default in the performance, or breach, of any covenant in the
Indenture (other than defaults specified in clauses (a), (b) or (c) above),
and continuance of such Default or breach for a period of 30 calendar days
after written notice specifying the Default 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 outstanding Notes;
(e) failure by the Company or any Subsidiary of the Company (i) to make
payment at maturity with respect to any other Indebtedness under one or more
classes or issues of Indebtedness in an aggregate principal amount of
$5,000,000 or more; or (ii) to perform any term, covenant, condition, or
provision of one or more classes or issues of Indebtedness in an aggregate
principal amount of
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$5,000,000 or more, which failure, in the case of this clause (ii), results
in an acceleration of the maturity thereof;
(f) one or more judgments, orders or decrees for the payment of money in
excess of $5,000,000, either individually or in an aggregate amount (to the
extent not covered by a reputable third-party insurance company as to which
the insurer has acknowledged coverage), shall be entered against the Company
or any Subsidiary of the Company or any of their respective properties and
shall not be discharged and there shall have been a period of 60 calendar
days during which a stay of enforcement of such judgment or order, by reason
of pending appeal or otherwise, shall not be in effect;
(g) certain events of bankruptcy or insolvency with respect to the
Company or any Subsidiary of the Company shall have occurred; or
(h) any of the Guarantees ceases to be in full force and effect or any
of the Guarantees is declared by a court of competent jurisdiction to be
null and void and unenforceable or any of the Guarantees is found by a court
of competent jurisdiction to be invalid or any of the Subsidiary Guarantors
denies its liability under its Guarantee (other than by reason of release of
a Subsidiary Guarantor in accordance with the terms of the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(g) with respect to the Company) occurs and is continuing, then the Trustee or
the Holders of at least 25% in aggregate principal amount of the outstanding
Notes may, by written notice to the Company and the Trustee (if given by
Holders), which notice shall specify the respective Event of Default, declare
the entire principal amount of all the outstanding Notes to be due and payable
immediately, together with all accrued and unpaid interest and premium, if any,
thereon (such aggregate principal amount, together with accrued and unpaid
interest and premium, if any, thereon, the "Default Amount"), provided, however,
that so long as the Acquisition Facility shall be in effect any such
acceleration shall not be effective until the earlier of (x) five (5) business
days after receipt by the Company and the Representatives under the Acquisition
Facility of such acceleration notice and (y) the acceleration of any
Indebtedness under the Acquisition Facility. Upon any such declaration (except
as provided in the preceding sentence), the Default Amount shall become due and
payable immediately. Notwithstanding the foregoing, if an Event of Default
specified in clause (g) occurs with respect to the Company and is continuing,
then the Default Amount shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder.
After a declaration of acceleration, the Holders of a majority in aggregate
principal amount of outstanding Notes by notice to the Trustee, may rescind such
declaration of acceleration if all existing Events of Default have been cured or
waived (other than nonpayment of the Default Amount that has become due solely
as a result of such acceleration) and if the rescission of acceleration would
not conflict with any judgment or decree. The Holders of a majority in aggregate
principal amount of the outstanding Notes also have the right to waive past
defaults under the Indenture except a default in the payment of the principal
of, or interest or premium, if any, on any Note, or in respect of a covenant or
a provision which cannot be modified or amended without the consent of all
Holders.
No Holder has any right to institute any proceeding with respect to the
Indenture for any remedy thereunder, unless (i) 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, (ii) the Trustee has failed to institute such proceeding within 15
calendar days after receipt of such notice and (iii) the Trustee has not within
such 15-day period 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 for the
enforcement of the payment of the principal of, premium, if any, or accrued
interest (if any) on, any Note held by such Holder on or after the respective
due dates expressed in such Note.
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During the continuance of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
shall have offered to the Trustee reasonable security or indemnity. Subject to
certain provisions of the Indenture concerning the rights of the Trustee, the
Holders of a majority in aggregate principal amount of the outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee.
DEFEASANCE
The Company and the Subsidiary Guarantors may at any time terminate all of
their obligations with respect to the Notes ("defeasance"), except for certain
obligations, including, without limitation, those regarding any trust
established for a defeasance and obligations to register the transfer or
exchange of the Notes, to replace mutilated, destroyed, lost or stolen Notes,
and to maintain agencies in respect of the Notes. The Company and the Subsidiary
Guarantors may at any time terminate their obligations under certain covenants
set forth in the Indenture, some of which are described under "ACertain
Covenants" above, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes ("covenant
defeasance"). In order to exercise either defeasance or covenant defeasance, the
Company and the Subsidiary Guarantors must irrevocably deposit in trust with the
Trustee, for the benefit of the Holders, money or United States government
obligations, or a combination thereof, in such aggregate amounts as will be
sufficient to pay the principal of, interest and premium, if any, on the Notes
to maturity or redemption and comply with certain other conditions, including
the delivery of an Opinion of Counsel as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid and Notes for whose payment money has theretofore been deposited in
trust or segregated and held in trust by the Company and thereafter repaid to
the Company or discharged from such trust) have been delivered to the Trustee
for cancellation; or (b) (i) all such Notes not theretofore delivered to the
Trustee for cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust solely for that purpose an aggregate amount of money sufficient to pay
and discharge the entire Indebtedness on the Notes not theretofore delivered to
the Trustee for cancellation, for principal, interest and premium, if any; (ii)
the Company has paid all sums payable by it under the Indenture; and (iii) the
Company has delivered irrevocable instructions to the Trustee to apply the
deposited money toward the payment of the Notes at maturity. In addition, the
Company must deliver an Officers' Certificate and an Opinion of Counsel stating
that all conditions precedent to satisfaction and discharge have been complied
with.
AMENDMENTS AND WAIVERS
From time to time the Company and the Subsidiary Guarantors, when authorized
by a Board Resolution, and the Trustee may, without the consent of the Holders,
amend, waive or supplement the Indenture and the Notes, for certain specified
purposes, including, among other things, curing ambiguities, defects or
inconsistencies, maintaining the qualification of the Indenture under the Trust
Indenture Act or making any change that does not adversely affect the rights of
any Holder. Other amendments and modifications of the Indenture may be made by
the Company, the Subsidiary Guarantors and the Trustee with the consent of the
Holders of not less than a majority of the aggregate principal amount of the
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outstanding Notes; provided that no such modification or amendment may, without
the consent of the Holder of each outstanding Note affected thereby, (i) reduce
the principal of, change the fixed maturity of or alter the redemption
provisions of, the Notes, (ii) change the currency in which the principal of any
Note or the accrued interest or premium (if any) thereon is payable, (iii)
reduce the percentage in principal amount of outstanding Notes whose Holders
must consent to an amendment, supplement or waiver or consent to take any action
under the Indenture or the Notes, (iv) impair the right set forth in the
Indenture to institute suit for the enforcement of any payment on or with
respect to the Notes (other than any such payment that has become due solely as
a result of the acceleration of the maturity of the Notes), (v) waive a Default
in payment with respect to the Notes, (vi) reduce the rate of or change the time
for payment of interest on the Notes, (vii) adversely affect the ranking of the
Notes or the Guarantees or (viii) release any Subsidiary Guarantor from any of
its obligations under its Guarantee or the Indenture otherwise than in
accordance with the terms of the Indenture.
REGARDING THE TRUSTEE
Chase Manhattan Bank and Trust Company, National Association is the Trustee
under the Indenture.
CERTAIN DEFINITIONS
Set forth below is a summary of defined terms used herein and certain
defined terms used in the Indenture. Reference is made to the Indenture for the
full definition of all such terms to be used therein.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Subsidiary of the
Company or at the time it merges or consolidates with the Company or any of its
Subsidiaries or assumed in connection with the acquisition of assets from such
Person and in each case not incurred by such Person in connection with, or in
anticipation or contemplation of, such Person becoming a Subsidiary of the
Company or such acquisition, merger or consolidation.
"Acquisition Facility" means (i) the Acquisition Facility, dated as of April
23, 1998, between Global Sub, the Company and the Subsidiary Guarantors, the
lenders party thereto in their capacities as lenders thereunder, Citibank, N.A.,
as issuing bank, Bank of America NT&SA, as documentation agent and Citicorp USA,
Inc., as administrative agent, together with the documents related thereto or
executed in connection therewith (including, without limitation, any guarantee
agreements, security documents and Interest Rate Protection Obligations), (ii)
any one or more additional agreements among the Company and/or any of its
Subsidiaries and one or more financial institutions providing for the making of
loans on a term or revolving basis and/or the issuance of letters of credit to
the extent incurred for the purpose of financing acquisitions, and (iii) any
agreement extending the maturity of, refinancing, renewing, replacing or
otherwise restructuring (including increasing the amount of available financings
thereunder (provided that such increase in borrowings is permitted by clauses
(c) and (d) of the "Limitation on Additional Indebtedness" covenant above)) all
or any portion of the Indebtedness or commitments or letters of credit under any
such agreement or any successor or replacement agreement and whether by the same
or any other agent, lender or group of lenders, in each case as such agreements
under the foregoing clauses (i), (ii) and (iii) may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time.
"Additional Amounts" has the meaning ascribed to such term under "Exchange
Offer--Purpose and Effect."
"Adjusted Net Assets" of any Person at any date shall mean the lesser of (x)
the amount by which the fair value of the property of such Person exceeds the
total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities),
but excluding liabilities under the Guarantee of such Person at such date and
(y) the amount by which the present fair salable value of the assets of such
Person at such date exceeds the amount that will be required to pay the probable
liability of such Person on its debts (after giving effect to all other fixed
and contingent
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liabilities and after giving effect to any collection from any Subsidiary of
such Person in respect of the obligations of such Person under the Guarantee of
such Person), excluding liabilities in respect of the Guarantee of such Person,
as they become absolute and matured.
"Affiliate" of any specified Person means any other Person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"affiliated," "controlling" and "controlled" have meanings correlative to the
foregoing.
"Affiliate Transaction" has the meaning ascribed to such term under
"--Certain Covenants--Limitations on Transactions with Affiliates."
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Capital Stock, by the Company or any of its Wholly-Owned
Subsidiaries in any other Person, in either case pursuant to which such Person
shall become a Wholly-Owned Subsidiary of the Company or any of its Wholly-Owned
Subsidiaries or shall be merged with or into the Company or any of its
Wholly-Owned Subsidiaries or (ii) any acquisition by the Company or any of its
Wholly-Owned Subsidiaries of the assets of any Person which constitute all of an
operating unit or business of such Person.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (including by means of sale-leaseback), assignment or other
transfer or disposition to any Person other than the Company or any Wholly-Owned
Subsidiary, in one transaction or a series of related transactions, of (i) any
Capital Stock of any Subsidiary of the Company (including by way of issuance by
such Subsidiary) or (ii) any other property or asset of the Company or any
Subsidiary of the Company other than inventory in the ordinary course, in each
case, other than such transactions or series of related transactions which do
not exceed $500,000. For the purposes of this definition, the term "Asset Sale"
will not include (a) any disposition of properties or assets of the Company or
any Subsidiary of the Company that is governed under and complies with the
requirements set forth in "--Certain Covenants--Limitation on Mergers and
Certain Other Transactions," "--Limitation on Sale-Leaseback Transactions" or
"--Limitation on Restricted Payments" above; or (b) dispositions of obsolete or
worn out equipment in the ordinary course of business and consistent with past
practice.
"Asset Sale Offer" has the meaning ascribed to such term under "--Certain
Covenants--Disposition of Proceeds of Asset Sales."
"Attributable Debt" means, in respect of a Sale-Leaseback Transaction, as at
the time of determination, the greater of (i) the Fair Market Value of the
property subject to such arrangement or (ii) the present value (discounted at
the interest rate borne by the Notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such arrangement (including any period for which such lease
has been extended).
"Board Resolution" means with respect to any Person, a copy of a resolution
certified by the Secretary or an Assistant Secretary of such Person to have been
duly adopted, in good faith, by the Board of Directors of such Person and to be
in full force and effect on the date of such certification.
"Business Day" means a day other than a Saturday, a Sunday or day which
banking institutions in the City of New York are not required to be open.
"Capital Stock" means any and all shares, interests, participations or other
equivalents (however designated) of any Person, including Common Stock or
Preferred Stock and including any rights, options or warrants with respect
thereto.
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"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted as a capital lease obligation under GAAP, and, for the purpose of the
Indenture, the amount of such obligation at any date will be the capitalized
amount thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means, at any time (i) any evidence of Indebtedness with
a maturity of 365 calendar days or less issued or directly and fully guaranteed
or insured by the United States of America or any agency or instrumentality
thereof (provided that the full faith and credit of the United States of America
is pledged in support thereof); (ii) certificates of deposit or acceptances or
money market deposits with a maturity of 365 calendar days or less of any
financial institution that is a member of the United States Federal Reserve
System having combined capital and surplus and undivided profits of not less
than $500,000,000; (iii) commercial paper with a maturity of 365 calendar days
or less issued by a corporation (except an Affiliate of the Company) organized
under the laws of any state of the United States or the District of Columbia and
rated at least A-1 by S&P or at least P-1 by Moody's; (iv) repurchase agreements
and reverse repurchase agreements relating to marketable direct obligations
issued or unconditionally guaranteed by the United States Government or issued
by any agency thereof and backed by the full faith and credit of the United
States, in each case maturing within 365 calendar days from the date of
acquisition; provided that, in the case of obligations issued or guaranteed by
the United States of America, the terms of such agreements comply with the
guidelines set forth in the United States Federal Financial Agreements of
Depository Institutions with Securities and Others, as adopted by the United
States Comptroller of the Currency; and (v) investments in money market funds
which invest substantially all their assets in securities of the types described
in (i)-(iv) above.
