<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996.
REGISTRATION NO. 33-78636
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
LEINER HEALTH PRODUCTS GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 2834 13-3641596
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
</TABLE>
901 EAST 233RD STREET
CARSON, CALIFORNIA 90745-6204
(310) 835-8400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DIANE J. BEARDSLEY
LEINER HEALTH PRODUCTS GROUP INC.
901 EAST 233RD STREET
CARSON, CALIFORNIA 90745-6204
(310) 835-8400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------
COPIES OF ALL COMMUNICATIONS, INCLUDING
COMMUNICATIONS SENT TO AGENT FOR SERVICE, SHOULD BE SENT TO:
<TABLE>
<S> <C>
FREDERICK H. FOGEL, ESQ. FAITH D. GROSSNICKLE, ESQ.
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON SHEARMAN & STERLING
ONE NEW YORK PLAZA 599 LEXINGTON AVENUE
NEW YORK, NEW YORK 10004-1980 NEW YORK, NEW YORK 10022-6069
(212) 859-8000 (212) 848-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. /X/
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
AMOUNT TO PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value...... 5,750,000 shares $15.00 $86,250,000 $29,741(3)
</TABLE>
(1) Includes 750,000 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) $19,826 previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF
INFORMATION REQUIRED BY THE ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR HEADING IN THE PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Facing Page of Registration Statement; Cross
Reference Sheet; Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; The Company
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds; Description of
Certain Indebtedness
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Inapplicable
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Dividend
Policy; Description of Capital Stock; Description of
Certain Indebtedness
10. Interests of Named Experts and Counsel............... Inapplicable
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; Risk
Factors; The Company; Use of Proceeds; Dividend
Policy; Dilution; Capitalization; Selected
Consolidated Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Transactions; Description of
Capital Stock; Description of Certain Indebtedness;
Shares Eligible for Future Sale; Experts;
Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Inapplicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may
not be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer to
sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any state in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such state.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 7, 1996
PROSPECTUS
5,000,000 SHARES
[LOGO]
COMMON STOCK
--------------
All of the 5,000,000 shares of Common Stock of Leiner Health Products Group
Inc. (the "Company") offered hereby are being sold by the Company. Prior to the
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. It is currently anticipated that the initial public offering
price will be between $14.00 and $16.00 per share. For a discussion relating to
the factors to be considered in determining the initial public offering price,
see "Underwriting."
Application will be made to list the Common Stock on the New York Stock
Exchange ("NYSE") under the proposed symbol "LNR."
SEE "RISK FACTORS," BEGINNING ON PAGE 10, FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
Per Share......................... $ $ $
Total (3)......................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities under the Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters an option exercisable within 30
days after the date hereof to purchase up to 750,000 additional shares of
Common Stock to cover over-allotments, if any. If such option is exercised
in full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
-------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1996.
-------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
<PAGE>
------------
The date of this Prospectus is , 1996.
<PAGE>
[Photos of Leiner products]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S
COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. INDUSTRY
DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM MARKET RESEARCH
ORGANIZATIONS, INDUSTRY PUBLICATIONS AND INTERNAL COMPANY ESTIMATES THAT THE
COMPANY BELIEVES TO BE RELIABLE, BUT HAS NOT INDEPENDENTLY VERIFIED. UNLESS THE
CONTEXT OTHERWISE REQUIRES, REFERENCES TO "LEINER" OR THE "COMPANY" INCLUDE
LEINER HEALTH PRODUCTS GROUP INC. AND ITS DIRECT AND INDIRECT SUBSIDIARIES,
INCLUDING ITS PRINCIPAL OPERATING SUBSIDIARY, LEINER HEALTH PRODUCTS INC.
("LHP"). REFERENCES HEREIN TO A "FISCAL" YEAR REFER TO THE COMPANY'S FISCAL YEAR
ENDED MARCH 31 IN THE CALENDAR YEAR INDICATED (E.G., REFERENCES TO FISCAL 1996
ARE REFERENCES TO THE COMPANY'S FISCAL YEAR ENDED MARCH 31, 1996). INCOME
STATEMENT DATA FOR THE YEAR ENDED MARCH 31, 1993 CONSIST OF THE RESULTS OF THE
COMPANY'S PREDECESSOR FOR THE ONE MONTH ENDED APRIL 30, 1992 TOGETHER WITH THE
RESULTS OF THE COMPANY FOR THE ELEVEN MONTHS ENDED MARCH 31, 1993. REFERENCES TO
"COMMON STOCK" REFER TO THE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE,
OF LEINER HEALTH PRODUCTS GROUP INC. EXCEPT WHERE OTHERWISE INDICATED, (I) ALL
SHARE AND PER SHARE DATA IN THIS PROSPECTUS HAVE BEEN ADJUSTED TO REFLECT THE
RECAPITALIZATION (AS HEREINAFTER DEFINED) THAT WILL BE IMPLEMENTED CONCURRENTLY
WITH THE SALE OF THE COMMON STOCK OFFERED HEREBY (SEE "THE COMPANY --
RECAPITALIZATION") AND (II) ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS HAS NOT BEEN EXERCISED.
THE COMPANY
GENERAL
Leiner is the nation's largest manufacturer and marketer of vitamins,
minerals and nutritional supplements (collectively, "vitamin products"). Leiner
markets over 320 vitamin products in more than 4,600 stock keeping units
("SKUs"). The Company estimates that it has a 50% share of private label sales
(three times as large as its largest competitor) and a 20% share of overall
vitamin product sales through mass market retailers in the United States.
Vitamin product sales represent approximately 79% of the Company's net sales.
The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets. The Company's vitamin product customers are primarily
mass market retailers and include the country's 20 largest drug store chains
(including Walgreen, American Stores, Eckerd, CVS, Rite-Aid and Revco), 18 of
the 20 largest supermarket chains (including Safeway, Winn-Dixie, Albertson's,
A&P and Lucky Stores), the 10 largest mass merchandising chains (including
Wal-Mart, Target, Kmart and Venture) and the two largest warehouse club chains
(Sam's and PriceCostco) (such retailer categories are referred to herein,
collectively, as "mass market"). The Company's vitamin products are sold under
its customers' store names ("private label products"), as well as under its own
brand, Your Life-Registered Trademark-, one of the nation's leading broadline
vitamin brands. The Company estimates that private label vitamin products
account for approximately 38% of total vitamin product sales by mass market
retailers and account for approximately 59% of Leiner's total net sales.
In recent years, Leiner has benefited from significant increases in demand
for vitamin products. According to industry sources and management estimates,
1995 retail sales of vitamin products in the U.S. mass market channel were $1.9
billion and have grown at a compound annual rate of approximately 11% since
1993. Since 1993, the fastest growing segment of the vitamin products category
has been nutritional supplements (including herbal products), sales of which
have grown at a compound annual rate of approximately 38% since 1993 to $307.8
million in 1995. According to the Gallup Organization, from 1991 to 1995, the
percentage of the U.S. population using vitamin products has grown from 34% to
38%. Management believes that growth in vitamin product sales has been driven by
(i) national media attention regarding scientific research suggesting potential
health benefits from regular consumption of vitamin products; (ii) the aging of
the U.S population (because a larger portion of older age groups use vitamin
products); (iii) the growing practice of self-care and preventive medicine; and
(iv) the favorable effects and opportunities presented by the enactment and
implementation of the Dietary Supplement Health and Education Act of 1994, which
enhanced the ability of vitamin product manufacturers to communicate the
benefits and functions of their products and to introduce new products. See
"Business -- Industry Overview."
By leveraging its strengths and resources in vitamin product manufacturing
and distribution, Leiner has also become one of the nation's largest
manufacturers and marketers of private label non-prescription
3
<PAGE>
("over-the-counter") pharmaceuticals, such as analgesics, cough and cold
remedies and digestive aids ("OTC pharmaceuticals"). Leiner markets over 100 OTC
pharmaceutical products in approximately 1,600 SKUs. OTC pharmaceutical sales
represent approximately 17% of the Company's net sales. The Company's OTC
pharmaceuticals are sold as private label products as well as under the
Company's Pharmacist Formula-Registered Trademark- brand.
The Company's net sales have increased from $230.8 million in fiscal 1993 to
$338.4 million in fiscal 1996. During the same period, the Company's operating
income, excluding certain charges not expected to continue, has increased from
$9.7 million in fiscal 1993 to $20.9 million in fiscal 1996. Excluded charges in
fiscal 1993 include management fees of $321,000 paid to AEA Investors Inc.
("AEA") that are expected to be discontinued and costs of $3.7 million related
to the LHP Acquisition (as hereinafter defined). Excluded charges in fiscal 1996
include management fees of $350,000 paid to AEA and a charge of $4.7 million for
impairment of long-lived assets. See "Selected Consolidated Financial Data."
While experiencing this growth, the Company has invested approximately $20.2
million in a facilities consolidation, capacity expansion and equipment
modernization program with respect to its facilities in the western United
States (the "Manufacturing Program"). The Company has also invested $3.7 million
in modern equipment for its midwestern U.S. facilities.
MARKET LEADERSHIP
Leiner is the largest manufacturer and marketer of vitamins to the mass
market channel in the United States. This channel accounts for approximately 52%
of overall vitamin product sales in the United States, according to industry
sources. The leading role Leiner enjoys in the mass market channel allows the
Company to realize economies of scale while developing strong relationships with
the nation's leading mass market retailers. The Company attributes its
leadership in the overall vitamin products business to several competitive
advantages:
PRODUCT QUALITY. Leiner believes its reputation for quality is a critical
factor in customer purchase decisions, particularly for private label products,
which are marketed under the names of Leiner's mass market retailer customers.
The Company believes that in 1991 it became the first major vitamin product
supplier to manufacture its vitamin products to meet standards for dissolution
and disintegration in substantially the form later adopted by the United States
Pharmacopoeial Convention, Inc. (the "USP"). Leiner promotes its innovation in
this area under the Proven Release-Registered Trademark- and Release
Assured-Registered Trademark- trademarks. In 1994, the Company became the first
vitamin product manufacturer to sell vitamin products exhibiting the USP symbol.
In 1995, the Company became the first vitamin product manufacturer certified as
being in compliance with USP vitamin product manufacturing standards. The
Company's facilities were audited by an independent quality assurance laboratory
and received the laboratory's highest rating category. See "Business --
Government Regulation."