"Change of Control" means (a) all or substantially all of the assets of the
Company are sold, leased, exchanged or otherwise transferred to any person or
entity or group of persons or entities acting in concert as a partnership or
other group (a "Group of Persons") other than a Permitted Holder (or other than
to a Wholly-Owned Subsidiary of the Company), (b) the Company is merged or
consolidated with or into another corporation with the effect that the Permitted
Holders hold less than 50% of the combined voting power of the then outstanding
securities of the surviving corporation of such merger or the corporation
resulting from such consolidation ordinarily (and apart from rights arising
under special circumstances) having the right to vote in the election of
directors, (c) a majority of the board of directors of the Company shall be
replaced, over a two-year period, from the directors who constituted the board
of directors at the beginning of such period, and such replacement shall not
have been approved by the board of directors as constituted at the beginning of
such period, (d) a Person or Group of Persons (other than the Permitted Holders)
shall, as a result of a tender or exchange offer, open market purchases,
privately negotiated purchases or otherwise, beneficially own (within the
meaning of Rule 13d-3 under the Exchange Act) Common Stock of the Company or
securities of the Company representing 50% or more of the Common Stock or voting
power of the then outstanding securities of the Company, or (e) the Permitted
Holders cease to own at least 50% of the Voting Capital Stock of the Company.
"Change of Control Date" has the meaning ascribed to such term under "Change
of Control."
"Change of Control Offer" has the meaning ascribed to such term under
"Change of Control."
"Change of Control Payment Date" has the meaning ascribed to such term under
"Change of Control."
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests (including partnership interests) or other participations in, and
other equivalents (however designated and whether voting or nonvoting) of such
Person's common stock or ordinary shares or interests, whether or not
outstanding at the Issue Date, and includes, without limitation, all series and
classes of such common stock or ordinary shares or interests.
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"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense
(including amortization or write-off of deferred financing costs of such Person
and its consolidated Subsidiaries during such period and any premium or penalty
paid in connection with redeeming or retiring Indebtedness or any series of
Disqualified Capital Stock or Preferred Stock of the Company and its
consolidated Subsidiaries prior to the stated maturity thereof pursuant to the
agreements governing such Indebtedness, Disqualified Capital Stock or Preferred
Stock, as the case may be) and (ii) the product of (x) the amount of all
dividend payments on any series of Disqualified Capital Stock of such Person and
any series of Disqualified Capital Stock or Preferred Stock of its Subsidiaries
(other than dividends paid in Capital Stock which is not Disqualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(y) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local tax
rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the aggregate of the interest expense (without deduction for interest
income) of such Person and its Subsidiaries for such period, on a consolidated
basis, as determined in accordance with GAAP, and including (a) all amortization
of original issue discount and deferred financing costs; (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such Person and its Subsidiaries during such period; (c) net
cash costs under all Interest Rate Protection Obligations (including
amortization of fees); (d) all capitalized interest; and (e) the interest
portion of any deferred payment obligations for such period.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP consistently
applied; provided, that (a) the Net Income of any other Person in which the
Person in question or one of its Subsidiaries has a joint interest with a third
party (which interest does not cause the Net Income of such other Person to be
consolidated into the Net Income of the Person in question in accordance with
GAAP) shall be included only to the extent of the amount of dividends or
distributions paid to the Person in question or the Subsidiary, (b) the Net
Income of any Subsidiary of such Person that is subject to any legal, consensual
or other restriction or limitation on the payment of dividends or the making of
other distributions shall be excluded to the extent of such restriction or
limitation, (c) (i) the Net Income (or loss) of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
and (ii) any net gain (but not loss) resulting from an Asset Sale by such Person
or any of its Subsidiaries other than in the ordinary course of business shall,
in each case, be excluded, and (d) extraordinary gains and losses (and any
related tax effects) and any one-time increase or decrease to Net Income which
is required to be recorded because of the adoption of new accounting practices
or standards required by GAAP, shall in each case be excluded.
"Consolidated Net Worth" means, with respect to any Person at any date of
determination, the consolidated equity represented by such Person's Capital
Stock (other than Disqualified Capital Stock) at such date, as determined on a
consolidated basis in accordance with GAAP. "covenant defeasance" has the
meaning ascribed to such term under "Defeasance."
"Currency Protection Obligations" means obligations under any foreign
exchange contract, currency swap agreement, or other similar agreement or
arrangement designed to protect the Company and its Subsidiaries against
fluctuations in currency values and entered into for hedging and not speculative
purposes.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Default Amount" has the meaning ascribed to such term under "Events of
Default." "defeasance" has the meaning ascribed to such term under "Defeasance."
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"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock which, 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 exchangeable for Indebtedness, or is redeemable
or required to be purchased at the option of the holder thereof, in whole or in
part, on or prior to the maturity date of the Notes.
"EBITDA" means, for a period ending at the close of any fiscal quarter, the
sum of: (a) Consolidated Net Income for such period, PLUS (b) to the extent
deducted in determining Consolidated Net Income, the sum of all expenses of the
Company and its Subsidiaries, on a consolidated basis, in accordance with GAAP
for such period in respect of (i) depreciation, (ii) amortization excluding
amortization of capitalized debt issuance costs, (iii) Consolidated Interest
Expense, (iv) consolidated income taxes, and (v) any other non-cash charges to
the extent deducted from or reflected in Consolidated Net Income except for any
non-cash charges that represent accruals of, or reserves for, cash disbursements
to be made in any future accounting period. Notwithstanding the foregoing, the
provision for taxes based on the income and profits of, and the depreciation,
amortization and other non-cash charges of, a Subsidiary shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Subsidiary was included in calculating
the Consolidated Net Income and only if a corresponding amount could, at the
date of determination, be paid as a dividend by such Subsidiary to the Company.
"EBITDA Coverage Ratio" means the ratio of (a) EBITDA for the four fiscal
quarters immediately preceding the determination date to (b) Consolidated Fixed
Charges calculated on a PRO FORMA basis for such four fiscal quarters. For
purposes of this definition, if the date of the transaction giving rise to the
need to calculate the EBITDA Coverage Ratio (the "Transaction Date") occurs
prior to the date on which the Company's consolidated financial statements for
the four full fiscal quarters subsequent to the Issue Date are first available,
EBITDA and Consolidated Fixed Charges shall be calculated, in the case of the
Company, after giving effect on a PRO FORMA basis as if the Notes outstanding on
the date of the Transaction Date were issued on the first day of such four full
fiscal quarter period and the assets and liabilities of the Company as of the
Transaction Date had been contributed to or assumed by the Company on such first
day. In addition to and without limitation of the foregoing, for purposes of
this definition, EBITDA and Consolidated Fixed Charges shall be calculated after
giving effect on a PRO FORMA basis for the period of such calculation to (i) the
incurrence or repayment of any Indebtedness of such Person or any of its
Subsidiaries (and the application of the proceeds thereof) at any time during
the period (the "Reference Period") (A) commencing on the first day of the four
full fiscal quarter period for which financial statements are available that
precedes the Transaction Date and (B) ending on and including the Transaction
Date, including, without limitation, the incurrence or repayment of the
Indebtedness (and the application of the proceeds thereof) giving rise to the
need to make such calculation, as if such incurrence or repayment occurred on
the first day of the Reference Period; provided, that if such Person or any of
its Subsidiaries directly or indirectly guarantees Indebtedness of a third
Person, the above clause shall give effect to the incurrence of such guaranteed
Indebtedness as if such Person or Subsidiary had directly incurred such
guaranteed Indebtedness and (ii) any Asset Sales or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to the need to
make such calculation as a result of the Company or any of its Wholly-Owned
Subsidiaries (including any Person who becomes a Wholly-Owned Subsidiary as a
result of the Asset Acquisition) incurring Acquired Indebtedness) occurring
during the Reference Period (it being expressly understood that such calculation
shall also give effect on a PRO FORMA BASIS to any increase or decrease in
Consolidated Net Income (including any PRO FORMA expense and cost reductions
calculated on a basis consistent with Regulation S-X under the Exchange Act)
attributable to such Asset Sale or Asset Acquisition, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period) and any
retirement of Indebtedness in connection with such Asset Sale or Asset
Acquisition, as if such Asset Sale or Asset Acquisition and/or retirement
occurred on the first day of the Reference Period. Furthermore, in calculating
the denominator (but not the numerator) of this "EBITDA Coverage Ratio," (1)
interest on Indebtedness determined on a fluctuating basis as of the Transaction
Date
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and which will continue to be so determined thereafter shall be deemed to accrue
at a fixed rate PER ANNUM equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (2) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to be in effect during the Reference Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Rate Protection Obligations, shall be deemed to accrue at the rate
PER ANNUM resulting after giving effect to the operation of such agreements.
"Event of Default" has the meaning ascribed to such term under "Events of
Default."
"Excess Proceeds" has the meaning ascribed to such term under "Certain
Covenants--Disposition of Proceeds of Asset Sales."
"Excess Proceeds Payment Date" has the meaning ascribed to such term under
"Certain Covenants-- Disposition of Proceeds of Asset Sales."
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" or "fair value" means, with respect to any asset or
property, the price which could be negotiated in an arm's-length transaction,
for cash, between a willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair Market Value
shall be determined by the Board of Directors of the Company acting in good
faith and shall be evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles as in effect from time
to time in the United States of America.
"Group of Persons" has the meaning ascribed to such term in the definition
of "Change of Control."
"Guarantees" has the meaning ascribed to such term under "Ranking and
Subordinated Guarantees."
"Guarantor Senior Debt" means with respect to any Subsidiary Guarantor, 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 law) on, and all amounts owing in respect of, all
monetary obligations of every nature under the Acquisition Facility and of any
guarantees by the Subsidiary Guarantors of Indebtedness under the Acquisition
Facility, including, without limitation, obligations to pay principal, premium
and interest, reimbursement obligations under letters of credit, fees, expenses
and indemnities unless the Acquisition Facility expressly provides that such
Indebtedness shall not be senior in right of payment to the Guarantee of such
Subsidiary Guarantor.
"Holders" means the holders from time to time of the Notes. "incur" has the
meaning ascribed to such term under "Certain CovenantsALimitation on Additional
Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
any liability, contingent or otherwise, of such Person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof) or (B) evidenced by a note, debenture or
similar instrument or letters of credit (including a purchase money obligation
or other obligation relating to the deferred purchase price of property and any
Capitalized Lease Obligations); (ii) any liability of others of the kind
described in the preceding clause (i) which such Person has guaranteed or which
is otherwise its legal liability; (iii) any obligation secured by a Lien to
which the property or assets of such Person are subject, whether or not the
obligations secured thereby shall have been assumed by or shall otherwise be
such Person's legal liability; (iv) Capitalized Lease Obligations, Currency
Protection Obligations and Interest Rate Protection Obligations; (v) the
Attributable Debt of any Sale-Leaseback Transaction; (vi) Disqualified Capital
Stock; and (vii) any and all deferrals, renewals, extensions and refundings of,
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or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clause (i), (ii), (iii), (iv), (v) or (vi).
"Independent" when used with respect to any specified Person means such a
Person who (a) is in fact independent, (b) does not have any direct financial
interest or any material indirect financial interest in the Company or any
Affiliate of the Company and (c) is not an officer, employee, promoter,
underwriter, trustee, partner, director or person performing similar functions
for the Company or any of its Affiliates.
"Independent Financial Advisor" means an accounting, appraisal or investment
banking or consulting firm of national recognition within the United States that
is, in the reasonable judgment of the Board of Directors of the Company,
qualified to perform the tasks for which such firm has been engaged and
Independent with respect to the Company and its Affiliates.
"Initial Purchaser" means, collectively, Citicorp Securities, Inc., Citibank
Canada Securities Limited and Citibank International plc.
"Interest Payment Date" has the meaning ascribed to such term under
"Maturity, Interest and Principal."
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include without limitation, interest rate swaps, caps,
floors, collars and similar agreements and, in each case, entered into for
hedging and not for speculative purposes.
"Investment" has the meaning ascribed to such term under "Certain
Covenants--Limitation on Investments, Loans and Advances."
"Issue Date" means April 23, 1998.
"Lien" means, with respect to any Person, any mortgage, deed of trust,
pledge, lien, lease, encumbrance, easement, restriction, covenant, right-of-way,
charge or adverse claim affecting title or resulting in an encumbrance against
real or personal (tangible or intangible) property or any interest therein of
such Person, or a security interest of any kind (including, without limitation,
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to sell,
in each case securing obligations of such Person, and any filing of or agreement
to give any financing statement under the Uniform Commercial Code (or equivalent
statute or statutes) of any jurisdiction other than to reflect ownership by a
third party of property leased to the referent Person or any of its Subsidiaries
under a lease that is not in the nature of a conditional sale or title retention
agreement).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Asset Sale Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents, including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations with respect to
Indebtedness are financed or sold with recourse to the Company or any of its
Subsidiaries) net of (i) brokerage commissions and other reasonable fees and
expenses (including reasonable fees and expenses of counsel and investment
bankers) incurred in connection with such Asset Sale; (ii) provisions for all
taxes payable as a result of such Asset Sale; (iii) payments made to retire
Indebtedness secured by the assets subject to such Asset Sale to the extent
required pursuant to the terms of such Indebtedness; and (iv) appropriate
amounts to be provided by the Company or any of its Subsidiaries, as the case
may be, as a reserve, in accordance with GAAP, against any liabilities
associated with such Asset Sale and retained by the Company or any of its
Subsidiaries, as the case may be, after such Asset Sale, including, without
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limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale.
"Net Income" means, with respect to any Person for any period, the net
income (loss) of such Person determined in accordance with GAAP.
"Net Proceeds" means (a) in the case of any sale of Capital Stock by the
Company, the aggregate net proceeds received by the Company, after payment of
expenses, commissions and the like incurred in connection therewith, whether
such proceeds are in cash or in property (valued at the Fair Market Value
thereof, as determined in good faith by the Board of Directors of the Company,
at the time of receipt) and (b) in the case of any exchange, exercise,
conversion or surrender of outstanding securities of any kind of the Company for
or into shares of Capital Stock of the Company which is not Disqualified Capital
Stock, the net book value of such outstanding securities on the date of such
exchange, exercise, conversion or surrender (plus any additional amount required
to be paid by the Company upon such exchange, exercise, conversion or surrender,
less any and all payments made to the holders, E.G., on account of fractional
shares and less all expenses incurred by the Company in connection therewith).
"Officer" means, with respect to any Person, the Chairman of the Board of
Directors, the Chief Executive Officer, the Chief Financial Officer, the
Treasurer or the Controller of such Person.
"Officers' Certificate" means, with respect to any Person, a certificate
signed by two Officers or by an Officer and either the Secretary or an Assistant
Secretary of such Person.
"Opinion of Counsel" means a written opinion from legal counsel who and
which is reasonably acceptable to the Trustee complying with the requirements of
the Indenture. Such legal counsel shall be outside counsel and not an employee
of or in-house counsel to the Company.