PRODUCT INNOVATION. Leiner has consistently introduced product innovations
based on scientific research and in response to consumer needs. It was the first
major vitamin product supplier to introduce such industry-wide innovations as
Proven Release-Registered Trademark- (standards for dissolution and
disintegration in substantially the form later adopted by the USP), Daily
Paks-Registered Trademark- (pre-sorted, prepackaged vitamin combinations), the
Naturalized-Registered Trademark- line (vitamin products free of preservatives
and artificial colors and flavors), Family Size packages (larger quantity
packages initially developed for warehouse clubs) and Phytograph-TM- herbal
testing (a process of testing herbal products to ensure that active constituents
contained in the products are in conformity to the natural source). The Company
also believes that its reputation for introducing new products only after
careful review of their safety, utility and commercial acceptance is a key
element of Leiner's strong relationships with mass market retailers and, in
turn, enhances Leiner's ability to introduce new products into the channels it
serves. Leiner has created a scientific advisory board (the "Scientific Advisory
Board") composed of scientific and regulatory authorities on nutrition and
related health fields to assist the Company in the evaluation of research and
new products. The Company believes that its Scientific Advisory Board is viewed
by Leiner's customers as a valuable resource.
CUSTOMER SERVICE, SALES AND MARKETING SUPPORT. The Company's long-standing
customer relationships are built upon its commitment to a high level of customer
service and have been recognized by "vendor of the year" awards from several of
the nation's leading retailers, including Albertson's, Revco, Rite-Aid, Safeway
and Target. The Company believes it has an excellent reputation for customer
service, which has
4
<PAGE>
been enhanced by consistently shipping complex orders complete and on time and
by providing electronic data interchange and vendor managed inventory services
to its customers. The Company, through its direct sales force and account
marketing managers, also provides retailers with category management services,
including integrated schedules of merchandising programs, advertising and
promotions, designed to maximize retailers' sales and profits. See "Business --
Customers, Sales and Marketing."
GRAPHICS AND PACKAGING EXPERTISE. Leiner designs and manages over 6,600
labels for approximately 265 customers. The Company believes that its resources
and expertise in label design and management are significant competitive
advantages in servicing the complex needs of its private label customers.
Leiner's in-house graphics capability enables the Company to deliver quick
turnaround times for private label design projects and allows its customers to
participate in the development and production of labeling and packaging.
Leiner's customers benefit from Leiner's significant investment in computer
design equipment, as well as in-house expertise in marketing strategies and
regulatory matters applicable to labels and packaging. The Company operates four
packaging facilities equipped with 32 packaging lines in order to satisfy the
complex demands and rapid response times required by its customers.
MODERN, EFFICIENT MANUFACTURING. The Company has the largest manufacturing
capacity in the vitamin product industry with two tableting facilities operating
to USP standards capable of producing over 13 billion tablets per year and four
packaging facilities containing 32 packaging lines, of which 25 are modern, high
speed lines. In fiscal 1994, Leiner began the Manufacturing Program, a
facilities consolidation, capacity expansion and equipment modernization program
designed to consolidate its western U.S. facilities into a smaller number of
larger, more efficient units, outfitted with modern tableting and packaging
equipment. The Manufacturing Program has allowed the Company to increase
capacity by adding modern, high speed equipment and to reduce variable
manufacturing costs by producing larger batch sizes and conducting longer
uninterrupted tableting and packaging runs. Through the consolidation of
packaging and distribution facilities, the Manufacturing Program has also
allowed the Company to reduce distribution costs in its western facilities.
Leiner's investment in the Manufacturing Program totaled approximately $20.2
million. Leiner expects to realize further improvements in efficiency as the
elements of the Manufacturing Program are further integrated into the Company's
operations. See "Business -- Manufacturing and Distribution."
COMPLEMENTARY NATURE OF VITAMIN PRODUCT AND OTC PHARMACEUTICAL
BUSINESSES. The Company's OTC pharmaceutical products are sold through the same
distribution channels and, for most products, manufactured by the same processes
as the Company's vitamin products. In addition, vitamin product and OTC
pharmaceutical purchase decisions are generally made by the same buyer at the
Company's customers. This overlap of channels and processes allows the Company
to enhance its strong position with mass market retailers and its manufacturing
and distribution expertise by (i) strengthening the relationship between the
Company and its customers by allowing the Company to offer "one-stop"
vitamin/OTC pharmaceutical shopping, (ii) allowing the Company to allocate its
fixed costs across a broader revenue base and (iii) offering a more diversified
source of revenue to fund future growth of the Company.
BUSINESS STRATEGY
The Company's business strategy is to use its competitive advantages to
increase its share of the growing overall vitamin product business and to
leverage its distribution, marketing and manufacturing strengths in vitamin
products to maximize profitability. In order to implement this strategy, the
Company intends to:
DEVELOP AND MARKET NEW PRODUCTS. The Company believes it is a leader in the
vitamin product industry in the responsible development of new products. The
Company intends to continue to develop new products and programs based on
scientific research and consumer needs. During fiscal 1997 the Company plans to
introduce a number of new nutritional supplements (including herbal products) as
line extensions that build on successful nutritional supplements previously
introduced. The Company believes that new nutritional supplement products offer
an important avenue of growth because (i) industry sales of nutritional
supplements have increased in the mass market channel at a compound annual rate
of approximately 38% from 1993 through 1995 and (ii) the Company's share of
nutritional supplement sales in the mass market channel is substantially lower
than the Company's share for vitamin and mineral sales and thus presents a
growth opportunity.
EXPAND VITAMIN PRODUCT SALES THROUGH NEW CHANNELS. The Company intends to
expand vitamin product sales through new channels such as warehouse club stores
(a new component of the mass market
5
<PAGE>
channel for vitamin products) and military commissaries. In addition to
continuing its efforts to increase its sales to warehouse club stores and to the
military through the development of specialized sales and marketing programs
designed to meet the unique needs of these channels, the Company intends to
focus on expanding its international sales (primarily in Asia, South America and
Canada) through increased investment of resources in international sales
development and by joining with its U.S. mass market customers in their
international expansion. To date, Leiner has obtained, or has pending
applications to obtain, trademark registrations or authorization for importation
and sale of its products in 44 countries outside of the United States. In
addition, Leiner has entered into a strategic alliance with Takeda Chemical
Industries, Ltd., one of Japan's largest pharmaceutical companies, regarding the
introduction, marketing and distribution of Your Life-Registered Trademark-
brand vitamin products in Japan.
EXPAND SALES AND DISTRIBUTION OF BRANDED PRODUCTS. Leiner's Your
Life-Registered Trademark- brand is one of the largest broadline brands of
vitamin products in the United States and accounted for approximately $66.5
million, or 20%, of the Company's net sales in fiscal 1996. Sales of Your
Life-Registered Trademark- brand vitamin products yield higher margins for the
Company than sales of comparable private label products. Nearly all of the
Company's product innovations (including Proven Release-Registered Trademark-,
Daily Paks-Registered Trademark-, Naturalized-Registered Trademark- vitamin
products, Family Size packages and Phytograph-TM- herbal testing) are initially
introduced under the Your Life-Registered Trademark- label. In 1993, Your
Life-Registered Trademark- was appointed the exclusive mass market vitamin
licensee of the United States Olympic Committee (through the 1996 Olympic games)
and has developed a marketing program based on this appointment. In order to
strengthen the Your Life-Registered Trademark- brand and expand the distribution
and sales of Your Life-Registered Trademark- vitamin products, Leiner is
increasing marketing and advertising expenditures in support of Your
Life-Registered Trademark- from approximately $8 million in fiscal 1996 to
approximately $10 million in fiscal 1997. An integral part of this expanded
marketing program will be a national radio campaign featuring endorsements by
well known personalities George Brett and Chuck Yeager.
SELECTIVE ACQUISITIONS. In addition to internally generated growth, Leiner
intends to expand sales and profitability through acquisitions of closely
related businesses and product lines. Leiner will focus on acquiring companies
that will add new distribution channels or additional brands to complement its
existing business. Although the Company is not currently considering any
acquisitions, it intends to review acquisitions in the future as opportunities
arise.
INCREASE OPERATING MARGINS. The Company's operating margin, excluding
certain charges not expected to continue, has increased from 4.2% in fiscal 1993
to 6.2% in fiscal 1996. Excluded charges in fiscal 1993 include management fees
of $321,000 paid to AEA that are expected to be discontinued and costs of $3.7
million related to the LHP Acquisition. Excluded charges in fiscal 1996 include
management fees of $350,000 paid to AEA and a charge of $4.7 million for
impairment of long-lived assets. In addition to continuing to control operating
costs, the Company intends to increase margins by shifting its product mix and
further reducing manufacturing costs.
Leiner intends to shift its product mix to increase the relative share of
higher margin products by (i) introducing new products, including herbal
products, in the nutritional supplement category, which typically earn higher
margins, (ii) developing new channels, such as international sales and warehouse
club stores, which sell a greater proportion of higher margin branded products
than the mass market generally and (iii) promoting the sales of Your
Life-Registered Trademark- branded products through increased marketing support.
As a result of the Manufacturing Program, Leiner has experienced significant
reductions in costs in its new and expanded facilities. The Company believes
similar opportunities to realize cost reductions exist with respect to its
midwestern U.S. facilities. The Company has decreased its operating expenses
(i.e., marketing, selling, distribution, general and administrative expenses) as
a percentage of net sales from 20.8% in fiscal 1993 to 18.5% in fiscal 1996,
illustrating the continuing focus of Leiner's management on controlling
operating costs. Although the Company expects operating expenses as a percentage
of net sales to increase slightly in fiscal 1997 due to the Company's decision
to increase marketing support of the Your Life-Registered Trademark- brand,
management intends to continue its focus on controlling costs.
Before making an investment in the Common Stock, prospective purchasers
should carefully consider certain matters set forth under "Risk Factors."
6
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered........................ 5,000,000 shares
Common Stock to be outstanding after the
Offering.................................. shares (1)
Use of proceeds............................. To (i) repay certain outstanding indebtedness
of LHP and (ii) redeem the outstanding
preferred stock of the Company. See "Use of
Proceeds."
Proposed NYSE symbol........................ LNR
</TABLE>
- -------------------
(1) Does not include shares of Common Stock issuable upon the exercise of
outstanding management stock options having a weighted average exercise
price of $ per share and does not include certain other options issued in
connection with the XCEL Acquisition (as hereinafter defined). As of the
date of this Prospectus, shares are issuable pursuant to currently
exercisable management stock options and no options issued in connection
with the XCEL Acquisition are exercisable. See "Management" and Notes 9 and
15 to the Company's Consolidated Financial Statements contained elsewhere in
this Prospectus.
7
<PAGE>
SUMMARY ACTUAL AND PRO FORMA DATA
On May 4, 1992, the Company, through a wholly owned subsidiary, acquired P.
Leiner Nutritional Products Corp. (the "Predecessor Company"), then a publicly
traded Delaware corporation (the "LHP Acquisition"). P. Leiner Nutritional
Products Corp. subsequently changed its name to Leiner Health Products Inc. On
May 22, 1992, the Company, through LHP, acquired XCEL Laboratories, Inc.
("XCEL"), an OTC pharmaceutical manufacturer (the "XCEL Acquisition"). Prior to
the LHP Acquisition, the Company did not have any significant assets or
liabilities and did not engage in any activities other than those incident to
the formation of the Company and the LHP and XCEL Acquisitions. See "The Company
- -- History." The following table presents summary actual and combined financial
data derived from the historical consolidated financial statements of the
Company for the periods subsequent to April 1992 and the Predecessor Company for
the periods prior to May 1992. The combined statement of operations data for the
year ended March 31, 1993 was derived from the audited historical consolidated
statement of operations of the Company for the eleven months ended March 31,
1993 together with the audited historical consolidated statement of operations
of the Predecessor Company for the month ended April 30, 1992. The LHP and XCEL
Acquisitions were accounted for under the purchase method of accounting and new
bases of accounting were established at the time of each acquisition.
Accordingly, the results of operations for the Predecessor Company are not
comparable to the results of operations for the Company.
The following table also presents summary pro forma statement of operations
data and summary pro forma balance sheet data. The summary pro forma statement
of operations data for the year ended March 31, 1996 gives effect to (i) the
Recapitalization, the issuance of shares of Common Stock offered hereby at an
assumed offering price of $15.00 per share and application of the estimated net
proceeds of $68.3 million as provided under "Use of Proceeds" as if such
transactions occurred at the beginning of the year, (ii) the elimination of the
long-lived asset impairment charge related to goodwill that arose as part of the
XCEL Acquisition, (iii) the elimination of certain management fees that are
expected to be discontinued and (iv) the elimination of actual interest incurred
in respect of indebtedness under the Credit Agreement (as hereinafter defined)
and the vendor revolving loan agreement. The summary as adjusted balance sheet
data for March 31, 1996 gives effect to the Recapitalization, the issuance of
the shares of Common Stock offered hereby at an assumed offering price of $15.00
per share and application of the estimated net proceeds as provided under "Use
of Proceeds" as if such transactions occurred on March 31, 1996. The pro forma
financial information does not necessarily reflect the results of operations or
the financial position of the Company that would have actually resulted had the
events referred to above or in the notes to the pro forma financial information
been consummated as of the date and for the period indicated and is not intended
to project the Company's financial position or results of operations for any
future period. The consolidated financial statements of the Company and notes
thereto are hereinafter referred to as the "Consolidated Financial Statements."
See "Capitalization," "Pro Forma Financial Information" and the Consolidated
Financial Statements contained elsewhere in this Prospectus.
8
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMBINED (1) COMPANY
--------------- ------------- -------------------------------
YEAR ENDED MARCH 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
--------------- ------------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 140,063 $ 230,847 $ 303,629 $ 314,730 $ 338,417
Cost of sales..................................... 94,183 171,691 226,045 236,613 253,272
--------------- ------------- --------- --------- ---------
Gross profit...................................... 45,880 59,156 77,584 78,117 85,145
Marketing, selling and distribution expenses...... 26,081 33,306 43,056 42,400 44,228
General and administrative expenses............... 10,328 14,693 16,476 17,302 18,344
Charge for long-lived asset impairment (2)........ -- -- -- -- 4,730
Amortization of goodwill.......................... 323 1,419 1,551 1,586 1,585
Other charges (3)................................. 958 3,981 2,367 1,044 482
--------------- ------------- --------- --------- ---------
Operating income.................................. 8,190 5,757 14,134 15,785 15,776
Interest expense, net............................. 915 5,791 6,974 9,010 9,924
--------------- ------------- --------- --------- ---------
Income (loss) before income taxes................. 7,275 (34) 7,160 6,775 5,852
Provision for income taxes........................ 3,521 999 3,631 3,333 4,686
--------------- ------------- --------- --------- ---------
Net income (loss)................................. $ 3,754 $ (1,033) $ 3,529 $ 3,442 $ 1,166
--------------- ------------- --------- --------- ---------
--------------- ------------- --------- --------- ---------
PRO FORMA STATEMENT OF OPERATIONS DATA (4):
Net sales......................................... $ 338,417
Operating income.................................. 20,856
Net income........................................ 8,867
Net income per share (5)..........................
Weighted average number of shares outstanding
(5)..............................................
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ 72,253 $ 76,654
Goodwill, net............................................................................. 52,386 52,386
Total assets.............................................................................. 251,314 254,584
Long-term debt............................................................................ 102,151 51,077
Redeemable preferred stock................................................................ 11,875 --
Total common shareholders' equity......................................................... 60,922 128,272
</TABLE>
- ------------------------
(1) The combined statement of operations data for the year ended March 31, 1993
represents the results of the Predecessor Company for the month ended April
30, 1992 together with the results of the Company for the eleven months
ended March 31, 1993.
(2) During fiscal 1996, the Company decided to significantly reduce the size of
its liquid OTC pharmaceuticals manufacturing business. Accordingly, the
Company determined that certain long-lived assets with a carrying amount of
$8,256,000 were impaired and wrote them down by $4,730,000 to their
estimated fair values. See Note 3 to the Consolidated Financial Statements
contained elsewhere in this Prospectus.
(3) Other charges for the year ended March 31, 1992 consist of certain
acquisition related costs, including fees and expenses paid to financial
advisors, legal advisors and others related to the LHP Acquisition. Other
charges for each of the years ended March 31, 1993 through March 31, 1996
include management fees paid to AEA during the respective periods that are
expected to be discontinued. Other charges also include costs related to
the LHP Acquisition and compensation expense arising from the sale of
shares of Common Stock to management in connection with the LHP Acquisition
in the year ended March 31, 1993, the write-off of deferred charges
associated with the refinancing of the Company's revolving credit facility
in the year ended March 31, 1994 and expenses incurred in connection with
the proposed public offering in the year ended March 31, 1995. Other
charges in the years ended March 31, 1994 through March 31, 1996 include
compensation expense arising from the granting of stock options. See Notes
6, 9 and 11 to the Consolidated Financial Statements contained elsewhere in
this Prospectus.
(4) Does not include the charge of $1.5 million expected to be incurred in
connection with the termination of the management agreement with AEA. Such
amount is anticipated to be paid in fiscal 1997.
(5) Pro forma net income per share is computed using the weighted average
number of common shares and common share equivalents outstanding during
fiscal 1996. Common share equivalents result from outstanding options to
purchase common stock. Pursuant to the requirements of the Securities and
Exchange Commission, common shares issued by the Company during the twelve
months immediately preceding the initial public offering, plus the number
of shares issuable upon exercise of stock options granted during this
period, have been included in the calculation of the shares used in
computing net income per share as if they were outstanding for all periods
presented (using the treasury stock method and the estimated public
offering price in calculating equivalent shares). Pro forma net income per
share also gives effect to the Recapitalization (as hereinafter defined)
and the issuance of 5,000,000 shares of Common Stock offered hereby as if
such transactions had occurred at the beginning of fiscal 1996.
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<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH BELOW AS WELL AS THE OTHER INFORMATION SET FORTH
IN THIS PROSPECTUS BEFORE MAKING AN INVESTMENT IN THE COMMON STOCK OFFERED
HEREBY.
EFFECT OF RESEARCH AND PUBLICITY ON VITAMIN PRODUCT BUSINESS
The Company believes the growth experienced in the last several years by the
vitamin product business is based largely on national media attention regarding
recent scientific research suggesting potential health benefits from regular
consumption of certain vitamin products. Various studies published since 1992 by
researchers at major universities have suggested an association between regular
consumption of vitamin products such as E, C and beta carotene (collectively,
"antioxidants") and a reduced risk of certain diseases. In addition, certain
other studies have reported that consumption of folic acid (a B vitamin) can aid
prevention of heart disease and neural tube birth defects. Such research has
been described in major medical journals, magazines, newspapers and television
programs. However, certain recent studies relating to certain antioxidants have
produced results contrary to the favorable indications of other prior and
subsequent studies. The scientific research to date is not conclusive, and there
can be no assurance of future favorable scientific results and media attention,
or the absence of unfavorable or inconsistent findings. In the event of future
unfavorable scientific results or media attention, the sales of vitamin products
could be adversely affected.
POTENTIAL FOR INCREASED GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the United States Food and Drug Administration (the
"FDA"), the United States Federal Trade Commission (the "FTC") and the United
States Consumer Product Safety Commission (the "CPSC"). The Company's activities
are also regulated by various agencies of the states, localities and countries
in which the Company's products are sold. In addition, the Company manufactures
and markets certain of its products in compliance with the guidelines
promulgated by voluntary standard organizations, such as the United States
Pharmacopoeial Convention, Inc. ("USP").
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was
enacted on October 25, 1994. DSHEA amends the Federal Food, Drug, and Cosmetic
Act to (i) define dietary supplements, (ii) improve the process for introducing
new dietary ingredients, (iii) permit "structure/function" claims for all
vitamin products, including herbal products and other nutritional supplements,
and (iv) permit the use of published literature in the sale of vitamin products.
The FDA has proposed, but not yet promulgated, regulations to implement the
labeling requirements of DSHEA. Since its adoption, certain aspects of DSHEA
have been subject to criticism as a result of the increased distribution of
certain products which have been linked to harmful effects, including death. A
possible effect of such criticism may be that regulations, when promulgated by
the FDA, may significantly limit certain beneficial provisions of DSHEA. The
Company cannot determine what effect regulations promulgated to implement DSHEA
will have on its business in the future. Such regulations are likely, among
other things, to require expanded or different labeling and could require
expanded documentation of the properties of certain products and scientific
substantiation regarding ingredients, product claims or safety. The Company
believes that it is in material compliance with all applicable laws.
In addition, the Company cannot predict whether new legislation or
regulation governing the Company's activities will be enacted by legislative
bodies or promulgated by agencies regulating the Company's activities, or what
the effect of any such legislation or regulation on the Company's business would
be. There can be no assurance that new legislation or regulation, including
changes to existing laws and regulations, will not adversely affect the
Company's results of operations or business. See "Business -- Government
Regulation."
10
<PAGE>
RELIANCE ON CERTAIN CUSTOMERS AND CERTAIN PRODUCTS
The Company has approximately 265 active customers. Sales to the Company's
largest customer accounted for approximately 21% of the Company's net sales for
fiscal 1996. The Company's second largest customer accounted for 13% of the
Company's net sales for fiscal 1996. Each of the Company's other major customers
accounted for less than 10% of the Company's net sales for fiscal 1996. The
Company's top ten customers in the aggregate accounted for approximately 67% of
the Company's net sales for fiscal 1996. Sales of vitamins C and E, in the
aggregate, accounted for approximately 33% of the Company's net sales in fiscal
1996. If several of the Company's major customers substantially reduced their
volume of purchases from the Company, or if sales of vitamin C or E were
substantially reduced, the Company's results of operations could be materially
adversely affected.