"Permitted Holder" means Richard D. Marconi, any spouse of Mr. Marconi, any
lineal descendants of Mr. Marconi, any trust or estate the sole beneficiaries of
which are Mr. Marconi, any spouses of Mr. Marconi or any lineal descendants of
Mr. Marconi, or any entity owned or controlled by any of the foregoing.
"Permitted Liens" means (i) Liens in favor of the Company or a Subsidiary of
the Company; (ii) Liens existing on the Issue Date; (iii) Liens securing
Indebtedness and other obligations related thereto (including accrued interest,
fees and reimbursements and indemnities thereon and other obligations related
thereto) incurred under the Acquisition Facility; provided, that the incurrence
of such Indebtedness is otherwise permitted under the Indenture; (iv) Liens on
assets of a Person when it becomes a Subsidiary and Liens securing Acquired
Indebtedness incurred in accordance with the "Limitation on Additional
Indebtedness" covenant; provided, that in each case (A) such Liens secured such
assets or Acquired Indebtedness at the time of and prior to such Person becoming
a Subsidiary or the incurrence of such Acquired Indebtedness by the Company or a
Subsidiary of the Company and were not granted in connection with, or in
anticipation of, the incurrence of such Acquired Indebtedness by the Company or
a Subsidiary of the Company and (B) such Liens do not extend to or cover any
property or assets of the Company or of any of its Subsidiaries other than the
property or assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Subsidiary of the
Company and are no more favorable to the lienholders than those securing the
Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by
the Company or a Subsidiary of the Company; (v) leases and subleases of real
property which do not interfere with the ordinary conduct of the business of the
Company or any of its Subsidiaries, and which are made on customary and usual
terms applicable to similar properties; (vi) Liens securing Indebtedness
incurred to finance Indebtedness secured by a Lien permitted under the Indenture
and is permitted to be refinanced under the Indenture, provided that such Liens
do not extend to or cover any property or assets of the Company or any of its
Subsidiaries not securing the Indebtedness so refinanced; (vii) any interest or
title of a lessor or sublessor, or any Lien in favor of a landlord, arising
under any real or personal property lease under which the Company or any of its
Subsidiaries is a lessee, sublessee or subtenant (other than any interest or
title and/or any Lien
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securing any Capitalized Lease Obligation); (viii) Liens securing Capitalized
Lease Obligations, Purchase Money Indebtedness, purchase money mortgages or
pledges or other purchase money liens upon any property acquired by the Company
or any Subsidiary of the Company after the Issue Date which are acquired or held
by such entity in the ordinary course of business and are securing solely the
purchase price or lease rental of such property or are Indebtedness incurred
solely for the purpose of financing or refinancing the acquisition or lease of
such property (but only to the extent the Indebtedness secured by such liens
shall otherwise be permitted under the covenants set forth herein); (ix) with
respect to any Person, any Lien arising by reason of (a) any judgment, decree or
order of any court, so long as such Lien is being contested in good faith and is
adequately bonded, and any appropriate legal proceedings which may have been
duly initiated for the review of such judgment, decree or order shall not have
been finally terminated or the period within which such proceedings may be
initiated shall not have expired, (b) taxes not yet delinquent or which are
being contested in good faith, (c) security for payment of workers' compensation
or other insurance, (d) security for the performance of tenders, contracts
(other than contracts for the payment of money) or leases, (e) deposits to
secure public or statutory obligations, or in lieu of surety or appeal bonds,
(f) operation of law in favor of carriers, warehouseman, landlords, mechanics,
materialman, laborers, employees or suppliers, incurred in the ordinary course
of business for sums which are not yet delinquent or are being contested in good
faith by negotiations or by appropriate proceedings which suspend the collection
thereof, (g) security for surety or appeal bonds, and (h) easements,
rights-of-way, zoning and similar covenants and restrictions and other similar
encumbrances or title defects which, in the aggregate, are not substantial in
amount, and which do not in any case materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of the Company or any of its Subsidiaries; and (x) other Liens
securing Indebtedness if the Indebtedness secured by the Lien, plus all other
Indebtedness secured by Liens (excluding Indebtedness secured by Liens permitted
by (i) through (ix) above) at the time of determination do not exceed
$1,000,000.
"Permitted Payments" has the meaning ascribed to such term under "Certain
Covenants--Limitation on Restricted Payments."
"Person" means any individual, corporation, partnership, joint venture,
limited liability company, trust, unincorporated organization or government or
any agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other class of Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation or otherwise.
"Purchase Money Indebtedness" means Indebtedness of the Company or its
Wholly-Owned Subsidiaries incurred for the purpose of financing all or any part
of the purchase price or the cost of installation, construction or improvement
of any property or equipment.
"Reorganization Agreement" means the reorganization agreement as in effect
on the Issue Date, among the Company and its Subsidiaries, together with the
documents referred to therein, pursuant to which the Reorganization was
consummated.
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Guarantor Senior Debt; provided that if, and
for so long as, any Guarantor Senior Debt lacks such a representative, then the
Representative for such Guarantor Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Guarantor Senior
Debt in respect of any Guarantor Senior Debt.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company or any Subsidiary of the
Company (other than (x) dividends or distributions payable solely in Capital
Stock (other than Disqualified Capital Stock) or in options, warrants or other
rights to purchase Capital Stock (other than Disqualified Capital
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Stock), and (y) in the case of Subsidiaries of the Company, dividends or
distributions payable to the Company or to a Wholly-Owned Subsidiary of the
Company), (ii) the purchase, redemption or other acquisition or retirement for
value of any Capital Stock of the Company, (iii) the making of any principal
payment on, purchase, defeasance, redemption, prepayment, decrease or other
acquisition or retiring for value, prior to any scheduled final maturity,
scheduled repayment or scheduled sinking fund payment, of any Indebtedness of
the Company that is subordinate or junior in right of payment to the Notes, and
(iv) the making of any Investment other than an Investment permitted under
clauses (i) through (x) of the "Limitation on Investments, Loans and Advances"
covenant.
"S Corporation" means an S corporation for purposes of the Internal Revenue
Code of 1986, as amended.
"Sale-Leaseback Transaction" means any direct or indirect arrangement, or
series of related arrangements, with any Person or to which any Person is a
party, providing for the leasing to the Company or to a Subsidiary of the
Company of any property, whether owned by the Company or by any Subsidiary of
the Company at the Issue Date or later acquired, which has been or is to be sold
or transferred by the Company or such Subsidiary of the Company to such Person
or to any other Person from whom funds have been or are to be advanced by such
Person on the security of such property.
"S&P" means Standard & Poor's Rating Service and its successors.
"Securities Act" means the Securities Act of 1933, as amended.
"Subsidiary," with respect to any Person, means (i) any corporation of which
the outstanding Capital Stock having at least a majority of the votes entitled
to be cast in the election of directors under ordinary circumstances shall at
the time be owned, directly or indirectly, by such Person or (ii) any other
Person (other than a corporation) including a partnership in which the Company,
a Subsidiary of the Company or the Company and a Subsidiary of the Company,
directly or indirectly, at the date of determination thereof, has at least a
majority ownership interest.
"Subsidiary Guarantor" means (i) Global Sub, D&F Sub, Omni-Pak, Dynamic and
West Coast, and (ii) each of the Company's Subsidiaries that in the future
executes a supplemental indenture in which such Subsidiary agrees to be bound by
the terms of the Indenture as a Subsidiary Guarantor; provided that any Person
constituting a Subsidiary Guarantor as described above shall cease to constitute
a Subsidiary Guarantor when its respective Guarantee is released in accordance
with the terms of the Indenture.
"Surviving Entity" has the meaning ascribed to such term under "Certain
Covenants--Limitation on Mergers and Certain Other Transactions."
"Trustee" has the meaning ascribed to such term in the first paragraph under
the caption "Description of the New Notes."
"Trust Indenture Act" has the meaning ascribed to such term in the first
paragraph under the caption "Description of the New Notes."
"Voting Capital Stock" means, with respect to any Person, Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors, managers or other members of the governing body of such Person.
"Wholly-Owned Subsidiary" means any Subsidiary of such Person of which all
the outstanding voting securities (other than in the case of a foreign
Subsidiary, directors' qualifying shares or an immaterial amount of shares
required to be owned by other Persons pursuant to applicable law) are owned by
such Person or any Wholly-Owned Subsidiary of such Person; provided that a
Wholly-Owned Subsidiary of the Company may provide for earn out or other similar
obligations in connection with the acquisition of a business for the purpose of
financing such acquisition, provided that the Company at all times shall
maintain ownership of at least 85% of the Capital Stock of such Wholly-Owned
Subsidiary.
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BOOK-ENTRY; DELIVERY AND FORM
The Old Notes purchased on the Original Issue Date by (i) "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act)
("QIBs") were represented by a single permanent global certificate in
definitive, fully registered form (the "QIB Global Certificate"), and (ii) non
U.S. Persons (as defined in Regulation S under the Securities Act) in offers and
sales that occurred outside the United States were represented by a single
global certificate in definitive, fully registered form (the "Regulation S
Global Certificate" and, together with the QIB Global Certificate, the
"Unregistered Global Certificates"). Except for New Notes issued to Non-Global
Purchasers (as defined below), the New Notes will initially be issued in the
form of one or more global certificates (collectively, the "Exchange Global
Certificates"). The Unregistered Global Certificates were deposited on the
closing of the Old Notes Offering and the Exchange Global Certificates will be
deposited on the date of the closing of the Exchange Offer with, or on behalf
of, The Depository Trust Company ("DTC") and registered in the name of a nominee
of DTC.
New Notes (i) originally purchased by or transferred to non U.S. persons or
institutional "accredited investors" (within the meaning of subparagraph (a)(1),
(2), (3) or (7) of Rule 501 under the Securities Act) who are not QIBs or (ii)
held by QIBs who elect to take physical delivery of their certificates instead
of holding their interest through Global Notes (and which are thus ineligible to
trade through DTC) (collectively referred to herein as the "Non-Global
Purchasers") will be issued in registered certificated form ("Certificated
Note"). Upon the transfer to a QIB of any Certificated Note initially issued to
a Non-Global Purchaser, such Certificated Note will, unless the transferee
requests otherwise or such Global Note has previously been exchanged in whole
for Certificated Notes, be exchanged for an interest in such Global Notes.
"Global Note" means the Old Notes represented by the Unregistered Global
Certificates or the New Notes represented by the Exchange Global Certificates,
as the case may be.
THE EXCHANGE GLOBAL CERTIFICATES
The Company expects that pursuant to procedures established by DTC (i) upon
deposit of the Exchange Global Certificates, DTC or its custodian will credit,
on its internal system, portions of the Exchange Global Certificates in the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of the New Notes will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC or its nominee
(with respect to interests of participant (as defined below)) and the records of
participants (with respect to interests of persons other than participants).
Ownership of beneficial interests in the Exchange Global Certificates will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants.
Holders may hold their interests in the Exchange Global Certificates
directly through DTC if they are participants in such system, or indirectly
through organizations which are participants in the system.
So long as DTC, or its nominee, is the registered owner or holder of the
Exchange Global Certificates, DTC or such nominee will be considered the sole
owner or holder of the New Notes represented by the Exchange Global Certificates
for all purposes under the Indenture and for any other purposes with respect to
the New Notes. No beneficial Certificate owner of an interest in the Exchange
Global Certificates will be able to transfer such interest except in accordance
with DTC's applicable procedures, in addition to those provided for under the
Indenture with respect to the Notes.
Payments of the principal of, premium (if any) and interest on, the Exchange
Global Certificates will be made to DTC or its nominee, as the case may be, as
the registered owner thereof. 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 beneficial ownership interests in the Exchange
Global Certificates or for maintaining, supervising or reviewing any records
relating to such beneficial interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium (if any) and interest on, the Exchange Global
Certificates, will credit participants' accounts with
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payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Exchange Global Certificates, as the case may be,
as shown on the records of DTC or its nominees. The Company also expects that
payments by participants to owners of beneficial interests in such Exchange
Global Certificates held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. If a holder
requires physical delivery of a Certificated Security for any reason, including
to sell Notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Exchange Global Certificates in accordance with the normal procedures of
DTC including, with respect to the Notes, the procedures set forth in the
Indenture.
Any beneficial interest in one of the Exchange Global Certificates that is
transferred to a person who takes delivery in the form of an interest in the
other Exchange Global Certificate will, upon transfer, cease to own an interest
in such Exchange Global Certificate and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Exchange Global Certificate with respect to
the applicable notes for as long as it remains such an interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
accounts the DTC interests in the Exchange Global Certificates is credited and
only in respect of the aggregate principal amount of Notes, as the case may be,
as to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Indenture, DTC will exchange
the Exchange Global Certificates for Certificated Securities, which it will
distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although DTC has agreed to follow the foregoing procedures in order to
facilitate transfers of interests in the Exchange Global Certificates among
participants of DTC, it is under no obligation to perform such procedures, and
such procedures may be discontinued at any time. Neither the Company nor the
Trustee will have any responsibility for the performance by DTC of its direct or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
Interests in the Exchange Global Certificates will be exchanged for
Certificated Securities if (i) DTC notifies the Company that it is unwilling or
unable to continue as depositary for the Exchange Global Certificates, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 40 days, or (ii) an
Event of Default has occurred and is continuing with respect to the Notes. Upon
the occurrence of any of the events described in the preceding sentence, the
Company will cause the appropriate Certificated Securities to be delivered.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Weil, Gotshal & Manges LLP, counsel to the Company, the
following summary, as it relates to conclusions or statements of law, accurately
sets forth the material United States federal ("federal") income tax
consequences of the purchase, ownership and disposition of Notes as well as the
exchange of Old Notes for New Notes pursuant to the Exchange Offer. This
discussion is a summary and does not consider all aspects of federal income
taxation that may be relevant to the purchase, ownership and disposition of
Notes by a Holder or the exchange by a Holder of Old Notes for New Notes
pursuant to the Exchange Offer, in light of such Holder's personal
circumstances. The discussion also does not address the federal income tax
consequences of ownership of Notes not held as capital assets within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code"),
or the federal income tax consequences to Holders subject to special treatment
under the federal income tax laws, such as dealers in securities or foreign
currency, tax-exempt investors, real estate investment trusts, regulated
investment companies, banks, thrifts, insurance companies or other financial
institutions, persons that hold the Notes as a position in a "straddle," or as
part of a "synthetic security" or "hedge," "conversion transaction" or other
integrated investment, persons that have a "functional currency" other than the
U.S. dollar, or investors in pass-through entities. In addition, this discussion
is generally limited to the tax consequences to initial Holders that purchased
the Old Notes at the "issue price." For this purpose, the "issue price" of an
Old Note is the first price at which a substantial part of the Old Notes was
sold to the public for money (excluding sales to bond houses, brokers, or
similar persons or organizations acting in the capacity of underwriters,
placement agents or wholesalers). Moreover, the effect of any applicable state,
local or foreign tax laws is not discussed.