REALIZATION OF BENEFITS AND IMPROVED OPERATING MARGINS FROM MANUFACTURING
PROGRAM
Beginning in fiscal 1994, the Company implemented a major facilities
consolidation, capacity expansion and equipment modernization program with
respect to its western U.S. facilities, whereby the Company consolidated its
western facilities into a smaller number of larger units with modern equipment
and expanded capacity for the purpose of realizing certain cost savings and
manufacturing efficiencies. Through fiscal 1996, the Company has invested
approximately $20.2 million in the Manufacturing Program and $3.7 million in
modern equipment for its midwestern U.S. facilities. The Company believes
further cost reduction opportunities exist with respect to its midwestern
facilities and plans to invest up to an additional $10 million in low cost
manufacturing equipment and distribution enhancements with respect to these
facilities. While the Company believes that the Manufacturing Program will
reduce the Company's manufacturing and distribution costs, there can be no
assurance that the expected cost reductions will be realized or that the
Manufacturing Program will result in improved profit margins. A significant,
unexpected disruption during the expansion of the Company's Manufacturing
Program to the Company's midwestern facilities could have a material adverse
effect on the Company's results of operations.
POTENTIAL FOR INCREASED COMPETITION
The market for the Company's products is highly competitive. The Company
competes with other vitamin product and OTC pharmaceutical manufacturers. Among
other factors, competition among these manufacturers is based upon price. If one
or more manufacturers significantly reduce their prices in an effort to gain
market share, the Company's results of operations or market position could be
adversely affected. Certain of the Company's competitors, particularly
manufacturers of nationally advertised brand name products, are larger and have
resources substantially greater than those of the Company. In the future, one or
more of these companies could seek to compete more directly with the Company by
manufacturing private label products or by significantly lowering the prices of
their national brand products.
The Company sells substantially all of its vitamin products to mass market
retailers. Although the Company does not currently participate in other channels
such as health food stores, direct mail and direct sales, the Company's products
may face competition from such alternative channels as more customers utilize
these channels of distribution to obtain vitamin products. See "Business --
Competition."
RELIANCE ON CERTAIN SUPPLIERS; AVAILABILITY AND COST OF PURCHASED MATERIALS
The Company purchases from third party suppliers certain important
ingredients and products that the Company cannot manufacture. Although the
Company currently has supply arrangements with several suppliers of these
ingredients and products, an unexpected interruption of supply could cause the
Company's results of operations to be adversely affected. Two suppliers provided
approximately 15% and 12%, respectively, of the Company's materials purchased
during fiscal 1996; however, the Company's purchased materials are generally
available from numerous sources. No other single supplier accounts for more than
10% of the Company's material purchases.
The Company has not always in the past been, and may not in the future
always be, able to raise prices quickly enough to offset the effects of
increased purchased material costs.
11
<PAGE>
POSSIBILITY OF TRADE DRESS CLAIMS
The Company designs the packaging of certain of its branded products and its
customers' private label products to communicate to consumers which national
brand product is comparable to the product manufactured by the Company. Although
the Company designs its packaging to avoid infringing upon any proprietary
rights of national brand marketers and is not the subject of any legal actions
regarding infringement, there can be no assurance that the Company will not be
subject to such legal actions in the future.
LEVERAGE AND RESTRICTIONS ON DIVIDENDS
The Company incurred substantial indebtedness in connection with the
acquisitions of LHP and XCEL and will remain leveraged after the Offering. After
giving effect to the application of the net proceeds of the Offering as
discussed in "Use of Proceeds," the Company would have had outstanding, at March
31, 1996, no indebtedness under LHP's bank revolving credit agreement (the
"Credit Agreement"), which expires on June 30, 1998, $45.0 million of
indebtedness under a note agreement (the "Senior Note Agreement") with respect
to LHP's senior notes (the "Senior Notes") maturing on April 30, 2002 and an
aggregate of approximately $8.1 million of additional indebtedness. LHP is
required to make principal payments on the Senior Notes of $11.3 million on each
of April 30, 1999, 2000, 2001 and 2002. The Company would have had, at March 31,
1996, on a pro forma basis after giving effect to the Offering and the
application of the net proceeds thereof, a consolidated ratio of debt to total
capital of 0.41 to 1 and borrowing availability under the Credit Agreement of
$55.0 million. The Credit Agreement and the Senior Notes are guaranteed (the
"Guarantee") by PLI Holdings Inc., the Company's sole subsidiary (itself a
holding company) ("Holdings"), and are secured by a pledge of LHP's capital
stock. The Credit Agreement and the Senior Note Agreement contain restrictive
financial and operating covenants and prohibitions. LHP's leverage and the
restrictions under the Credit Agreement and the Senior Note Agreement require a
substantial portion of LHP's cash flow to be dedicated to service its
indebtedness, may impair LHP's ability to finance its future operations and
capital needs and may limit the Company's flexibility in responding to changing
business and economic conditions and to business opportunities.
The Company is a holding company with no operations or assets other than the
stock of LHP, which the Company holds indirectly through Holdings. As a result,
the Company's ability to pay dividends on its Common Stock will be dependent
upon the ability of LHP and Holdings to pay cash dividends or make other
distributions. The Credit Agreement, the Senior Note Agreement and the Guarantee
contain provisions that currently prohibit LHP and Holdings from declaring and
paying cash dividends and other distributions to holders of Common Stock. The
Company does not intend to pay dividends in the foreseeable future. See "Use of
Proceeds," "Dividend Policy," "Capitalization" and "Description of Certain
Indebtedness."
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's operations, economic performance and financial condition, including,
among other things, the Company's growth strategies and the integration of
elements of the Manufacturing Program into the Company's existing operations.
These statements are based on the Company's expectations and are subject to
various risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors, including those
identified under this "Risk Factors" section and elsewhere in this Prospectus.
LITIGATION INVOLVING PRODUCTS CONTAINING L-TRYPTOPHAN
Like many manufacturers, distributors, suppliers, importers and retailers of
L-Tryptophan or products containing L-Tryptophan, the Company has been named as
a defendant in lawsuits brought in federal or state courts seeking compensatory
and, in some cases, punitive damages for alleged personal injuries resulting
from the ingestion of certain products containing L-Tryptophan. As of May 13,
1996, the Company and/or certain of its customers had been named in
approximately 650 such lawsuits, of which approximately 640 have been settled.
As a result of a defense and indemnification agreement with one of its
suppliers, to date the Company has not been required to make any payments toward
the cost of defense or settlement of any of these lawsuits. While management of
the Company, after consultation with counsel, does not expect that the Company
will be required to make any material payments in connection with the resolution
of any
12
<PAGE>
remaining cases by virtue of the defense and indemnification agreement, there
can be no assurance that the Company will not be required to make such a payment
or that more cases will not be brought against the Company in the future. See
"Business -- Legal Proceedings and Product Liability."
SHARES ELIGIBLE FOR FUTURE SALE
After the Offering, it is expected that a public market will exist for the
Common Stock, thus providing liquidity for the holdings of existing
stockholders. Substantially all of the shares of Common Stock held by existing
stockholders will be eligible for sale pursuant to Rule 144 after the Offering.
Certain existing stockholders have registration rights with respect to these
shares of Common Stock. The exercise by certain existing stockholders of their
registration rights or the sales of substantial amounts of Common Stock in the
public market after the Offering pursuant to Rule 144 under the Securities Act
of 1933, as amended, or otherwise, or the perception that such sales could
occur, may adversely affect prevailing market prices of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities. The Company and each of its stockholders, however,
have agreed not to offer, sell, contract to sell or otherwise dispose of any
shares of Common Stock, or any securities convertible into or exercisable or
exchangeable for Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated, on behalf of the representatives of the Underwriters,
subject to certain exceptions. See "Principal Stockholders" and "Shares Eligible
for Future Sale."
DILUTION OF PURCHASERS OF SHARES
Persons purchasing shares of Common Stock will incur immediate and
substantial dilution in net tangible book value per share. See "Dilution."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Common Stock.
Although the Company intends to apply for listing of the Common Stock on the New
York Stock Exchange (the "NYSE"), there can be no assurance that an active
trading market in the Common Stock will develop. The initial public offering
price per share will be determined by negotiation between the Company and the
Underwriters and may not be indicative of the market price for the Common Stock
following the Offering. See "Underwriting."
RESTRICTIONS ON CHANGE OF CONTROL
A change of control of the Company will result in a default under the Credit
Agreement and obligate the Company to redeem the Senior Notes (with accrued
interest and a premium) of any holder of Senior Notes that does not consent to
the change of control. Under the Credit Agreement and the Senior Note Agreement,
a change of control is defined to mean, among other things, any event in which
(1) any entity or group of related entities, other than AEA, its current or
future employees, shareholders, directors and officers (collectively, the "AEA
Persons") (i) gains, or enters into any agreement with the Company or any of its
direct or indirect shareholders pursuant to which such entity or group of
related entities will gain, beneficial ownership of 30% or more of the
outstanding voting stock of the Company after an initial public offering of the
common stock of the Company as a result of which the AEA Persons beneficially
own less than a majority in interest of the outstanding voting stock of the
Company; or (ii) constitutes a majority of the board of directors of the Company
at a time when the AEA Persons beneficially own less than a majority in interest
of the outstanding voting stock of either the Company or (2) an entity, other
than an entity controlled by the AEA Persons, acquires or enters into any
agreement to acquire all or substantially all of the assets of Leiner Health
Products Group Inc., Holdings or LHP. The Offering will not result in a change
of control under either the Credit Agreement or the Senior Note Agreement. See
"Description of Certain Indebtedness."
The Company's bylaws contain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, proxy contest or
otherwise. These provisions include advance notice procedures for stockholders
to nominate candidates for election as directors of the Company and for
stockholders to submit proposals for consideration at stockholders' meetings. In
addition, the Company is subject to section 203 of the Delaware General
Corporation Law (the "DGCL"), which limits transactions between a publicly held
company and "interested stockholders" (generally those stockholders who,
together
13
<PAGE>
with their affiliates and associates, own 15% or more of the Company's
outstanding capital stock). This provision of the DGCL also may have the effect
of deterring certain potential acquisitions of the Company. See "Description of
Capital Stock."
A change of control of the Company will accelerate the vesting of options of
the Company issued to management.
RELIANCE ON KEY MANAGEMENT
The operation of the Company requires managerial and operational expertise.
The Company does not have employment contracts with any of its executive
officers. If, for any reason, key personnel do not continue to be active in the
Company's management, operations could be adversely affected. After the
Offering, the Company's executive officers will own, as a group, at least
shares of Common Stock of the Company and have options to purchase
approximately additional shares of Common Stock, representing on a fully
diluted basis a % aggregate ownership interest in the Company's
shareholders' equity.
14
<PAGE>
THE COMPANY
GENERAL
Leiner is the nation's largest manufacturer and marketer of vitamin
products. Leiner markets over 320 vitamin products in more than 4,600 SKUs. The
Company estimates that it has a 50% share of private label sales (three times as
large as its largest competitor) and a 20% share of overall vitamin product
sales through mass market retailers in the United States. Vitamin product sales
represent approximately 79% of the Company's net sales.
The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets. The Company's vitamin product customers are primarily
mass market retailers and include the country's 20 largest drug store chains
(including Walgreen, American Stores, Eckerd, CVS, Rite-Aid and Revco), 18 of
the 20 largest supermarket chains (including Safeway, Winn-Dixie, Albertson's,
A&P and Lucky Stores), the 10 largest mass merchandising chains (including
Wal-Mart, Target, Kmart and Venture) and the two largest warehouse club chains
(Sam's and PriceCostco) (such retailer categories are referred to herein,
collectively, as "mass market"). The Company's vitamin products are sold as
private label products, as well as under its own brand, Your
Life-Registered Trademark-, one of the nation's leading broadline vitamin
brands. The Company estimates that private label vitamin products account for
approximately 38% of total vitamin product sales by mass market retailers and
account for approximately 59% of Leiner's total net sales.
By leveraging its strengths and resources in vitamin product manufacturing
and distribution, Leiner has also become one of the nation's largest
manufacturers and marketers of private label OTC pharmaceuticals, such as
analgesics, cough and cold remedies and digestive aids. Leiner markets over 100
OTC pharmaceutical products in approximately 1,600 SKUs. OTC pharmaceutical
sales represent approximately 17% of the Company's net sales. The Company's OTC
pharmaceuticals are sold as private label products as well as under the
Company's Pharmacist Formula-Registered Trademark- brand.
HISTORY
The Company is the ultimate successor to the vitamin division of P. Leiner &
Sons America, which division was founded in 1973. In 1979, the vitamin division
was purchased by management and Booker plc ("Booker").
The Company was incorporated under the laws of the State of Delaware in 1987
by AEA. In October 1991, Booker, the majority shareholder of the Predecessor
Company, resolved to sell its holdings in the Predecessor Company (then a
publicly traded company). Shortly thereafter, the Company, viewing the
Predecessor Company as an attractive investment opportunity, entered into a
merger agreement to acquire the Predecessor Company. On May 4, 1992, the Company
acquired the Predecessor Company. The Predecessor Company subsequently changed
its name to Leiner Health Products Inc.
The LHP Acquisition was arranged by AEA, working together with senior
management of the Company. The total purchase price for the LHP Acquisition was
approximately $90.9 million and was funded by the issuance of common stock for
$42.7 million, the issuance of the Senior Notes for $45.0 million, $0.5 million
drawn under a revolving bank credit facility and $2.7 million of assumed debt.
As a result of the LHP Acquisition, the long-term debt supported by the
operations of the Predecessor Company increased from approximately $14 million
to $45 million, resulting in a significantly increased cost of debt service.
Prior to the LHP Acquisition, the Company did not have any significant
assets or liabilities and did not engage in any activities other than those
incident to the formation of the Company, the LHP Acquisition and the XCEL
Acquisition described below. The Company is a holding company with no operations
or assets other than the stock of LHP. The Company holds its LHP stock through
the Company's sole direct subsidiary, Holdings, itself a holding company. See
"Certain Transactions," "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Acquisitions" and "Description of Certain
Indebtedness."
On May 22, 1992, the Company, through LHP, acquired privately held XCEL, a
major private label OTC pharmaceutical manufacturer, for a total purchase price
of approximately $24.7 million (including debt
15
<PAGE>
incurred and assumed), plus contingent earn-out payments that are available only
through fiscal 1997 and that the Company does not expect will be payable (the
"XCEL Acquisition"). The contingent earn-out payments (and only such payments)
may be used to exercise certain options to purchase common stock of the Company,
which options were granted in connection with the XCEL Acquisition (the "XCEL
Earn-Out Options"). See Note 9 to the Consolidated Financial Statements
contained elsewhere in this Prospectus.
Substantially all of the outstanding capital stock of the Company is owned
by AEA, its current and former management and its shareholder-investors
(collectively, the "AEA Participants") and management of the Company (the
"Management Investors"). After the Offering, the AEA Participants and the
Management Investors will own approximately % and %, respectively, of the
shares of Common Stock, taking into account outstanding management stock options
( % and %, respectively, if the Underwriters' over-allotment option is
exercised in full). The Offering does not include the sale of any shares of
Common Stock by existing shareholders of the Company.
On May 4, 1994, the Company's name was changed from PLI Investors Inc. to
Leiner Health Products Group Inc. The principal executive offices of the Company
are located at 901 East 233rd Street, Carson, California 90745-6204, and the
telephone number is (310) 835-8400.
RECAPITALIZATION
In connection with and subject to completion of the Offering, the Company
will effect a common stock conversion and a common stock split (collectively,
the "Recapitalization"). Prior to the Recapitalization, the Company had three
classes of common stock outstanding. Immediately prior to the closing of the
Offering, all outstanding shares of such common stock will be converted to a
single class of common stock on a one-for-one basis, and the outstanding shares
of common stock will be adjusted for a -for-1 stock split, resulting in
shares of Common Stock outstanding immediately prior to the Offering. The
Company will apply a portion of the net proceeds of the Offering to repay
certain indebtedness and to redeem all of its Redeemable Preferred Stock. See
"Use of Proceeds."
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USE OF PROCEEDS
The net proceeds to be received by the Company from the Offering are
estimated to be approximately $68.3 million (approximately $78.7 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $15.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The Company intends to use the net proceeds it receives from the Offering as
follows: (i) to repay approximately $51.6 million of outstanding indebtedness of
the Company, including under (a) the Credit Agreement (approximately $43.3
million, including accrued interest) and (b) the vendor revolving loan agreement
(approximately $8.3 million, including accrued interest), (ii) to redeem all of
the outstanding shares of the Company's 13% payment in kind, exchangeable
redeemable series A preferred stock (the "Redeemable Preferred Stock"), which
are owned by AEA for an aggregate amount of approximately $11.9 million
(including accrued dividends) and (iii) to pay to AEA a $1.5 million fee in
connection with the termination of its management agreement with the Company.
See "Description of Certain Indebtedness" and "Certain Transactions." The
balance of approximately $3.3 million will be used for general corporate
purposes. Following the repayment of indebtedness under the Credit Agreement,
$55 million will be available for reborrowing for general corporate purposes,
including among other things, continued investment in low cost manufacturing
equipment and distribution enhancements.
On March 31, 1996, $42.8 million was outstanding under the Credit Agreement
and the weighted average interest rate on the borrowings under the Credit
Agreement was 8.2%. The Credit Agreement matures on June 30, 1998. On March 31,
1996, $8.3 million was outstanding under the vendor revolving loan agreement and
the interest rate on the borrowings under the agreement was 5.5%. The vendor
revolving loan agreement matures on May 31, 1997. The Redeemable Preferred Stock
pays cumulative dividends at a rate of 13% per annum.
DIVIDEND POLICY
Since the LHP Acquisition, the Company has not declared or paid dividends on
its common stock. The Company does not anticipate paying dividends in the
foreseeable future. As a holding company, the ability of the Company to pay
dividends will depend on the receipt of dividends or other payments from the
Company's subsidiaries. The Credit Agreement, the Senior Note Agreement and
related guarantees currently prohibit LHP and Holdings from declaring and paying
cash dividends and other distributions to holders of Common Stock. See
"Description of Certain Indebtedness." Any determinations to pay cash dividends
in the future will be dependent upon the Company's results of operations,
financial condition, contractual and legal restrictions and other factors deemed
relevant at that time by the Company's board of directors.
17
<PAGE>
DILUTION
At March 31, 1996, the net tangible book value of the Company (total assets
less intangible assets, total liabilities and outstanding preferred stock) was
$8.5 million or $ per share of Common Stock, determined by dividing the net
tangible book value of the Company by the number of shares of Common Stock
outstanding at March 31, 1996.
After giving effect, at March 31, 1996, to the sale by the Company of the
shares of Common Stock in the Offering at an assumed initial public offering
price of $15.00 per share and the use of the net proceeds thereof as described
in "Use of Proceeds", but without adjustment for any other change subsequent to
such date, the pro forma net tangible book value of the Company would have been
approximately $75.9 million, or $ per share of Common Stock. This represents
an immediate increase in net tangible book value of $ per share of Common
Stock to existing common stockholders and an immediate dilution of $ per
share of Common Stock to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $ 15.00
Net tangible book value per share at March 31, 1996............
Increase in net tangible book value per share attributable to
the Offering..................................................
Pro forma net tangible book value per share after the
Offering......................................................
Dilution per share to new investors in the Offering............
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1996,
after giving effect to the Recapitalization, the total consideration paid to the
Company by the existing stockholders, the total consideration paid by the new
investors purchasing Common Stock in the Offering and the average price per
share paid by the existing stockholders and by the new investors purchasing
Common Stock in the Offering (based on an assumed initial public offering price
of $15.00 per share).
<TABLE>
<CAPTION>
NUMBER OF SHARES AMOUNT OF TOTAL
PURCHASED CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PERCENTAGE AND PER SHARE DATA)
Existing stockholders.......................... % $ 52,733 41.3% $
New investors in the Offering.................. 5,000 75,000 58.7 15.00
--------- ----- ---------- ----- -----------
Total...................................... 100.0% $ 127,733 100.0% $
--------- ----- ---------- ----- -----------
--------- ----- ---------- ----- -----------
</TABLE>
The foregoing tables assume no exercise of any outstanding options to
purchase Common Stock. At March 31, 1996, there were outstanding management
options to purchase shares of Common Stock at a weighted average exercise
price of $ per share. See "Management -- Stock Option Plan" and "Certain
Transactions." In addition, the table assumes no exercise of the XCEL Earn-Out
Options, which are not currently exercisable. See "The Company -- History."
18
<PAGE>
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of the
Company at March 31, 1996 and the as adjusted consolidated capitalization of the
Company at March 31, 1996, both of which are adjusted to give effect to the
Recapitalization. In addition, as adjusted amounts are adjusted to reflect (i)
the sale of 5,000,000 shares of Common Stock pursuant to the Offering and (ii)
the application of the estimated net proceeds of the Offering as described in
"Use of Proceeds." The information presented below should be read in conjunction
with the Consolidated Financial Statements and the related notes thereto
contained elsewhere in this Prospectus and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PAR VALUE DATA)
<S> <C> <C>
Current portion of long-term debt........................................................ $ 2,023 $ 2,023
---------- -----------
---------- -----------
Long-term debt, excluding current portion:
Credit Agreement (1)................................................................... $ 42,803 $ --
Senior Note Agreement.................................................................. 45,000 45,000
Other.................................................................................. 14,348 6,077
---------- -----------
Total long-term debt, excluding current portion...................................... 102,151 51,077
Redeemable preferred stock:
Authorized shares -- 30,000 actual, none as adjusted
Issued and outstanding shares -- 12,728 actual, none as adjusted (2)................... 11,875 --
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized shares -- none actual, as adjusted
Issued and outstanding shares -- none actual, none as adjusted....................... -- --
Common stock, $.01 par value:
Authorized shares -- actual, as adjusted
Issued and outstanding shares -- actual, as adjusted (3)..................... 7
Capital in excess of par value......................................................... 54,347
Retained earnings...................................................................... 6,568 6,568
---------- -----------
Total shareholders' equity........................................................... 60,922 128,272
---------- -----------
Total capitalization............................................................... $ 174,948 $ 179,349
---------- -----------
---------- -----------
</TABLE>
- -------------------
(1) As of March 31, 1996, actual and as adjusted amounts available to the
Company pursuant to the terms of the Credit Agreement were approximately
$12.2 million and $55.0 million, respectively.