This discussion is based upon the Code, existing and proposed regulations
thereunder ("Treasury Regulations"), and current administrative rulings and
court decisions. All of the foregoing are subject to change, possibly on a
retroactive basis, and any such change could affect the continuing validity of
this discussion.
Persons considering the purchase, ownership and disposition of Notes as well
as the exchange of Old Notes for New Notes pursuant to the Exchange Offer should
consult their own tax advisors concerning the application of federal income tax
laws, as well as the laws of any state, local or foreign taxing jurisdiction, to
their particular situations.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is limited to the federal income tax consequences
relevant to a Holder that is (i) a citizen or resident (as defined in Section
7701(b)(1) of the Code) of the United States, (ii) a corporation organized under
the laws of the United States or any political subdivision thereof or therein,
(iii) an estate the income of which is subject to federal income tax regardless
of its source, or (iv) a trust with respect to which a court within the United
States is able to exercise primary supervision over its administration and one
or more U.S. persons have the authority to control all of its substantial
decisions (a "U.S. Holder"). Certain federal income tax consequences relevant to
a Holder other than a U.S. Holder are discussed separately below.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF EXCHANGING OLD NOTES FOR NEW NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer will
not result in U.S. income tax consequences to U.S. Holders effecting such
exchange pursuant to the Exchange Offer. A U.S. Holder effecting such exchange
will have the same adjusted basis and holding period in the New Notes as it had
in the Old Notes exchanged therefor.
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STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
The stated interest on a Note will be taxable to a U.S. Holder as ordinary
interest income either at the time it accrues or is received, depending upon
such U.S. Holder's method of accounting for federal income tax purposes. The Old
Notes were issued with original issue discount ("OID") for federal income tax
purposes. All U.S. Holders of Notes will be required to include OID in income as
it accrues, regardless of such holders' regular method of accounting for federal
income tax purposes. OID generally will be treated as interest income to the
U.S. Holder and will accrue on a yield-to-maturity basis over the life of the
Note, as discussed below.
The amount of OID with respect to a Note will be an amount equal to the
excess of the stated redemption price at maturity of such Note over the "issue
price" (as defined above) of such Note. The stated redemption price at maturity
of each Note will include all cash payments required to be made under the Note
through maturity, other than payments of "qualified stated interest." Stated
interest on the Note will qualify as qualified stated interest. Accordingly, the
amount of OID with respect to a Note will be equal to the excess of the Note's
principal amount over its issue price.
The amount of OID accruing to a Holder with respect to any Note will be the
sum of the "daily portions" of OID with respect to such Note for each day during
the taxable year (or portion thereof) on which such Holder owns such Note
("accrued OID"). The daily portion is determined by allocating to each day in
any "accrual period" a pro rata portion of the OID allocable to that accrual
period. An accrual period for a Note may be of any length and may vary in length
over the term of a Note provided that each accrual period is no longer than one
year and each scheduled payment of principal or interest occurs either on the
final day or on the first day of an accrual period. The amount of OID accruing
during any full accrual period with respect to a Note will be equal to the
following amount: (i) the "adjusted issue price" of such Note at the beginning
of that accrual period, multiplied by (ii) the yield to maturity of such Note
(taking into account the length of the accrual period). The adjusted issue price
of a Note at the beginning of its first accrual period will be equal to its
issue price. The adjusted issue price at the beginning of any subsequent accrual
period will be equal to (i) the adjusted issue price at the beginning of the
preceding accrual period, plus (ii) the amount of OID accrued during the
preceding accrual period, minus (iii) any payments made on the Note during the
preceding accrual period and on the first day of such subsequent accrual period,
other than payments of stated interest on a Note.
Under these rules, a Holder generally will have to include in income
increasingly greater amounts of OID in successive accrual periods. The "yield to
maturity" of a Note is the discount rate that, when used in computing the
present value of all payments to be made on a Note, produces an amount equal to
the issue price of the Note.
In the event of a Change of Control, the Holders of Notes will have the
right to require the Company to purchase their Notes. The Treasury Regulations
provide that the right of Holders of the Notes to require redemption of the
Notes upon the occurrence of a Change of Control will not affect the yield or
maturity date of the Notes unless, based on all the facts and circumstances as
of the Issue Date, it is more likely than not that a Change of Control giving
rise to the redemption right will occur. The Company does not intend to treat
this redemption provision of the Notes as affecting the computation of the yield
to maturity of the Notes.
The Company may redeem the Notes at any time on or after a certain date,
and, in certain circumstances, may redeem or repurchase all or a portion of the
Notes any time prior to the maturity date. Under the Treasury Regulations, the
Company is deemed to exercise any option to redeem if the exercise of such
option would lower the yield of the debt instrument. The Company believes, and
intends to take the position, that it will not be treated as having exercised an
option to redeem under these rules.
In certain cases, in the event the Company does not comply with certain
covenants set forth in the Registration Rights Agreement, the Company will be
obligated to pay specified liquidated damages to the
96
<PAGE>
Holders of the Notes. The Company believes the contingency that the Company will
pay such additional amounts is "remote and incidental" within the meaning of the
applicable Treasury Regulations. On that basis, the Company believes such
additional amounts, if any, will be taxable to U.S. Holders as ordinary income
at the time such amounts accrue or are received in accordance with each such
Holder's method of accounting for federal income tax purposes.
TAX BASIS
A U.S. Holder's adjusted tax basis in a Note at a given date generally will
be equal to the purchase price paid by such U.S. Holder for such Note, increased
by the amount of OID previously included in income with respect to the Notes and
decreased by all prior payments received on the Notes, other than payments of
stated interest.
SALE OR REDEMPTION OF NOTES
Unless a nonrecognition provision applies, the sale, exchange, redemption
(including pursuant to an offer by the Company) or other disposition of a Note
will be a taxable event for federal income tax purposes ("Taxable Disposition").
In such event, a U.S. Holder generally will recognize gain or loss equal to the
difference between (i) the amount of cash plus the fair market value of any
other property received upon the Taxable Disposition (other than in respect of
accrued and unpaid stated interest thereon) and (ii) the U.S. Holder's adjusted
tax basis therein (other than any tax basis attributable to accrued and unpaid
stated interest). Such gain or loss generally will be capital gain or loss, and
in the case of non-corporate U.S. Holders, capital gain from the sale or
exchange of a Note will be taxed at different rates depending upon whether the
holding period of such Note is more than one year but not more than eighteen
months, or more than 18 months. U.S. Holders are advised to consult their tax
advisors regarding the treatment of amounts attributable to interest that is
accrued but unpaid at the date of a Taxable Disposition of the Notes. The
deductibility of capital losses is subject to certain limitations.
ADDITIONAL AMOUNTS
The Company intends to take the position that any Additional Amounts
described above under "Exchange Offer--Purpose and Effect" will be taxable to a
U.S. Holder of a Note as ordinary income in accordance with the Holder's usual
method of accounting for federal income tax purposes. The Internal Revenue
Service (the "Service") may take a different position, however, which could
affect the timing of the Holder's income with respect to the Additional Amounts.
BACKUP WITHHOLDING
A U.S. Holder of Notes may be subject to "backup withholding" at a rate of
31% with respect to certain "reportable payments" including interest payments
and, under certain circumstances, principal payments on the Notes. These backup
withholding rules apply if the U.S. Holder, among other things, (i) fails to
furnish a social security number or other taxpayer identification number ("TIN")
certified under penalties of perjury within a reasonable time after the request
therefor, (ii) furnishes an incorrect TIN, (iii) fails to report properly
interest, or (iv) under certain circumstances, fails to provide a certified
statement, signed under penalties of perjury, that the TIN furnished is the
correct number and that such Holder is not subject to backup withholding. A U.S.
Holder who does not provide the Company with its correct TIN also may be subject
to penalties imposed by the Service. Any amount withheld from a payment to a
U.S. Holder under the back-up withholding rules is creditable against the U.S.
Holder's federal income tax liability, provided the required information is
furnished to the Service. Backup withholding will not apply, however, with
respect to payments made to certain Holders, including corporations and tax-
exempt organizations, provided their exemption from backup withholding is
properly established.
97
<PAGE>
The Company will report to the U.S. Holders of Notes and to the Service the
amount of any "reportable payments" for each calendar year and the amount of tax
withheld, if any, with respect to such payments.
NON-U.S. HOLDERS
The following discussion is limited to the federal income tax consequences
relevant to a Holder of a Note that is not a U.S. Holder, as defined above (a
"Non-U.S. Holder").
For purposes of withholding tax on interest discussed below, a non-resident
alien or other non-resident fiduciary of an estate or trust will be considered a
Non-U.S. Holder. For purposes of the following discussion, interest (including
OID) from the Notes, as well as gain on the sale, exchange (including the
exchange of Old Notes for New Notes pursuant to the Exchange Offer) or other
disposition of Notes, will be considered to be "U.S. trade or business income"
if such income or gain is (i) effectively connected with the conduct of a U.S.
trade or business or, (ii) in the case of a Non U.S. Holder that is a resident
of a nation with which the United States has entered into an income tax treaty,
attributable to a permanent establishment (or, in the case of an individual, a
fixed base) in the United States.
STATED INTEREST
Generally, any interest paid (including OID) to a Non-U.S. Holder that is
not U.S. trade or business income will not be subject to federal income tax if
the interest qualifies as "portfolio interest." Interest on the Notes will
generally qualify as portfolio interest if (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total voting power of all
voting stock of the Company and is not a "controlled foreign corporation" with
respect to which the Company is a "related person" within the meaning of the
Code, and (ii) the beneficial owner (a) under penalties of perjury, certifies
that the beneficial owner is not a U.S. person and such certificate provides the
beneficial owner's name and address, and (b) is not a bank receiving interest on
an extension of credit made pursuant to a loan agreement made in the ordinary
course of its trade or business.
The gross amount of payments of interest to a Non-U.S. Holder that neither
qualify for the portfolio interest exception nor are U.S. trade or business
income will be subject to federal income tax at the rate of 30%, unless a United
States income tax treaty applies to reduce or eliminate withholding. U.S. trade
or business income will be taxed at regular federal income tax rates rather than
the 30% gross rate. In the case of a Non-U.S. Holder that is a corporation, such
U.S. trade or business income may also be subject to the "branch profits tax"
(which is generally imposed on a foreign corporation on the actual or deemed
repatriation from the United States of earnings and profits attributable to U.S.
trade or business income) at a rate of 30%. The branch profits tax may not apply
(or may apply at a reduced rate) if the recipient is a qualified resident of
certain countries with which the United States has an income tax treaty. To
claim the benefit of a tax treaty or to claim exemption from withholding because
the income is U.S. trade or business income, the Non-U.S. Holder must provide a
properly executed Form 1001 or 4224 (or such successor forms as the Service
designates), as applicable, prior to the payment of interest. These forms must
be periodically updated. Under final Treasury Regulations that will be effective
for payments after December 31, 1999 (the "Final Regulations"), the Forms 1001
and 4224 may be replaced by Form W-8. Also, under the Final Regulations, a
Non-U.S. Holder who is claiming the benefit of a treaty in certain circumstances
may be required to obtain a federal TIN and to provide certain documentary
evidence issued by foreign governmental authorities to prove residence in the
foreign country. Certain special procedures are provided in the Final
Regulations for payments through qualified intermediaries. Prospective
purchasers are urged to consult their tax advisors regarding the Final
Regulations.
98
<PAGE>
SALE, EXCHANGE OR REDEMPTION OF NOTES
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange
(including the exchange of Old Notes for New Notes pursuant to the Exchange
Offer), redemption or other disposition of a Note generally will not be subject
to federal income tax, provided that (i) such gain is not U.S. trade or business
income; (ii) the Non-U.S. Holder is not an individual who holds the Note as a
capital asset, is present in the United States for 183 days or more in the
taxable year of the disposition and who meets certain other requirements; and
(iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of
federal tax law applicable to certain U.S. expatriates (including certain former
citizens or residents of the United States).
FEDERAL ESTATE TAX
Notes held (or treated as held) by an individual who is not a citizen or
resident of the United States (for federal estate tax purposes) at the time of
his or her death will not be subject to the federal estate tax, provided that
(i) the individual does not actually or constructively own 10% or more of the
total voting power of all voting stock of the Company and (ii) income on the
Notes was not U.S. trade or business income.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Service and to each Non-U.S. Holder
any interest that is subject to withholding, exempt from federal withholding tax
pursuant to a tax treaty, or exempt from federal income tax under the portfolio
interest exception. Copies of such information returns may also be made
available under the provisions of a specific treaty or agreement to the tax
authorities of the country in which the Non-U.S. Holder resides.
The Treasury Regulations provide that backup withholding and information
reporting will not apply to payments of principal on the Notes by the Company to
a Non-U.S. Holder, if the Holder certifies, under penalties of perjury, as to
its non-U.S. status or otherwise establishes an exemption (provided that neither
the Company nor its paying agent has actual knowledge that the Holder is a U.S.
person or that the conditions of any other exemption are not, in fact,
satisfied).
The payment of the proceeds from the disposition of Notes to or through the
U.S. office of any U.S. or foreign broker will be subject to information
reporting and possible backup withholding unless the owner certifies, under
penalties of perjury, as to its non-U.S. status or otherwise establishes an
exemption (provided that the broker does not have actual knowledge that the
Holder is a U.S. person or that the conditions of any other exemptions are not,
in fact, satisfied). The payment of the proceeds from the disposition of a Note
to or through a non-U.S. office of a non-U.S. broker will not be subject to
information reporting or backup withholding unless the non-U.S. broker has
certain types of relationships with the United States (a "U.S. related person").