(2) The Redeemable Preferred Stock accumulates dividends at the rate of 13% per
annum and is redeemable at $900 per share.
(3) Does not include shares of Common Stock issuable upon the exercise of
outstanding management stock options having a weighted average exercise
price of $ per share and does not include certain other options issued in
connection with the XCEL Acquisition. As of the date of this Prospectus,
shares are issuable pursuant to currently exercisable management stock
options and no options issued in connection with the acquisition of XCEL are
exercisable. See "Management" and Note 9 to the Company's Consolidated
Financial Statements contained elsewhere in this Prospectus.
19
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information was
derived from the historical financial data of the Company contained elsewhere in
this Prospectus. The pro forma statement of operations for the year ended March
31, 1996 gives effect to (i) the Recapitalization, the issuance of the shares of
Common Stock offered hereby at an assumed offering price of $15.00 per share and
the application of the estimated net proceeds as provided under "Use of
Proceeds" as if such transactions occurred at the beginning of the year, (ii)
the elimination of the long-lived asset impairment charge related to goodwill
that arose as part of the XCEL Acquisition, (iii) the elimination of certain
management fees that are expected to be discontinued and (iv) the elimination of
actual interest incurred in respect of indebtedness under the Credit Agreement
and the vendor revolving loan agreement. The pro forma condensed balance sheet
at March 31, 1996 gives effect to the Recapitalization, the issuance of the
shares of Common Stock offered hereby and the application of the estimated net
proceeds as provided under "Use of Proceeds," as if the Offering occurred on
March 31, 1996.
The pro forma financial information does not necessarily reflect the results
of operations or the financial position of the Company which would have actually
resulted had the events referred to above or in the notes to the pro forma
financial information been consummated as of the date and for the period
indicated and is not intended to project the Company's financial position or
results of operations for any future period. The pro forma financial information
should be read in conjunction with the notes thereto and the Consolidated
Financial Statements contained elsewhere in this Prospectus.
20
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1996
----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA(5)
---------- ------------- -------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales............................................................... $ 338,417 $ 338,417
Cost of sales........................................................... 253,272 253,272
---------- -------------
Gross profit............................................................ 85,145 85,145
Marketing, selling and distribution expenses............................ 44,228 44,228
General and administrative expenses..................................... 18,344 18,344
Charge for long-lived asset impairment.................................. 4,730 $ (4,730)(1) --
Amortization of goodwill................................................ 1,585 1,585
Other charges........................................................... 482 (350)(1) 132
---------- -------------
Operating income........................................................ 15,776 20,856
Interest expense, net................................................... 9,924 (4,601)(2) 5,323
---------- -------------
Income before income taxes.............................................. 5,852 15,533
Provision for income taxes.............................................. 4,686 1,980(3) 6,666
---------- ------------- -------------
Net income.............................................................. $ 1,166 $ 7,701 $ 8,867
---------- ------------- -------------
---------- ------------- -------------
Net income per share (4)................................................
Weighted average number of shares outstanding (4).......................
</TABLE>
- -------------------
(1) To eliminate (i) the long-lived asset impairment charge related to goodwill
that arose as part of the XCEL Acquisition and (ii) management fees paid to
AEA that are expected to be discontinued.
(2) To eliminate actual interest expense incurred in respect of indebtedness
under the Credit Agreement and the vendor revolving loan agreement to be
repaid using a portion of the net proceeds of the Offering as provided in
"Use of Proceeds."
(3) To record the income tax effect, at a combined federal and state tax rate of
40%, of the pro forma adjustments, except for the long-lived asset
impairment charge, which is not deductible for income tax purposes.
(4) Pro forma net income per share is computed, after giving effect to the
Recapitalization, using the weighted average number of common shares and
common share equivalents outstanding during fiscal 1996. Common share
equivalents result from outstanding options to purchase common stock.
Pursuant to the requirements of the Securities and Exchange Commission,
common shares issued by the Company during the twelve months immediately
preceding the initial public offering, plus the number of shares issuable
upon exercise of stock options granted during this period, have been
included in the calculation of the shares used in computing pro forma net
income per share as if they were outstanding for all periods presented
(using the treasury stock method and the estimated public offering price in
calculating equivalent shares). Pro forma net income per share also gives
effect to the issuance of 5,000,000 shares of Common Stock offered hereby as
if such transaction had occurred at the beginning of fiscal 1996.
(5) The pro forma statement of operations does not include the charge of $1.5
million expected to be incurred in connection with the termination of the
management agreement with AEA. Such amount is anticipated to be paid in
fiscal 1997.
21
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
---------- ------------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
ASSETS
Current assets............................................................ $ 145,302 $ 68,250(1) $ 148,572
(51,605)(2)
(11,875)(3)
(1,500)(4)
Property, plant and equipment, net........................................ 41,864 41,864
Goodwill, net............................................................. 52,386 52,386
Other noncurrent assets................................................... 11,762 11,762
---------- ------------- -----------
Total assets.......................................................... $ 251,314 $ 3,270 $ 254,584
---------- ------------- -----------
---------- ------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt......................................... $ 2,023 -- $ 2,023
Other current liabilities................................................. 71,026 $ (531)(2) 69,895
(600)(4)
---------- -----------
Total current liabilities............................................. 73,049 71,918
Long-term debt............................................................ 102,151 (51,074)(2) 51,077
Deferred income taxes..................................................... 2,202 2,202
Other noncurrent liabilities.............................................. 1,115 1,115
Redeemable preferred stock................................................ 11,875 (11,875)(3) --
Common shareholders' equity............................................... 60,922 68,250(1) 128,272
(900)(4)
---------- ------------- -----------
Total liabilities and shareholders' equity............................ $ 251,314 $ 3,270 $ 254,584
---------- ------------- -----------
---------- ------------- -----------
</TABLE>
- -------------------
(1) Reflects the estimated net proceeds from the Offering as provided in "Use of
Proceeds."
(2) Reflects the repayment of indebtedness under the Credit Agreement and the
vendor revolving loan agreement together with related accrued interest
thereon with a portion of the net proceeds of the Offering.
(3) Reflects the payment for redemption of the Redeemable Preferred Stock,
including accrued dividends of approximately $496,000 as of March 31, 1996.
(4) Reflects the payment of $1.5 million for the expected termination of a
management agreement with AEA, net of related income tax effect.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data derived
from the historical consolidated financial statements of the Company for the
periods subsequent to the LHP Acquisition (which occurred in May 1992) and the
Predecessor Company for the periods prior to the LHP Acquisition. The LHP
Acquisition and the XCEL Acquisition were accounted for under the purchase
method of accounting and new bases of accounting were established at the time of
each such acquisition. Accordingly, the results of operations for the
Predecessor Company are not comparable to the results of operations for the
Company. See "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Consolidated Financial
Statements and related notes thereto contained elsewhere in this Prospectus.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMBINED (1) COMPANY
----------- ------------ -------------------------------
YEAR ENDED MARCH 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales.......................................... $ 140,063 $ 230,847 $ 303,629 $ 314,730 $ 338,417
Cost of sales...................................... 94,183 171,691 226,045 236,613 253,272
----------- ------------ --------- --------- ---------
Gross profit....................................... 45,880 59,156 77,584 78,117 85,145
Marketing, selling and distribution expenses....... 26,081 33,306 43,056 42,400 44,228
General and administrative expenses................ 10,328 14,693 16,476 17,302 18,344
Charge for long-lived asset impairment (2)......... -- -- -- -- 4,730
Amortization of goodwill........................... 323 1,419 1,551 1,586 1,585
Other charges (3).................................. 958 3,981 2,367 1,044 482
----------- ------------ --------- --------- ---------
Operating income................................... 8,190 5,757 14,134 15,785 15,776
Interest expense, net.............................. 915 5,791 6,974 9,010 9,924
----------- ------------ --------- --------- ---------
Income (loss) before income taxes.................. 7,275 (34) 7,160 6,775 5,852
Provision for income taxes......................... 3,521 999 3,631 3,333 4,686
----------- ------------ --------- --------- ---------
Net income (loss).................................. $ 3,754 $ (1,033) $ 3,529 $ 3,442 $ 1,166
----------- ------------ --------- --------- ---------
----------- ------------ --------- --------- ---------
</TABLE>
BALANCE SHEET DATA (4):
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY COMPANY
----------- ---------------------------------------------
MARCH 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
----------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Working capital.................................... $ 35,695 $ 49,458 $ 63,595 $ 61,690 $ 72,253
Goodwill, net...................................... 7,511 60,467 60,239 58,698 52,386
Total assets....................................... 88,747 200,291 244,781 257,361 251,314
Long-term debt..................................... 8,717 72,599 95,249 102,572 102,151
Redeemable preferred stock......................... -- -- 9,293 10,490 11,875
Total common shareholders' equity.................. 45,280 54,840 58,634 61,011 60,922
</TABLE>
- ---------------------
(1) The combined statement of operations data for the year ended March 31, 1993
represents the results of operations of the Predecessor Company for the
month ended April 30, 1992 together with the results of operations of the
Company for the eleven months ended March 31, 1993.
(2) During fiscal 1996, the Company decided to significantly reduce the size of
its liquid OTC pharmaceutical manufacturing business. Accordingly, the
Company determined that certain long-lived assets with a carrying amount of
$8,256,000 were impaired and wrote them down by $4,730,000 to their
estimated fair value. See Note 3 to the Consolidated Financial Statements
contained elsewhere in this Prospectus.
(3) Other charges for the year ended March 31, 1992 consist of certain
acquisition related costs, including fees and expenses paid to financial
advisors, legal advisors and others related to the LHP Acquisition. Other
23
<PAGE>
charges for each of the years ended March 31, 1993 through March 31, 1996
include management fees paid to AEA during the respective periods that are
expected to be discontinued. Other charges also include costs related to the
LHP Acquisition and compensation expense arising from the sale of shares of
Common Stock to management in connection with the LHP Acquisition in the
year ended March 31, 1993, the write-off of deferred charges associated with
the refinancing of the Company's revolving credit facility in the year ended
March 31, 1994 and expenses incurred in connection with the proposed public
offering in the year ended March 31, 1995. Other charges in the years ended
March 31, 1994 through 1996 include compensation expense arising from the
granting of stock options. See Notes 6, 9 and 11 to the Consolidated
Financial Statements contained elsewhere in this Prospectus.