In the case of the payment of proceeds from the disposition of the Notes to
or through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the Treasury Regulations require information reporting (but not
backup withholding) on the payment unless the broker has documentary evidence in
its files that the owner is a Non-U.S. Holder and the broker has no knowledge to
the contrary.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a refund or credit against such Non-U.S.
Holder's federal income tax liability, provided that the requisite procedures
are followed.
The Final Regulations make modifications to the information reporting and
backup withholding rates described above. Prospective purchasers are urged to
consult their tax advisor regarding the Final Regulations.
99
<PAGE>
THE PRECEDING DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES IS A SUMMARY NOT
INTENDED TO ADDRESS EVERY ASPECT OF TAXATION THAT MAY BE RELEVANT TO EVERY
HOLDER. ACCORDINGLY, EACH INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO
PARTICULAR TAX CONSEQUENCES TO IT OF PURCHASING, HOLDING AND DISPOSING OF NOTES
OF THE COMPANY AS WELL AS THE EXCHANGE OF OLD NOTES FOR NEW NOTES PURSUANT TO
THE EXCHANGE OFFER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL
OR FOREIGN TAX LAWS, AND OF ANY PROPOSED CHANGES IN APPLICABLE LAWS.
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 meeting
the requirements of the Securities Act in connection with any resales of such
New Notes. This Prospectus, as it may be amended or supplemented from time to
time, may be used by all persons subject to the prospectus delivery requirements
of the Securities Act, including broker-dealers in connection with resales of
New Notes received in exchange for Old Notes where such Old Notes were acquired
as a result of market-making activities or other trading activities. The Company
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 broker-dealer
for use in connection with any such resale.
The Company 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 and/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 on 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 meeting the requirements of the Securities Act, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer other than commissions or concessions of any
brokers or dealers and will indemnify holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities offered
hereby will be passed upon for the Company by Weil, Gotshal & Manges LLP, New
York, New York.
EXPERTS
The Historical Financial Statements as of December 31, 1997 and 1996 and for
each of the years in the three year period ended December 31, 1997 included in
this Prospectus have been audited by Deloitte
100
<PAGE>
& Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a 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 omits
certain information, exhibits and undertakings contained in the Registration
Statement. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement,
including the exhibits thereto and the financial statements, notes and schedules
filed as a part thereof. The Registration Statement (and the exhibits and
schedules thereto), as well as the periodic reports and other information filed
by the Company with the Commission, may be inspected and copied at the public
reference section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
information can also be reviewed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System which is publicly available through the
Commission's Web Site (http:www.sec.gov). Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, each
such statement being qualified by such reference.
Pursuant to the Indenture, the Company has agreed to furnish to the Trustee
and to registered holders of the Notes without cost to the Trustee or such
registered holders, copies of all reports and other information that would be
required to be filed by the Company with the Commission under the Exchange Act,
whether or not the Company is then required to file reports with the Commission.
101
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
D&F INDUSTRIES (PREDECESSOR ENTITY) PAGE
---------
<S> <C>
Independent Auditors' Report......................................................... F-3
Balance Sheets....................................................................... F-4
Statements of Income................................................................. F-5
Statements of Stockholders' Equity................................................... F-6
Statements of Cash Flows............................................................. F-7
Notes to Financial Statements........................................................ F-8
<CAPTION>
RAVEN INDUSTRIES D/B/A/ OMNI-PAK INDUSTRIES AND AFFILIATES PAGE
---------
<S> <C>
Independent Auditors' Report......................................................... F-12
Combined Balance Sheets.............................................................. F-13
Combined Statements of Income........................................................ F-14
Combined Statements of Stockholders' Equity.......................................... F-15
Combined Statements of Cash Flows.................................................... F-16
Notes to Combined Financial Statements............................................... F-17
<CAPTION>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/ OMNI-PAK INDUSTRIES
AND AFFILIATES PAGE
---------
<S> <C>
Independent Auditors' Report......................................................... F-20
Combined Balance Sheets.............................................................. F-21
Combined Statements of Income........................................................ F-22
Combined Statements of Stockholders' Equity.......................................... F-23
Combined Statements of Cash Flows.................................................... F-24
Notes to Combined Financial Statements............................................... F-25
See Continuation Page
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
D&F INDUSTRIES (PREDECESSOR ENTITY) - FOR THE QUARTER ENDED MARCH 31, 1998
(UNAUDITED) PAGE
---------
<S> <C>
Condensed Balance Sheets............................................................. F-29
Condensed Statements of Income....................................................... F-30
Condensed Statements of Cash Flows................................................... F-31
Notes to Condensed Financial Statements.............................................. F-32
<CAPTION>
RAVEN INDUSTRIES D/B/A/ OMNI-PAK INDUSTRIES AND AFFILIATES - FOR THE QUARTER ENDED
MARCH 31, 1998 (UNAUDITED) PAGE
---------
<S> <C>
Condensed Combined Balance Sheets.................................................... F-34
Condensed Combined Statements of Income.............................................. F-35
Condensed Combined Statements of Cash Flows.......................................... F-36
Notes to Condensed Combined Financial Statements..................................... F-37
<CAPTION>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/ OMNI-PAK INDUSTRIES
AND AFFILIATES - FOR THE QUARTER ENDED MARCH 31, 1998 (UNAUDITED) PAGE
---------
<S> <C>
Condensed Combined Balance Sheets.................................................... F-38
Condensed Combined Statements of Income.............................................. F-39
Condensed Combined Statements of Cash Flows.......................................... F-40
Notes to Condensed Combined Financial Statements..................................... F-41
</TABLE>
The financial statements which follow are those of the predecessor, D&F
Industries, those of the acquired companies, Raven Industries d/b/a/ Omni-Pak
Industries and Affiliates, and the supplemental combined financial statements of
D&F Industries, Raven Industries d/b/a Omni-Pak Industries and Affiliates (the
"Combined Financial Statements"). The Combined Financial Statements are being
presented because, in the opinion of management, they provide a more meaningful
representation of the underlying business and cash flows. These entities
historically operated under common management and had a high degree of common
ownership, customers and systems, including similar accounting and financial
reporting systems to manage the combined enterprises.
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
D&F Industries:
We have audited the accompanying balance sheets of D&F Industries (the
"Company"), as of December 31, 1997 and 1996, and the related statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 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 audits 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997 and
1996, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, CA
February 25, 1998
F-3
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS (NOTE 4)
Current Assets:
Cash and cash equivalents (Note 1)............................................... $ 3,767,609 $ 4,570,961
Accounts receivable (Note 1)..................................................... 2,864,279 2,362,585
Inventories (Notes 1 and 2)...................................................... 8,040,251 4,300,736
Prepaid expenses and other current assets........................................ 80,029 155,509
------------- -------------
Total current assets........................................................... 14,752,168 11,389,791
Property and Equipment, Net (Notes 1 and 3)........................................ 1,983,412 2,280,010
------------- -------------
Total............................................................................ $ 16,735,580 $ 13,669,801
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit (Note 4).......................................................... $ 420,000 $ 540,000
Accounts payable................................................................. 7,633,062 6,249,560
Accrued expenses and other current liabilities................................... 1,086,934 552,115
------------- -------------
Total current liabilities...................................................... 9,139,996 7,341,675
------------- -------------
Commitments and Contingencies (Notes 5 and 6)
Stockholders' Equity:
Common stock; no par value, authorized,
2,000,000 shares; issued and
outstanding, 1,075,000 shares.................................................. 1,026,211 1,026,211
Retained earnings................................................................ 6,569,373 5,301,915
------------- -------------
Total stockholders' equity..................................................... 7,595,584 6,328,126
------------- -------------
Total........................................................................ $ 16,735,580 $ 13,669,801
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Sales (Notes 1 and 6)............................................... $ 85,191,329 $ 73,523,072 $ 52,164,353
Cost of sales....................................................... 55,019,915 47,958,393 34,894,801
------------- ------------- -------------
Gross profit...................................................... 30,171,414 25,564,679 17,269,552
Selling, general and administrative expenses
(Notes 5 and 6)................................................... 7,088,489 6,347,455 5,462,458
------------- ------------- -------------
Operating income.................................................. 23,082,925 19,217,224 11,807,094
Interest (income) expense (Note 4).................................. (82,451) (56,237) (76,319)
------------- ------------- -------------
Income before provision for state income taxes...................... 23,165,376 19,273,461 11,883,413
Provision for state income taxes (Note 1)........................... 350,618 279,420 137,090
------------- ------------- -------------
Net income.......................................................... $ 22,814,758 $ 18,994,041 $ 11,746,323
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994............................. 1,075,000 $ 1,026,211 $ 3,612,351 $ 4,638,562
Net income............................................. 11,746,323 11,746,323
Cash dividends......................................... (11,214,400) (11,214,400)
---------- ------------ ------------- -------------
Balance at December 31, 1995............................. 1,075,000 1,026,211 4,144,274 5,170,485
Net income............................................. 18,994,041 18,994,041
Cash dividends......................................... (17,836,400) (17,836,400)
---------- ------------ ------------- -------------
Balance at December 31, 1996............................. 1,075,000 1,026,211 5,301,915 6,328,126
Net income............................................. 22,814,758 22,814,758
Cash dividends......................................... (21,547,300) (21,547,300)
---------- ------------ ------------- -------------
Balance at December 31, 1997............................. 1,075,000 $ 1,026,211 $ 6,569,373 $ 7,595,584
---------- ------------ ------------- -------------
---------- ------------ ------------- -------------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 22,814,758 $ 18,994,041 $ 11,746,323
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 522,875 503,697 448,526
Changes in operating assets and liabilities:
Accounts receivable.......................................... (501,694) (383,091) 762,557
Inventories.................................................. (3,739,515) (827,127) 1,624,266
Prepaid expenses and other current assets.................... 75,480 (46,982) 12,070
Accounts payable............................................. 1,383,502 719,908 (109,799)
Accrued expenses and other current liabilities............... 534,819 (55,644) (37,391)
-------------- -------------- --------------
Net cash provided by operating activities.................. 21,090,225 18,904,802 14,446,552
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment............................ (226,277) (870,961) (419,767)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid............................................ (21,547,300) (17,836,400) (11,214,400)
Principal payments under note payable.......................... (40,000) (130,000)
Principal payments under line of credit, net................... (120,000) (60,000)
-------------- -------------- --------------
Net cash used in financing activities........................ (21,667,300) (17,936,400) (11,344,400)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents............. (803,352) 97,441 2,682,385
Cash and cash equivalents, beginning of year..................... 4,570,961 4,473,520 1,791,135
-------------- -------------- --------------
Cash and Cash equivalents, end of year........................... $ 3,767,609 $ 4,570,961 $ 4,473,520
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information -
Cash paid during the period for:
Interest..................................................... $ 42,549 $ 50,540 $ 62,811
Income taxes................................................. 350,618 279,420 137,090
</TABLE>
See notes to financial statements.
F-7
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS--D&F Industries (the "Company") is primarily engaged
in the manufacture of nutritional supplements, including vitamins, minerals and
other nutrition-related products.
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 period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. To reduce its credit risk, the Company monitors the credit standing
of the financial institutions that hold the Company's cash and cash equivalents.
ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS--Financial instruments that
potentially subject the Company to a concentration of credit risk consist
primarily of trade accounts receivable. The Company performs ongoing credit
evaluations of its customers and maintains, when necessary, an allowance for
potential credit losses.
The Company's largest customer is Herbalife International, Inc.
("Herbalife"). Sales to Herbalife represented 85%, 80% and 85% of net sales in
1997, 1996 and 1995, respectively. Receivables from Herbalife also represented
41%, 38% and 72% of total accounts receivable at December 31, 1997, 1996 and
1995, respectively. The Chief Executive Officer of Herbalife owns one-third of
the outstanding shares of Omni-Pak Industries and twenty percent of the
outstanding shares of Dynamic Products, which entities are under common
management. See Note 6 for a discussion of the Herbalife supply contract.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost.
Depreciation and amortization are provided for on the straight-line method using
estimated useful lives of 7 years for equipment and 31 years for buildings.
Leasehold improvements are amortized over the life of the related asset or the
term of the lease, whichever is shorter.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable based upon undiscounted cash flows. Impairment losses would be
recognized if the carrying amount of the asset exceeds its fair value.
REVENUE RECOGNITION--Sales are recorded when merchandise is shipped. Sales
returns are not significant.
INCOME TAXES--The Company has elected S corporation status for federal and
state income tax purposes, and other than a 1.5% state tax, taxable income is
passed through to the Company's shareholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Company has estimated the fair
value of its financial instruments using the following methods and assumptions:
the carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, and the line of credit approximate fair value.
F-8
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Raw materials........................................ $6,758,813 $3,378,667
Work in process...................................... 1,022,275 586,093
Finished goods....................................... 259,163 335,976
--------- ---------
Total................................................ $8,040,251 $4,300,736
--------- ---------
--------- ---------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Equipment............................................ $7,114,384 $6,925,398
Leasehold improvements............................... 1,199,913 1,163,022
Land................................................. 149,500 149,500
--------- ---------
8,463,797 8,237,920
Less accumulated depreciation and amortization....... 6,480,385 5,957,910
--------- ---------
Total................................................ $1,983,412 $2,280,010
--------- ---------
--------- ---------
</TABLE>
4. LINE OF CREDIT
The Company has a line of credit agreement with a bank under which it may
borrow up to $2,000,000. The Company had borrowings of $420,000 and $540,000
outstanding at December 31, 1997 and 1996, respectively. Borrowings accrue
interest at the bank's reference rate, which was 8.50% and 8.25% at December 31,
1997 and 1996, respectively. The line of credit is collateralized by
substantially all of the Company's assets. In addition, the agreement contains
financial covenants related to the Company's ratio of debt to tangible net worth
and require the Company to maintain minimum levels of net income.
During 1995, the Company had a note payable to a bank which was payable in
monthly installments of $10,000, plus interest at the bank's reference rate,
8.5%, at December 31, 1995. The note was repaid in 1996.
5. EMPLOYEE BENEFITS
The Company has a qualified 401(k) retirement plan for its full-time
employees and makes matching contributions in an amount equal to 50% of the
first 6% of the employee's compensation. In addition, the Company may make
additional contributions at the discretion of the Board of Directors. Total
contributions to the plan were $92,369 in 1997, $89,503 in 1996 and $77,238 in
1995.