(4) As of May 4, 1992, the Company acquired all of the outstanding shares of
stock of the Predecessor Company and merged the Predecessor Company into the
Company. The balance sheet data reflect the effects of the allocation of the
purchase price to the net assets acquired, on the basis of their estimated
fair values at the date of the acquisition. The data with respect to the
Predecessor Company (prior to the acquisition by the Company) are based on
historical consolidated financial statements of the Predecessor Company,
which reflect the Predecessor Company's historical cost basis in its assets
and liabilities.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements contained elsewhere in this Prospectus. The Company's fiscal year
ends on March 31 of each year. References herein to a "fiscal" year refer to the
Company's fiscal year ended March 31 in the calendar year indicated (e.g.,
references to fiscal 1996 are references to the Company's fiscal year ended
March 31, 1996).
ACQUISITIONS
The LHP Acquisition, arranged by AEA working with senior management of the
Company, was consummated on May 4, 1992. The total purchase price was
approximately $90.9 million, including debt incurred and assumed. The Company
acquired privately held XCEL, a major private label OTC pharmaceutical
manufacturer, on May 22, 1992, for a total purchase price of $24.7 million, plus
contingent earn-out payments not to exceed $2.5 million in the aggregate. The
XCEL Acquisition was financed with new and existing indebtedness.
The LHP and XCEL Acquisitions were accounted for under the purchase method
of accounting and new bases of accounting were established at the time of the
acquisitions. The historical data of the Predecessor Company and the historical
data of the Company are not comparable in all respects as a result of, among
other things, the effects of using the purchase accounting method to account for
the LHP and XCEL Acquisitions, the interest expense associated with the
indebtedness incurred in connection with the LHP and XCEL Acquisitions and the
recording by the Company of certain nonrecurring charges in connection with the
LHP Acquisition.
GENERAL
The Company is the nation's largest manufacturer and marketer of vitamin
products and one of the nation's largest manufacturers and marketers of private
label OTC pharmaceuticals. The Company distributes its products to the nation's
leading mass market retailers. Since the LHP Acquisition in May 1992, the
Company has pursued a strategy designed to increase its share of the growing
vitamin product business and lower its manufacturing costs. To do so, the
Company has invested in modern, high-speed equipment and consolidated certain of
its packaging and distribution facilities. As a result of these efforts, the
XCEL Acquisition and the growth in the markets for the Company's products, the
Company's net sales increased from $140 million in fiscal 1992 to approximately
$338 million in fiscal 1996. XCEL sales totaled $47.5 million in fiscal 1993.
The Company's operating income, excluding certain charges not expected to
continue, has increased from $9.7 million in fiscal 1993 to $20.9 million in
fiscal 1996. Excluded charges in fiscal 1993 include management fees of $321,000
paid to AEA that are expected to be discontinued and costs of $3.7 million
related to the LHP Acquisition. Excluded charges in fiscal 1996 include
management fees of $350,000 paid to AEA and a charge of $4.7 million for
impairment of long-lived assets. There can be no assurance that the Company's
strong historical growth will be continued.
Throughout fiscal 1993 and fiscal 1994, the Company's growth was fueled by
favorable publicity of scientific research evidencing the health benefits of
vitamin product consumption. During fiscal 1994 and fiscal 1995, the Company
took its initial step to build capacity and lower its manufacturing costs by
making significant investments in its western U.S. tableting operation and
consolidating two western U.S. packaging plants and one distribution facility
into a single facility (for which expenditures totaled $20.2 million through
fiscal 1996).
In the first quarter of fiscal 1995, however, a study which reached a
negative conclusion as to the health benefits of consumption of certain
antioxidants was released and received significant media attention. The release
of this study, referred to as the "Finnish Smokers Study," negatively impacted
short-term consumer demand for certain vitamin products, including beta
carotene. In addition, retailers reacted by promptly reducing the promotion of
most major vitamin categories, compounding the negative impact on consumer
demand. Moreover, many retail chains that had heavily invested in large
inventories to support anticipated strong demand for vitamin products also
reacted by aggressively reducing their inventory levels.
25
<PAGE>
The Company, in recognition of this downturn in sales, halted its
manufacturing restructuring plan and focused on the development of a program to
downsize, including the closure of a tableting plant and the elimination of
approximately 200 tableting and packaging positions. The Company's western U.S.
tableting and packaging facilities, designed to operate most efficiently on
higher volumes, were negatively affected by this downturn, which lead the
Company to operate these facilities at significantly sub-optimal production
levels. During the second half of fiscal 1995, the sales of vitamin products
stabilized and by the first quarter of fiscal 1996 sales of vitamin products had
returned to levels comparable to pre-Finnish Smokers Study levels. This market
stabilization and recovery, however, occurred more quickly and with greater
strength than had been foreseen by the Company and its customers. The efficiency
of the Company's manufacturing operations was, consequently, again negatively
impacted, in this instance, by costs associated with expedited manufacturing and
packaging scheduling required through December 1995 in order for the Company to
meet its customers' increased orders within required order fulfillment
deadlines.
The Company's top ten customers, in the aggregate, accounted for
approximately 67% of the Company's net sales for fiscal 1996. Sales to the two
largest customers accounted for 21% and 13%, respectively, of the Company's net
sales in fiscal 1996. The Company believes that the concentration of substantial
portions of its sales to major customers has enabled the Company to focus on and
develop strong relationships with these customers. Sales of vitamins C and E, in
the aggregate, accounted for approximately 33% of the Company's net sales in
fiscal 1996. The Company believes the large portion of the Company's sales
comprised of vitamins C and E has enabled the Company to build supply
relationships and realize economies of scale that have enabled the Company to
strengthen customer relationships. However, if several of the Company's major
customers substantially reduced their volume of purchases from the Company, or
if the Company's sales of vitamin C or E were substantially reduced, the
Company's results of operations could be materially adversely affected.
SEASONALITY
Leiner's business is seasonal, as increased vitamin usage corresponds with
the cough, cold and flu season. A significant portion of the Company's sales and
a more significant portion of the Company's operating income, therefore, occurs
in the second half of the fiscal year as reflected in the table below:
<TABLE>
<CAPTION>
OPERATING INCOME (LOSS)
NET SALES
---------------------- ------------------------
AMOUNT % OF YEAR AMOUNT(1) % OF YEAR
--------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Fiscal 1996
First quarter....................................................... $ 62.7 19% $ 1.6 7%
Second quarter...................................................... 78.7 23 2.7 13
Third quarter....................................................... 94.8 28 6.0 29
Fourth quarter...................................................... 102.2 30 10.6(2) 51
--------- ----- ----------- -----
$ 338.4 100% $ 20.9 100%
--------- ----- ----------- -----
--------- ----- ----------- -----
Fiscal 1995
First quarter....................................................... $ 61.4 20% $ (1.7) (10%)
Second quarter...................................................... 71.5 23 3.9 23
Third quarter....................................................... 82.2 26 5.3 32
Fourth quarter...................................................... 99.6 31 9.2(3) 55
--------- ----- ----------- -----
$ 314.7 100% $ 16.7 100%
--------- ----- ----------- -----
--------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Excludes annual management fees of $350,000 paid to AEA that are expected to
be discontinued.
(2) Excludes charge for long-lived asset impairment of $4.7 million recorded in
the fourth quarter of fiscal 1996.
(3) Excludes expenses incurred in connection with the preparation of a
registration statement for an uncompleted public offering.
26
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales for the years ended March 31, 1994, 1995
and 1996.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES FOR THE
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales.............................................................. 100.0% 100.0% 100.0%
Cost of sales.......................................................... 74.4 75.2 74.8
--------- --------- ---------
Gross profit........................................................... 25.6 24.8 25.2
Marketing, selling and distribution expenses........................... 14.2 13.5 13.1
General and administrative expenses.................................... 5.4 5.5 5.4
Charge for long-lived asset impairment................................. -- -- 1.4
Amortization of goodwill............................................... 0.5 0.5 0.5
Other charges.......................................................... 0.8 0.3 0.1
--------- --------- ---------
Operating income....................................................... 4.7 5.0 4.7
Interest expense, net.................................................. 2.3 2.9 3.0
--------- --------- ---------
Income before income taxes............................................. 2.4 2.1 1.7
Provision for income taxes............................................. 1.2 1.0 1.4
--------- --------- ---------
Net income............................................................. 1.2% 1.1% 0.3%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales increased by $23.7 million, or 7.5%, to $338.4 million for fiscal
1996 from $314.7 million for fiscal 1995.
Vitamin product sales increased by $28.0 million, or 11.7%, to $267.7
million for fiscal 1996 from $239.7 million for fiscal 1995. The increase was
principally attributable to unit sales increases in most major types of vitamin
products, initial sales of the Company's herbal product line and the Company's
introduction of other new nutritional supplements, including products such as
Pycnogenol-Registered Trademark-, evening primrose oil and coenzyme Q10. Selling
price increases implemented late in fiscal 1995 and during fiscal 1996
contributed approximately $8.5 million of the vitamin product sales increase.
OTC pharmaceutical sales decreased by $4.3 million, or 6.8%, to $58.8
million for fiscal 1996 from $63.1 million for fiscal 1995. The decrease was
principally due to declines in the net average selling price of certain
analgesics and in the number of units sold as a result of price competition and
the introduction by nationally branded companies of several new analgesic
products. Additionally, the Company's decision to resign as the liquid OTC
pharmaceutical supplier to a major drugstore chain (due to unprofitable margins)
in the first half of fiscal 1996 contributed approximately $4.0 million to this
sales decline. These decreases were partially offset by revenues from new
private label OTC pharmaceutical business developed by the Company in fiscal
1996.
Gross profit increased $7.0 million, or 9.0%, to $85.1 million in fiscal
1996 from $78.1 million in fiscal 1995. The gross profit margin also improved to
25.2% in fiscal 1996 from 24.8% in fiscal 1995. The increase in the gross profit
margin was principally due to a decrease in the Company's manufacturing costs
resulting from the investment in manufacturing equipment and facility
consolidations during the last three fiscal years, which allowed the Company,
among other things, to achieve lower per unit manufacturing and packaging costs
through larger batch sizes and longer packaging runs.
Marketing, selling and distribution expenses, together with general and
administrative expenses (collectively, "operating expenses"), increased $2.9
million to $62.6 million in fiscal 1996 from $59.7 million in fiscal 1995.
Expressed as a percentage of sales, operating expenses declined 0.5% from 19.0%
in fiscal 1995 to 18.5% in fiscal 1996, as the Company continued to leverage its
operating expenses as it increased sales. The
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Company intends to invest $3.5 million in a national radio advertising program
in fiscal 1997 (versus $1.1 million in fiscal 1996) that is expected to result
in the first increase in operating expenses, expressed as a percentage of net
sales, since the LHP Acquisition was completed in fiscal 1993.