F-9
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES.--The Company leases certain of its operating facilities.
Facility leases contain rent escalation clauses. Leases are primarily net
leases, which require the payment of executory costs such as real estate taxes,
insurance, common area maintenance and other operating costs in addition to
minimum rentals.
The Company also rents an operating facility from an entity affiliated
through common ownership. The facility is rented on a month-to-month basis.
Total rent paid to this entity was $83,520 in 1997, 1996 and 1995. The Company
also leases certain equipment under noncancelable operating leases. The Company
is committed under facility and equipment operating leases for minimum rental
payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 749,213
1999............................................................................ 689,585
2000............................................................................ 697,771
2001............................................................................ 715,662
2002............................................................................ 759,260
Thereafter...................................................................... 181,663
------------
Total....................................................................... $ 3,793,154
------------
------------
</TABLE>
Rental expense for the period ended December 31, 1997, 1996 and 1995 was
$669,325, $629,474 and $655,852, respectively.
AGREEMENT WITH HERBALIFE--During the periods presented, the Company had an
agreement with Herbalife under which Herbalife agreed to purchase all of its
requirements for tablets, capsules and related products from the Company. In
return, the Company was contractually restricted from selling the products sold
to Herbalife to others. The agreement also provided the Company a right of first
refusal to establish any manufacturing facility outside North America that
Herbalife proposed to develop or acquire and the right to receive certain
royalty payments in the event such manufacturing facility was contracted for or
acquired by Herbalife and the Company's right of first refusal was exercised.
In September 1997, the Company signed a new three-year agreement with
Herbalife, which became effective on January 12, 1998. Among other matters, the
terms of the new agreement eliminate certain exclusivity clauses from the
contract, but contain clauses which require Herbalife to purchase certain
minimum inventory requirements of certain specified products from the Company at
agreed upon prices.
LITIGATION. The Company is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not expect the
resolution of these legal matters to have a material adverse effect on the
Company's financial statements.
7. RELATED-PARTY TRANSACTION
The Company sells products to an entity affiliated through common ownership.
The affiliated company, in turn, sells the product to Herbalife. Sales to the
affiliated company were $1,393,251 in 1997,
F-10
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
7. RELATED-PARTY TRANSACTION (CONTINUED)
$1,162,327 in 1996 and $1,370,086 in 1995. The Company had a receivable from the
affiliated company of $101,000 at December 31, 1997 and $44,630 at December 31,
1996.
In addition, the Company sells products to other entities affiliated through
common ownership. Sales to other affiliate company were $1,183,086 in 1996. The
Company had receivables from the affiliated companies of $474,912 at December
31, 1996.
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Raven Industries
d/b/a Omni-Pak Industries and Affiliates:
We have audited the accompanying combined balance sheets of Raven Industries
d/b/a Omni-Pak Industries and Affiliates (collectively, the "Companies"), which
are under common management, as of December 31, 1997 and 1996, and the related
combined statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Companies' 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 audits 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, such financial statements present fairly, in all material
respects, the financial position of the Companies as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, CA
February 25, 1998
F-12
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 1)............................................... $ 5,188,823 $ 2,507,576
Accounts receivable (Note 1)..................................................... 3,105,727 1,760,685
Inventories (Notes 1 and 2)...................................................... 3,810,203 3,855,233
Prepaid expenses and other current assets........................................ 137,591 97,961
------------- -------------
Total current assets........................................................... 12,242,344 8,221,455
Property and Equipment, Net (Notes 1 and 3)........................................ 2,627,738 2,317,384
------------- -------------
Total.......................................................................... $ 14,870,082 $ 10,538,839
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................................. $ 4,672,239 $ 4,025,328
Accrued expenses and other current liabilities................................... 1,151,257 1,343,577
------------- -------------
Total current liabilities...................................................... 5,823,496 5,368,905
------------- -------------
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity:
Common stock..................................................................... 208,760 208,760
Retained earnings................................................................ 8,837,826 4,961,174
------------- -------------
Total stockholders' equity..................................................... 9,046,586 5,169,934
------------- -------------
Total.............................................................................. $ 14,870,082 $ 10,538,839
------------- -------------
------------- -------------
</TABLE>
See notes to combined financial statements.
F-13
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Sales (Notes 1 and 5)............................................... $ 98,587,163 $ 73,412,870 $ 34,534,492
Cost of Sales....................................................... 64,106,613 49,001,033 21,921,705
------------- ------------- -------------
Gross Profit...................................................... 34,480,550 24,411,837 12,612,787
Selling, General and Administrative Expenses
(Notes 4 and 5)................................................... 5,930,940 4,855,212 2,783,398
------------- ------------- -------------
Operating Income.................................................. 28,549,610 19,556,625 9,829,389
Interest (Income) Expense and Other................................. (197,072) (105,575) (67,185)
------------- ------------- -------------
Income Before Provision for State Income Taxes...................... 28,746,682 19,662,200 9,896,574
Provision for State Income Taxes (Note 1)........................... 428,030 287,210 146,312
------------- ------------- -------------
Net Income........................................................ $ 28,318,652 $ 19,374,990 $ 9,750,262
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to combined financial statements.
F-14
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
OMNI-PAK INDUSTRIES AFFILIATES
COMMON STOCK COMMON TOTAL
--------------------- STOCK RETAINED STOCKHOLDERS'
SHARES AMOUNT AMOUNT EARNINGS EQUITY
--------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994....................... 30,000 $ 150,000 $ 58,760 $ 4,254,322 $ 4,463,082
Net income....................................... 9,750,262 9,750,262
Cash Dividends................................... (9,594,500) (9,594,500)
--------- ---------- --------- ------------- -------------
Balance at December 31, 1995....................... 30,000 150,000 58,760 4,410,084 4,618,844
Net income....................................... 19,374,990 19,374,990
Cash dividends................................... (18,823,900) (18,823,900)
--------- ---------- --------- ------------- -------------
Balance at December 31, 1996....................... 30,000 150,000 58,760 4,961,174 5,169,934
Net income....................................... 28,318,652 28,318,652
Cash dividends................................... (24,442,000) (24,442,000)
--------- ---------- --------- ------------- -------------
Balance at December 31, 1997....................... 30,000 $ 150,000 $ 58,760 $ 8,837,826 $ 9,046,586
--------- ---------- --------- ------------- -------------
--------- ---------- --------- ------------- -------------
</TABLE>
See notes to combined financial statements.
F-15
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ----------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 28,318,652 $ 19,374,990 $ 9,750,262
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................ 513,083 397,902 278,750
Changes in operating assets and liabilities:
Accounts receivable........................................ (1,345,042) (161,054) 388,021
Inventories................................................ 45,030 (1,284,053) (1,164,739)
Prepaid expenses and other current assets.................. (39,630) (20,677) (3,525)
Accounts payable........................................... 646,911 838,139 1,799,292
Accrued expenses and other current liabilities............. (192,320) (54,806) 109,428
------------- ----------------- ------------
Net cash provided by operating activities................ 27,946,684 19,090,441 11,157,489
------------- ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchases of property and equipment............................ (823,437) (1,439,968) (155,565)
------------- ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES--
Cash dividends paid............................................ (24,442,000) (18,823,900) (9,594,500)
------------- ----------------- ------------
Net increase (decrease) in cash and cash equivalents............. 2,681,247 (1,173,427) 1,407,424
Cash and cash equivalents, beginning of year..................... 2,507,576 3,681,003 2,273,579
------------- ----------------- ------------
Cash and cash equivalents, end of year........................... $ 5,188,823 $ 2,507,576 $ 3,681,003
------------- ----------------- ------------
------------- ----------------- ------------
Supplemental disclosures of cash flow information--..............
Cash paid during the period for--Income taxes.................. $ 428,030 $ 287,210 $ 146,312
</TABLE>
See notes to combined financial statements.
F-16
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION. The accompanying financial statements include
the accounts of Raven Industries d/b/a Omni-Pak Industries ("Omni-Pak") and its
affiliated entities (the "Affiliates"), collectively referred to as the
"Companies." Omni-Pak is primarily engaged in the manufacture of nutritional
supplements, primarily drink powders. The Affiliates consist of Dynamic Products
Inc. and West Coast Sales. These entities sell nutritional supplements
manufactured by Omni-Pak and D&F Industries ("D&F"). The Companies are under
common management. Summarized financial information for the affiliates as of and
for the year ended December 31, 1997 is as follows:
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 period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS. The Companies consider all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. To reduce its credit risk, the Company monitors the credit standing
of the financial institutions that hold the Company's cash and cash equivalents.
ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS--Financial instruments that
potentially subject the Companies to a concentration of credit risk consist
primarily of trade accounts receivable. The Companies perform ongoing credit
evaluations of its customers and maintains, when necessary, an allowance for
potential credit losses.
The Companies' largest customer is Herbalife International, Inc.
("Herbalife"). The Chief Executive Officer of Herbalife owns one-third of the
outstanding common shares of Omni-Pak Industries and 20% of Dynamic Products,
Inc. Sales to Herbalife represented 68%, 67% and 80% of net sales in 1997, 1996
and 1995, respectively. Receivables from Herbalife also represented 72%, 24% and
66% of total accounts receivable at December 31, 1997, 1996 and 1995,
respectively. See Note 6 for a discussion of the Herbalife supply contract. In
addition, sales to Natural Supplement Association, Inc. d/b/a Experimental and
Applied Sciences ("EAS") represented 26% of net sales in 1997 and 23% of net
sales in 1996. Receivables from EAS represented 16% and 41% of total accounts
receivable at December 31, 1997 and 1996, respectively.
INVENTORIES. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT. Property and equipment is stated at cost.
Depreciation and amortization are provided for on the straight-line method using
estimated useful lives of seven years for equipment and 31 years for buildings.
Leasehold improvements are amortized over the life of the related asset or the
term of the lease, whichever is shorter.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable based upon undiscounted cash flows. Impairment losses would be
recognized if the carrying amount of the asset exceeds its fair value.
REVENUE RECOGNITION. Sales are recorded when merchandise is shipped. Sales
returns are not significant.
F-17
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company has estimated the fair
value of its financial instruments using the following methods and assumptions:
the carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable and approximate fair value.
INCOME TAXES. The Companies have elected S corporation status for federal
and state income tax purposes, and other than a 1.5% state tax, taxable income
is passed through to the Companies' shareholders.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Raw materials..................................................... $ 2,325,438 $ 2,728,951
Work in process................................................... 637,492 451,700
Finished goods.................................................... 847,273 674,582
------------ ------------
Total............................................................. $ 3,810,203 $ 3,855,233
------------ ------------
------------ ------------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
Equipment......................................................... $ 3,452,724 $ 3,065,464
Leasehold improvements............................................ 1,217,686 781,509
Building.......................................................... 420,524 420,524
------------ ------------
5,090,934 4,267,497
Less accumulated depreciation and amortization.................... 2,463,196 1,950,113
------------ ------------
Total............................................................. $ 2,627,738 $ 2,317,384
------------ ------------
------------ ------------
</TABLE>
4. EMPLOYEE BENEFITS
The Companies have qualified 401(k) retirement plans for their full-time
employees and make matching contributions in an amount equal to 50% of the first
6% of the employee's compensation. In addition, the Companies may make
additional contributions at the discretion of the Board of Directors. Total
contributions to the plan were $38,956 in 1997; $27,668 in 1996; and $25,208 in
1995.
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Companies lease certain of their operating facilities.
Facility leases contain rent escalation clauses. Leases are primarily net
leases, which require the payment of executory costs such as
F-18
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
real estate taxes, insurance, common area maintenance and other operating costs
in addition to minimum rentals.
The Companies also lease certain equipment under noncancelable operating
leases. The Companies are committed under facility and equipment operating
leases for minimum rental payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 618,118
1999............................................................................ 645,875
2000............................................................................ 675,025
2001............................................................................ 705,648
2002............................................................................ 649,774
Thereafter...................................................................... 2,263,731
------------
Total....................................................................... $ 5,558,171
------------
------------
</TABLE>
Rental expense for the period ended December 31, 1997, 1996 and 1995 was
$562,812, $446,477 and $345,540, respectively.
AGREEMENT WITH HERBALIFE--During the periods presented, the Companies have
an agreement with Herbalife under which Herbalife has agreed to purchase all of
its requirements for tablets, capsules and related products from the Companies.
In return, the Companies were contractually restricted from selling the products
sold to Herbalife to others. The agreement also provided the Companies a right
of first refusal to establish any manufacturing facility outside North America
that Herbalife proposed to develop or acquire and the right to receive certain
royalty payments in the event such manufacturing facility was contracted for or
acquired by Herbalife and the Companies' right of first refusal was exercised.
In September 1997, the Companies signed a new three-year agreement with
Herbalife, which became effective on January 12, 1998. Among other matters, the
terms of the new agreement eliminate certain exclusivity clauses from the
contract but contain clauses which require Herbalife to purchase certain minimum
inventory requirements of certain specified products from the Companies at
agreed upon prices.
LITIGATION--The Companies are subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not expect the
resolution of these legal matters to have a material adverse effect on the
Companies' financial statements.
6. RELATED-PARTY TRANSACTIONS
The Company sells raw materials to an entity affiliated through common
ownership. Sales to the affiliated company were $26,365 in 1996 and $23,705 in
1995. The Company had a receivable from the affiliated Company of $3,175 at
December 31, 1996.
* * * * * *
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
D&F Industries, Raven Industries
d/b/a Omni-Pak Industries and Affiliates:
We have audited the accompanying combined balance sheets of D&F Industries,
Raven Industries d/ b/a Omni-Pak Industries and Affiliates (collectively, the
"Companies"), which are under common management, as of December 31, 1997 and
1996, and the related combined statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Companies' 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 audits 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, such financial statements present fairly, in all material
respects, the financial position of the Companies as of December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, CA
February 25, 1998
F-20
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS (NOTE 4) 1997 1996
- ----------------------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)............................................... $ 8,956,432 $ 7,078,537
Accounts receivable (Note 1)..................................................... 5,869,102 3,697,130
Inventories (Notes 1 and 2)...................................................... 11,850,454 8,155,969
Prepaid expenses and other current assets........................................ 217,620 253,470
------------- -------------
Total current assets........................................................... 26,893,608 19,185,106
------------- -------------
Property and Equipment, Net (Notes 1 and 3)...................................... 4,611,150 4,597,394
------------- -------------
Total.......................................................................... $ 31,504,758 $ 23,782,500
------------- -------------
------------- -------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Line of credit (Note 4).......................................................... $ 420,000 $ 540,000
Accounts payable................................................................. 12,204,397 9,848,748
Accrued expenses and other current liabilities................................... 2,238,191 1,895,692
------------- -------------
Total current liabilities...................................................... 14,862,588 12,284,440
------------- -------------
Commitments and Contingencies (Notes 5 and 6)
Stockholders' Equity:
Common stock..................................................................... 1,234,971 1,234,971
Retained earnings................................................................ 15,407,199 10,263,089
------------- -------------
Total stockholders' equity..................................................... 16,642,170 11,498,060
------------- -------------
Total............................................................................ $ 31,504,758 $ 23,782,500
------------- -------------
------------- -------------
</TABLE>
See notes to combined financial statements
F-21
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- -------------
<S> <C> <C> <C>
Sales (Notes 1 and 6)............................................ $ 182,385,241 $ 144,735,099 $ 85,263,834
Cost of sales.................................................... 117,733,277 94,758,583 55,381,495
-------------- -------------- -------------
Gross profit................................................... 64,651,964 49,976,516 29,882,339
Selling, general and administrative expenses
(Notes 5 and 6)................................................ 13,019,429 11,202,667 8,245,856
-------------- -------------- -------------
Operating income............................................... 51,632,535 38,773,849 21,636,483
Interest (income) expense and other (Note 4)..................... (279,523) (161,812) (143,504)
-------------- -------------- -------------
Income before provision for state income taxes................... 51,912,058 38,935,661 21,779,987
Provision for state income taxes (Note 1)........................ 778,648 566,630 283,402
-------------- -------------- -------------
Net income..................................................... $ 51,133,410 $ 38,369,031 $ 21,496,585
-------------- -------------- -------------
-------------- -------------- -------------
</TABLE>
See notes to combined financial statements
F-22
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
OMNI-PARK
D&F INDUSTRIES INDUSTRIES AFFILIATES
COMMON STOCK COMMON STOCK COMMON TOTAL
-------------------- -------------------- STOCK RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARE AMOUNT AMOUNT EARNINGS EQUITY
--------- --------- --------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994................... 1,075,000 $1,026,211 30,000 $ 150,000 $ 58,760 $7,866,673 $9,101,644
Net income................................... 21,496,585 21,496,585
Cash dividends............................... (20,808,900) (20,808,900)
--------- --------- --------- --------- ----------- ---------- ------------
Balance, December 31, 1995................... 1,075,000 1,026,211 30,000 150,000 58,760 8,554,358 9,789,329
Net income................................... 38,369,031 38,369,031
Cash dividends............................... (36,660,300) (36,660,300)
--------- --------- --------- --------- ----------- ---------- ------------
Balance, December 31, 1996................... 1,075,000 1,026,211 30,000 150,000 58,760 10,263,089 11,498,060
Net income................................... 51,133,410 51,133,410
Cash dividends............................... (45,989,300) (45,989,300)
--------- --------- --------- --------- ----------- ---------- ------------
Balance, December 31, 1997................... 1,075,000 $1,026,211 30,000 $ 150,000 $ 58,760 $15,407,199 $16,642,170
--------- --------- --------- --------- ----------- ---------- ------------
--------- --------- --------- --------- ----------- ---------- ------------
</TABLE>
See notes to financial statements
F-23
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 51,133,410 $ 38,369,031 $ 21,496,585
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on sale of property and equipment..........................
Depreciation and amortization................................... 1,035,958 901,599 727,276
Changes in operating assets and liabilities:
Accounts receivable........................................... (2,171,972) (223,122) 1,255,695
Inventories................................................... (3,694,485) (2,111,180) 669,789
Prepaid expenses and other current assets..................... 35,850 (67,659) 8,545
Accounts payable.............................................. 2,355,649 1,237,024 1,584,376
Accrued expenses and other current liabilities................ 342,499 (110,450) 72,037
------------- ------------- -------------
Net cash provided by operating activities................... 49,036,909 37,995,243 25,814,303
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............................... (1,049,714) (2,310,929) (785,594)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid............................................... (45,989,300) (36,660,300) (20,808,900)
Principal payments under note payable............................. (40,000) (130,000)
Principal payments under line of credit, net...................... (120,000) (60,000)
------------- ------------- -------------
Net cash used in financing activities....................... (46,109,300) (36,760,300) (20,938,900)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents................ 1,877,895 (1,075,986) 4,089,809
Cash and Cash Equivalents, Beginning of Year........................ 7,078,537 8,154,523 4,064,714
------------- ------------- -------------
Cash and Cash Equivalents, End of Year.............................. $ 8,956,432 $ 7,078,537 $ 8,154,523
------------- ------------- -------------
------------- ------------- -------------
Supplemental Disclosures of Cash Flow Information -Cash paid during
the year for:
Interest........................................................ $ 42,549 $ 50,540 $ 62,811
Income taxes.................................................... 773,041 546,327 337,300
</TABLE>
See notes to combined financial statements.
F-24
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION The accompanying financial statements include the
accounts of D&F Industries ("D&F"), Raven Industries d/b/a Omni-Pak Industries,
("Omni-Pak") and their affiliated entities (the "Affiliates"), collectively
referred to as the "Companies." D&F is primarily engaged in the manufacture of
nutritional supplements, including vitamins, minerals and other
nutrition-related products. Omni-Pak is primarily engaged in the manufacture of
nutritional supplements, primarily drink powders. The Affiliates consist of
Dynamic Products, Inc. and West Coast Sales. These entities sell nutritional
supplements manufactured by D&F and Omni-Pak. The Companies are under common
management.
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 period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--The Companies consider all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. To reduce their credit risk, the Companies monitor the credit
standing of the financial institutions that hold the Companies' cash and cash
equivalents.
ACCOUNTS RECEIVABLE AND SIGNIFICANT CUSTOMERS--Financial instruments that
potentially subject the Companies to a concentration of credit risk consist
primarily of trade accounts receivable. The Companies perform ongoing credit
evaluations of their customers and maintain, when necessary, an allowance for
potential credit losses.
The Companies' largest customer is Herbalife International, Inc.
("Herbalife"). The Chief Executive Officer of Herbalife owns one-third of the
outstanding common shares of Omni-Pak and 20% of Dynamic Products, Inc. Sales to
Herbalife represented 76%, 74% and 83% of sales in 1997, 1996 and 1995,
respectively. Receivables from Herbalife also represented 56%, 32% and 69% of
total accounts receivable at December 31, 1997, 1996 and 1995, respectively. See
Note 6 for a discussion of the Herbalife supply contract. In addition, sales to
Natural Supplement Association, Inc. d/b/a Experimental and Applied Sciences
("EAS") represented 15% of sales in 1997 and 12% of sales in 1996. Receivables
from EAS represented 15% and 21% of total accounts receivable at December 31,
1997 and 1996, respectively.
INVENTORIES--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation and amortization are provided for on the straight-line method using
estimated useful lives of 7 years for equipment and 31 years for buildings.
Leasehold improvements are amortized over the life of the related asset or the
term of the lease, whichever is shorter.
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable based upon undiscounted cash flows. Impairment losses would be
recognized if the carrying amount of the asset exceeds its fair value.
REVENUE RECOGNITION--Sales are recorded when merchandise is shipped. Sales
returns are not significant.
F-25
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS--The Companies have estimated the fair
value of their financial instruments using the following methods and
assumptions: the carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable, and the line of credit approximate fair value.
INCOME TAXES--The Companies have elected S corporation status for federal
and state income tax purposes, and other than a 1.5% state tax, taxable income
is passed through to the Companies' shareholders.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Raw materials....................................... $9,084,252 $6,107,618
Work in process..................................... 1,659,767 1,037,793
Finished goods...................................... 1,106,435 1,010,558
---------- ---------
Total............................................... $11,850,454 $8,155,969
---------- ---------
---------- ---------
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Equipment........................................... $10,567,108 $9,990,862
Leasehold improvements.............................. 2,417,599 1,944,531
Building............................................ 420,524 420,524
Land................................................ 149,500 149,500
---------- ---------
13,554,731 12,505,417
Less accumulated depreciation and amortization...... 8,943,581 7,908,023
---------- ---------
Total............................................... $4,611,150 $4,597,394
---------- ---------
---------- ---------
</TABLE>
4. LINE OF CREDIT
D&F has a line of credit agreement with a bank under which it may borrow up
to $2,000,000. D&F had borrowings of $420,000 and $540,000 outstanding at
December 31, 1997 and 1996, respectively. Borrowings accrue interest at the
bank's reference rate, which was 8.5% and 8.25% at December 31, 1997 and 1996,
respectively.
The line of credit agreement is collateralized by substantially all of D&F's
assets. In addition, the agreement contains financial covenants related to D&F's
ratio of debt to tangible net worth and requires D&F to maintain minimum levels
of net income.
F-26
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
4. LINE OF CREDIT (CONTINUED)
During 1995, D&F had a note payable to a bank that was payable in monthly
installments of $10,000, plus interest at the bank's reference rate, 8.5%, at
December 31, 1995. The note was repaid in 1996.
5. EMPLOYEE BENEFITS
The Companies have qualified 401(k) retirement plans for their full-time
employees and make matching contributions in an amount equal to 50% of the first
6% of the employee's compensation. In addition, the Companies may make
additional contributions at the discretion of the Boards of Directors. Total
contributions to the plan were $131,325 in 1997, $117,171 in 1996 and $102,446
in 1995.
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Companies lease certain of their operating facilities.
Facility leases contain rent escalation clauses. Leases are primarily net
leases, which require the payment of executory costs such as real estate taxes,
insurance, common area maintenance and other operating costs in addition to
minimum rentals.
The Companies also rent an operating facility from an entity affiliated
through common ownership. The facility is rented on a month-to-month basis.
Total rent paid to this entity was $83,520 in 1997, 1996 and 1995.
The Companies also lease certain equipment under noncancelable operating
leases. Most equipment and automobile leases include options to purchase the
equipment and automobiles at fair market value at lease expiration.
The Companies are committed under facility and equipment operating leases
for minimum rental payments as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- --------------------------------------------------------------------------------
<S> <C>
1998............................................................................ $ 1,367,331
1999............................................................................ 1,335,460
2000............................................................................ 1,372,796
2001............................................................................ 1,421,310
2002............................................................................ 1,409,034
Thereafter...................................................................... 2,445,394
------------
Total....................................................................... $ 9,351,325
------------
------------
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995 was
$1,232,137, $1,075,951 and $1,001,392, respectively.
AGREEMENT WITH HERBALIFE--During the periods presented, the Companies had an
agreement with Herbalife whereby Herbalife had agreed to purchase all of its
requirements for tablets, capsules and related products from the Companies. In
return, the Companies were contractually restricted from selling the products
sold to Herbalife to others. The agreement also provided the Companies a right
of first
F-27
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A/
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
refusal to establish any manufacturing facility outside North America that
Herbalife proposed to develop or acquire and the right to receive certain
royalty payments in the event such manufacturing facility was contracted for or
acquired by Herbalife, and the Companies' right of first refusal was exercised.
In September 1997, the Companies signed a new three-year agreement with
Herbalife, which became effective on January 12, 1998. Among other matters, the
terms of the new agreement eliminate certain exclusivity clauses from the
contract but contain clauses that require Herbalife to purchase certain minimum
inventory requirements of certain specified products from the Companies at
agreed-upon prices.
LITIGATION--The Companies are subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not expect the
resolution of these legal matters to have a material adverse effect on the
Companies' financial statements.
* * * * * *
F-28
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
ASSETS
Current assets.........................................................................................
Cash and cash equivalents............................................................................ $ 5,581
Accounts receivable, net of allowances............................................................... 3,114
Inventories.......................................................................................... 7,414
Prepaid expenses and other current assets............................................................ 344
-----------
Total current assets............................................................................. 16,453
Property and equipment, net............................................................................ 2,245
-----------
TOTAL ASSETS..................................................................................... $ 18,698
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................................................ $ 8,939
Line of credit....................................................................................... 400
-----------
Total current liabilities........................................................................ 9,339
Commitments and Contingencies
Stockholders' Equity
Common stock, no par, authorized- 2,000,000 shares, issued and outstanding- 1,075,000 shares......... 1,026
Retained earnings.................................................................................... 8,333
-----------
Total stockholders' equity....................................................................... 9,359
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................................... $ 18,698
-----------
-----------
</TABLE>
See notes to condensed financial statements.
F-29
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
CONDENSED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Net sales................................................................................... $ 22,372 $ 18,921
Cost of sales............................................................................... 15,595 12,134
--------- ---------
Gross profit............................................................................ 6,777 6,787
Selling, general and administrative expenses................................................ 1,750 1,536
--------- ---------
Operating income............................................................................ 5,027 5,251
Interest (income) expense................................................................... (38) (33)
--------- ---------
Income before income taxes.................................................................. 5,065 5,284
Provision for state income taxes............................................................ 76 78
--------- ---------
Net income.................................................................................. $ 4,989 $ 5,206
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements.
F-30
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Cash Flows From (For) Operating Activities:
Net income................................................................................. $ 4,989 $ 5,206
Depreciation and amortization.............................................................. 105 75
Changes in operating assets and liabilities:
Accounts receivable...................................................................... (249) (629)
Inventories.............................................................................. 626 (1,300)
Prepaid expenses and other current assets................................................ (264) 73
Accounts payable and accrued expenses.................................................... 219 812
--------- ---------
Net cash from operating activities....................................................... 5,426 4,237
--------- ---------
Cash Flows For Investing Activities:
Additions to property and equipment........................................................ (367) --
--------- ---------
Net cash for investing activities........................................................ (367) --
--------- ---------
Cash Flows From (For) Financing Activities:
Cash dividends paid........................................................................ (3,226) (3,225)
Principal payments under line of credit, net............................................... (20) (30)
--------- ---------
Net cash from (for) financing activities................................................. (3,246) (3,255)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents......................................... 1,813 982
Cash and Cash Equivalents, at Beginning of Period............................................ 3,768 4,571
--------- ---------
Cash and Cash Equivalents, at End of Period.................................................. $ 5,581 $ 5,553
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements.
F-31
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ending March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2--SUBSEQUENT EVENTS
ACQUISITION AND RECAPITALIZATION--On April 23, 1998, the Company acquired
100% of the common stock of Omni-Pak and Affiliates for a total purchase price
of $137,867, of which $136,300 is expected to be allocated to goodwill and other
intangibles. In addition, the Company paid $58,700 to repurchase approximately
543,000 outstanding shares from its stockholders. In connection with these
transactions, BGA Consulting was paid a fee of $2,400 by the Company's
stockholders and the stockholders of Omni-Pak and Affiliates. The Company's
Chief Executive Officer, Mr. Paul Buxbaum, is the President of BGA Consulting.
LONG-TERM NOTES--In connection with the transactions described above, the
Company issued the Notes due 2008 in aggregate principal amount of $225,000.
Expenses related to the issuance of the Notes were $7,243. The stated interest
rate on the Notes is 11%. The Notes were issued at a discount of $6,608 for an
effective rate of approximately 11.5%. The Indenture places certain limitations
on incurrence of additional debt, acquisitions, investments and dividends.
ACQUISITION FACILITY--Effective April 23, 1997, the Company entered into a
new credit agreement (the "Acquisition Facility") which allows it to borrow up
to $50,000 under a line of credit through April 2003, of which no more than
$10,000 is available for working capital and general corporate purposes. Under
the Acquisition Facility, borrowings bear interest at the Company's election
either at the bank's prime rate plus certain margins, which range from 75 to 150
basis points or at LIBOR plus certain margins, which range from 200 to 275 basis
points. The Acquisition Facility requires the Company to maintain financial
ratios related to leverage, consolidated EBITDA, cash interest coverage and
fixed charge coverage. In addition, the Acquisition Facility limits the amount
of annual capital expenditures and cash dividends.
CASH DISTRIBUTIONS TO STOCKHOLDERS--In April 1998, distributions totaling
$5,160 were made to stockholders of record.
NOTE 3--CUSTOMER SALES FOR THE QUARTER ENDED MARCH 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Herbalife..................................................... $ 18,519 $ 16,353
Other Customers............................................... 3,853 2,568
--------- ---------
$ 22,372 $ 18,921
--------- ---------
--------- ---------
</TABLE>
F-32
<PAGE>
D&F INDUSTRIES (PREDECESSOR ENTITY)
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NOTE 4--INVENTORIES
Inventories consist of the following at March 31, 1998:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Raw materials................................................. $ 5,678
Work in process............................................... 941
Finished goods................................................ 795
---------
$ 7,414
---------
---------
</TABLE>
NOTE 5--NEW ACCOUNTING PRINCIPLES
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. The statement, which the Company
adopted in the first quarter of 1998, establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. There are no adjustments between net income and
comprehensive income for the periods presented.
NOTE 6--COMMITMENTS AND CONTINGENCIES
On March 31, 1998, the Company was named as a defendant in an action
originally filed on June 13, 1997 by John W. Rowles against Mr. Mark Hughes,
Herbalife and an Herbalife distributor. The plaintiff alleges that a product
manufactured by the Company for Herbalife was defective and unsafe for its
intended use and caused harm to the plaintiff. The plaintiff is claiming an
unspecified amount of damages, including a claim for punitive damages. The
lawsuit is in its preliminary stages of discovery and an estimate of the range
of loss, if any, cannot be made at this time. The Company believes, however,
that liability, if any is incurred, will not be material to the Company's
results of operations or financial condition. In addition, the Company has
approximately $2 million in available product liability insurance.
F-33
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents........................................................ $ 6,796
Accounts receivable, net of allowances........................................... 3,367
Inventories...................................................................... 3,034
Prepaid expenses and other current assets........................................ 265
-----------
Total current assets......................................................... 13,462
Property and equipment, net........................................................ 2,348
-----------
TOTAL ASSETS................................................................. $ 15,810
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................................ $ 7,517
-----------
Total current liabilities.................................................... 7,517
Commitments and Contingencies
Stockholders' Equity
Common stock..................................................................... 209
Retained earnings................................................................ 8,084
-----------
Total stockholders' equity................................................... 8,293
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................................... $ 15,810
-----------
-----------
</TABLE>
See notes to condensed financial statements.
F-34
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Net sales................................................. $ 24,847 $ 20,281
Cost of sales............................................. 16,906 13,905
--------- ---------
Gross profit............................................ 7,941 6,376
Selling, general and administrative expenses.............. 1,536 1,454
--------- ---------
Operating income........................................ 6,405 4,922
Interest (income) expense--net............................ (34) (22)
--------- ---------
Income before income taxes................................ 6,439 4,944
Provision for state income taxes.......................... 97 75
--------- ---------
Net income.............................................. $ 6,342 $ 4,869
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements.
F-35
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From (For) Operating Activities:
Net income................................................................................. $ 6,342 $ 4,869
Depreciation and amortization.............................................................. 97 75
Changes in operating assets and liabilities:
Accounts receivable...................................................................... (404) (943)
Inventories.............................................................................. 776 180
Prepaid expenses and other current assets................................................ (127) 4
Accounts payable and accrued expenses.................................................... 1,694 1,233
--------- ---------
Net cash from operating activities....................................................... 8,378 5,418
--------- ---------
Cash Flows For Investing Activities:
Additions to property and equipment........................................................ (221) (42)
--------- ---------
Net cash for investing activities........................................................ (221) (42)
--------- ---------
Cash Flows From (For) Financing Activities:
Cash dividends paid........................................................................ (6,550) (2,810)
--------- ---------
Net cash from (for) financing activities................................................. (6,550) (2,810)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents......................................... 1,607 2,566
Cash and Cash Equivalents, at Beginning of Period............................................ 5,189 2,508
--------- ---------
Cash and Cash Equivalents, at End of Period.................................................. $ 6,796 $ 5,074
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial statements.
F-36
<PAGE>
RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ending March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2--SUBSEQUENT EVENTS
On April 23, 1998 D&F Industries, Inc. acquired 100% of the common stock of
Omni-Pak and Affiliates for a total purchase price of $137,867.
In April, 1998, distributions totaling $6,720 were made to the stockholders
of record.
NOTE 3--CUSTOMER SALES FOR THE QUARTER ENDED MARCH 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Herbalife............................................................... $ 13,925 $ 11,879
EAS..................................................................... 8,399 5,770
Other Customers......................................................... 2,523 2,632
--------- ---------
$ 24,847 $ 20,281
--------- ---------
--------- ---------
</TABLE>
NOTE 4--INVENTORIES
Inventories consist of the following at March 31, 1998:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Raw materials...................................................................... $ 1,736
Work in process.................................................................... 845
Finished goods..................................................................... 453
---------
$ 3,034
---------
---------
</TABLE>
NOTE 5--NEW ACCOUNTING PRINCIPLES
In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. The statement, which the Company
adopted in the first quarter of 1998, establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. There are no adjustments between net income and
comprehensive income for the periods presented.
F-37
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1998
-----------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................................ $ 12,377
Accounts receivable, net of allowances............................................................... 6,411
Inventories.......................................................................................... 10,448
Prepaid expenses and other current assets............................................................ 609
-----------
Total current assets............................................................................... 29,845
Property and equipment, net............................................................................ 4,593
-----------
TOTAL ASSETS....................................................................................... $ 34,438
-----------
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................................................ $ 16,386
Line of credit....................................................................................... 400
-----------
Total current liabilities.......................................................................... 16,786
Commitments and Contingencies
Stockholders' Equity
Common stock......................................................................................... 1,235
Retained earnings.................................................................................... 16,417
-----------
Total stockholders' equity......................................................................... 17,652
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................................... $ 34,438
-----------
-----------
</TABLE>
See notes to condensed combined financial statements.
F-38
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Net sales................................................................................... $ 46,842 $ 39,117
Cost of sales............................................................................... 32,124 25,979
--------- ---------
Gross profit.............................................................................. 14,718 13,138
Selling, general and administrative expenses................................................ 3,286 2,973
--------- ---------
Operating income.......................................................................... 11,432 10,165
Interest (income) expense................................................................... (72) (55)
--------- ---------
Income before income taxes.................................................................. 11,504 10,220
Provision for state income taxes............................................................ 173 145
--------- ---------
Net income................................................................................ $ 11,331 $ 10,075
--------- ---------
--------- ---------
</TABLE>
See notes to condensed combined financial statements.
F-39
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Cash Flows From (For) Operating Activities:
Net income................................................................................ $ 11,331 $ 10,075
Depreciation and amortization............................................................. 202 362
Changes in operating assets and liabilities:
Accounts receivable..................................................................... (684) (1,326)
Inventories............................................................................. 1,402 (1,119)
Prepaid expenses and other current assets............................................... (392) 62
Accounts payable and accrued expenses................................................... 1,943 2,120
--------- ---------
Net cash from operating activities...................................................... 13,802 10,174
--------- ---------
Cash Flows For Investing Activities:
Additions to property and equipment....................................................... (587) (211)
--------- ---------
Net cash for investing activities....................................................... (587) (211)
--------- ---------
Cash Flows From (For) Financing Activities:
Cash dividends paid....................................................................... (9,775) (6,036)
Principal payments under line of credit, net.............................................. (20) (30)
--------- ---------
Net cash from (for) financing activities................................................ (9,795) (6,066)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents........................................ 3,420 3,897
Cash and Cash Equivalents, at Beginning of Period........................................... 8,957 7,079
--------- ---------
Cash and Cash Equivalents, at End of Period................................................. $ 12,377 $ 10,976
--------- ---------
--------- ---------
</TABLE>
See notes to condensed combined financial statements.
F-40
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Article 10 of Regulation S-X.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ending March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2--SUBSEQUENT EVENTS
ACQUISITION AND RECAPITALIZATION--On April 23, 1998, D&F Industries (the
predecessor entity) acquired 100% of the common stock of Omni-Pak and Affiliates
for a total purchase price of $137,867, of which $136,300 is expected to be
allocated to goodwill and other intangibles. In addition, D&F Industries paid
$58,700 to repurchase approximately 543,000 outstanding shares from its
stockholders. In connection with these transactions, BGA Consulting was paid a
fee of $2,400 by the Company's stockholders. The Company's Chief Executive
Officer, Mr. Paul Buxbaum, is the President of BGA Consulting.
LONG-TERM NOTES--In connection with the transactions described above, the
Company issued the Notes in an aggregate principal amount of $225,000. Expenses
related to the issuance of the Notes were $7,243. The stated interest rate on
the Notes is 11%. The Notes were issued at a discount of $6,608 for an effective
rate of approximately 11.5%. The Indenture places certain limitations on
incurrence of additional debt, acquisitions, investments and dividends.
ACQUISITION FACILITY--Effective April 23, 1997, the Company entered into a
new credit agreement (the "Acquisition Facility") which allows it to borrow up
to $50,000 under a line of credit through April 2003, of which no more than
$10,000 is available for working capital and general corporate purposes. Under
the Acquisition Facility, borrowings bear interest at the Company's election
either at the bank's prime rate plus certain margins, which range from 75 to 150
basis points or at LIBOR plus certain margins, which range from 200 to 275 basis
points. The Acquisition Facility requires the Company to maintain financial
ratios related to leverage, consolidated EBITDA, cash interest coverage and
fixed charge coverage. In addition, the Acquisition Facility limits the amount
of annual capital expenditures and cash dividends.
CASH DISTRIBUTIONS TO STOCKHOLDERS--In April 1998, distributions totaling
$11,880 were made to stockholders of record.
NOTE 3--CUSTOMER SALES FOR THE QUARTER ENDED MARCH 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Herbalife............................................................... $ 32,671 $ 29,350
EAS..................................................................... 9,027 5,769
Other Customers......................................................... 5,144 3,998
--------- ---------
$ 46,842 $ 39,117
--------- ---------
--------- ---------
</TABLE>
F-41
<PAGE>
D&F INDUSTRIES, RAVEN INDUSTRIES D/B/A
OMNI-PAK INDUSTRIES AND AFFILIATES
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NOTE 4--INVENTORIES
Inventories consist of the following at March 31, 1998:
<TABLE>
<S> <C>
Raw materials...................................................... $ 7,414
Work in process.................................................... 1,786
Finished goods..................................................... 1,248
---------
$ 10,448
---------
---------
</TABLE>
NOTE 5--NEW ACCOUNTING PRINCIPLES
In June 1997, the FASB issued SFAS No.130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. The statement, which the Company
adopted in the first quarter of 1998, establishes standards for reporting and
displaying comprehensive income and its components in a full set of general
purpose financial statements. There are no adjustments between net income and
comprehensive income for the periods presented.
NOTE 6--COMMITMENTS AND CONTINGENCIES
On March 31, 1998, the Company was named as a defendant in an action
originally filed on June 13, 1997 by John W. Rowles against Mr. Mark Hughes,
Herbalife and an Herbalife distributor. The plaintiff alleges that a product
manufactured by the Company for Herbalife was defective and unsafe for its
intended use and caused harm to the plaintiff. The plaintiff is claiming an
unspecified amount of damages, including a claim for punitive damages. The
lawsuit is in its preliminary stages of discovery and an estimate of the range
of loss, if any, cannot be made at this time. The Company believes, however,
that liability, if any is incurred, will not be material to the Company's
results of operations or financial condition. In addition, the Company has
approximately $2 million in available product liability insurance.
F-42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN
ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 18
Capitalization................................ 26
Selected Historical and Pro Forma Financial
Data........................................ 27
Unaudited Pro Forma Condensed Combined
Financial Statements........................ 30
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 36
Business...................................... 44
Management.................................... 56
Executive Compensation........................ 57
Security Ownership of Certain Beneficial
Owners and Management....................... 59
Certain Related Party Transactions............ 60
Description of Acquisition Facility........... 61
The Exchange Offer............................ 62
Description of the New Notes.................. 70
Book-Entry; Delivery and Form................. 93
Material United States Federal Income Tax
Consequences................................ 95
Plan of Distribution.......................... 100
Legal Matters................................. 100
Experts....................................... 100
Available Information......................... 101
Index to Financial Statements................. F-1
</TABLE>
$225,000,000
[LOGO]
GLOBAL HEALTH
SCIENCES, INC.
11% SENIOR NOTES
DUE 2008
--------------
PROSPECTUS
--------------
DATED AUGUST 12, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