In fiscal 1996, following the Company's resignation as the liquid OTC
pharmaceutical supplier to a major drugstore chain, the Company decided to scale
back its liquid manufacturing capability. As a result of this decision, the
Company recognized a long-lived asset impairment and recorded a write-down of a
portion of the goodwill arising from the XCEL Acquisition. This write-down has
been reflected in the fiscal 1996 results of operations as a long-lived asset
impairment charge of $4.7 million.
Goodwill amortization of $1.6 million in each of the years ended March 31,
1995 and 1996 relates to the goodwill arising from the LHP and XCEL
Acquisitions. As a result of the goodwill write-down discussed above, the
amortization of goodwill will decline to $1.4 million in fiscal 1997. The other
charges of $0.5 million in fiscal 1996 are comprised of management fees paid to
AEA that are expected to be discontinued in fiscal 1997 and compensation expense
resulting from the grant of stock options to certain members of management in
fiscal 1994. In fiscal 1995, in addition to these expenses, other charges
included expenses incurred in connection with the preparation of a registration
statement to offer the Company's shares publicly. This public offering was not
completed principally due to the release of the Finnish Smokers Study and the
resulting impact on the public valuation of vitamin companies.
As a result of the factors discussed above, operating income of $15.8
million for fiscal 1996 was equal to operating income in fiscal 1995. Excluding
the long-lived asset impairment charge and other charges, operating income
increased by $4.2 million, or 25%, to $21.0 million in fiscal 1996 from $16.8
million in fiscal 1995.
Net interest expense increased by $0.9 million to $9.9 million in fiscal
1996 from $9.0 million in fiscal 1995. The increase was principally due to
higher weighted average interest rates. The interest rates on the majority of
the Company's debt are at rates that are a function of either the LIBOR or prime
rates.
The Company's effective income tax rate of 80% for fiscal 1996 is higher
than the combined state and federal rate of 40% primarily because of the
nondeductibility of goodwill, as well as the nondeductibility of the long-lived
asset impairment charge. The effective income tax rate for fiscal 1996 is higher
than the effective income tax rate of 49% for fiscal 1995, principally due to
the nondeductibility of the long-lived asset impairment charge.
As a result of the above factors, net income for fiscal 1996 declined by
66.1% to $1.2 million from $3.4 million in fiscal 1995. Excluding the long-lived
asset impairment charge, net income would have increased to $5.9 million in
fiscal 1996.
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales increased by $11.1 million, or 3.7%, to $314.7 million in fiscal
1995 from $303.6 million in fiscal 1994.
Vitamin product sales increased by $22.4 million, or 10%, to $239.7 million
in fiscal 1995 from $217.3 million in fiscal 1994 despite a decrease in demand
for vitamin products resulting from negative media coverage of the Finnish
Smokers Study. The increase was attributable principally to selling price
increases implemented in the last quarter of fiscal 1994 and throughout fiscal
1995 in response to raw material cost increases incurred by the Company. To a
lesser extent, the increased sales of vitamin products were due to the Company's
introduction of phyto-nutrient products and the growth of nutritional
supplements, including chromium picolinate, ginseng and garlic.
Sales of OTC pharmaceuticals decreased by $4.3 million, or 6.4%, to $63.1
million in fiscal 1995 from $67.4 million in fiscal 1994. During fiscal 1995,
the Company resigned the OTC pharmaceutical business of certain customers on
which the Company realized low margins.
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Sales of other products decreased by $7.0 million, or 37%, to $11.9 million
in fiscal 1995 from $18.9 million in fiscal 1994. The decrease was principally
attributable to the resignation of the contract manufacturing of certain
national branded digestive liquid products. Additionally, the sales of
Bodycology-Registered Trademark-, a line that was not considered strategic by
the Company, declined as the number of nationally branded offerings increased.
Gross profit increased $0.5 million, or 0.7%, to $78.1 million in fiscal
1995 from $77.6 million in fiscal 1994. The gross profit margin declined,
however, from 25.6% in fiscal 1994 to 24.8% in fiscal 1995. The decrease in
demand for vitamin products resulting from the negative media coverage of the
Finnish Smokers Study, the Company's resulting downsizing initiatives and the
resignation of certain low margin OTC pharmaceutical business had a significant
impact on volumes produced and resulted in inefficiencies in the Company's
manufacturing operations.
Although the Company invested $13.5 million in expanding and enhancing its
tableting capacity in fiscal 1994 and 1995, the full benefits of the enhanced
technology and increased capacity were not realized as tablet production
declined 2% between fiscal 1994 and fiscal 1995 in response to softened consumer
and retailer demand. Variable tableting costs increased from fiscal 1994 to
fiscal 1995 and higher fixed costs were not absorbed.
The Company consolidated two western U.S. packaging facilities into one
large facility in the last quarter of fiscal 1994. The Company also purchased
additional packaging equipment. As indicated above with respect to the tableting
operations, the decrease in demand for vitamin products delayed realization of
the benefits anticipated from these consolidation and capital expenditures. From
fiscal 1994 to fiscal 1995, variable packaging costs increased and fixed costs
increased in absolute and per unit terms (as the number of units bottled
decreased 2% between years).
Additionally, competitive factors accentuated by a decrease in demand for
vitamin products necessitated the payment of $8 million by the Company to secure
long-term sales agreements with certain customers in late fiscal 1994 and the
beginning of fiscal 1995. The amortization of these costs over the terms of
those agreements (which are generally expected to extend from two to four years)
negatively impacted gross margins in fiscal 1995. Historically, the Company had
expended approximately $3 million annually to secure such sales agreements.
Operating expenses increased $0.2 million to $59.7 million in fiscal 1995
from $59.5 million in fiscal 1994. Expressed as a percentage of net sales,
however, operating expenses declined 0.6% from 19.6% in fiscal 1994 to 19.0% in
fiscal 1995. Marketing, selling and distribution expenses decreased as a
marketing program in support of the Pharmacist Formula-Registered Trademark-
brand conducted in fiscal 1994 was not continued in fiscal 1995. General and
administrative expenses increased principally due to a significant upgrade to
the Company's computer systems to bring about internal operating efficiencies
and improve its electronic data interchange capabilities to better service its
customers.
Goodwill amortization of $1.6 million in each of the years ended March 31,
1994 and 1995 relates to the goodwill arising from the LHP and XCEL
Acquisitions. The other charges of $2.4 million recorded by the Company in
fiscal 1994 were comprised of the write-off of deferred charges associated with
the refinancing of the Company's revolving credit facility in December 1993,
compensation expense resulting from the grant of stock options and management
fees paid to AEA. In fiscal 1995, these charges relate to management fees paid
to AEA, compensation expense resulting from the grant of stock options and
expenses incurred in connection with the preparation of a registration statement
for an uncompleted public offering.
As a result of the factors discussed above, operating income increased by
$1.7 million to $15.8 million for fiscal 1995 from $14.1 million in fiscal 1994.
Excluding other charges, operating income increased $0.3 million to $16.8
million for fiscal 1995 from $16.5 million for fiscal 1994.
Interest expense increased by $2.0 million to $9.0 million for fiscal 1995
from $7.0 million for fiscal 1994. This increase is principally attributable to
the additional debt the Company incurred in the later part of fiscal 1994 and in
fiscal 1995 to finance its manufacturing program and payments to secure certain
long-term customer sales agreements. Increasing interest rates during fiscal
1995 also contributed to this increase.
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<PAGE>
The Company's effective income tax rate for fiscal 1995 of 49% is higher
than the combined federal and state tax rate of approximately 40% primarily as a
result of the nondeductibility of $1.6 million of goodwill amortization. The
fiscal 1995 rate is lower, however, than the fiscal 1994 rate of 51% as the
Company's state tax rate declined to 6% for fiscal 1995 from 9% in fiscal 1994,
principally attributable to state tax credits resulting from the fiscal 1995
capital expenditures.
As a result of the above factors, net income for fiscal 1995 declined by
$0.1 million to $3.4 million from $3.5 million in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities prior to changes in assets and
liabilities was $21.9 million in fiscal 1996. The Company's working capital
increased $10.6 million, to $72.3 million at March 31, 1996 from $61.7 million
at March 31, 1995. This increase in working capital was principally due to a
reduction in the bank checks outstanding at March 31, 1996. During fiscal 1996,
the Company's net additions to property, plant and equipment totaled $3.5
million as compared to $16.7 million during fiscal 1995. During the later part
of fiscal 1993 and during fiscals 1994 and 1995, the Company significantly
increased its manufacturing capacity and enhanced its manufacturing technology.
Accordingly, the Company invested in property, plant and equipment during fiscal
1996 at a maintenance level.
At March 31, 1996, the Company had $42.8 million outstanding under the
Credit Agreement and $12.2 million of borrowing availability. On a pro forma
basis, after giving effect to the Offering as if it had occurred on March 31,
1996, the Company would have had no amounts outstanding under the Credit
Agreement and $55 million of borrowing availability. The Credit Agreement
expires on June 30, 1998. Borrowings under this facility bear interest at the
prime rate plus up to 1.25% or LIBOR plus up to 2.25%. At March 31, 1996,
borrowings under the Credit Agreement had a weighted average interest rate of
8.2%. The Credit Agreement contains certain restrictive covenants related to,
among other things, cash flow coverage, interest coverage, debt-to-total capital
ratios, minimum levels of net worth and limits on capital expenditures. At March
31, 1996 the outstanding indebtedness under the Senior Notes was $45.0 million
and the weighted average interest rate on the borrowings under the Senior Notes
was 9.48%. Annual principal payments of $11.3 million on the Senior Notes
commence on April 30, 1999. The Senior Notes contain substantially the same
restrictive covenants as the Credit Agreement. See "Description of Certain
Indebtedness." At March 31, 1996, $8.3 million was outstanding under the vendor
revolving loan agreement and the interest rate on the borrowings was 5.5%. The
vendor revolving loan agreement matures on May 31, 1997.
In addition to repaying amounts outstanding under the Credit Agreement, the
net proceeds of the Offering will be utilized to redeem all of the outstanding
shares of the Company's Redeemable Preferred Stock plus accrued dividends, to
repay the revolving vendor loan agreement and to pay to AEA a $1.5 million fee
in connection with the termination of its management agreement with the Company.
The Company believes funds available under the Credit Agreement, from
operations and from the proceeds of the Offering will provide adequate liquidity
for the foreseeable future.
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<PAGE>
BUSINESS
GENERAL
Leiner is the nation's largest manufacturer and marketer of vitamins,
minerals and nutritional supplements (collectively, "vitamin products"). Leiner
markets over 320 vitamin products in more than 4,600 stock keeping units
("SKUs"). The Company estimates that it has a 50% share of private label sales
(three times as large as its largest competitor) and a 20% share of overall
vitamin product sales through mass market retailers in the United States.
Vitamin product sales represent approximately 79% of the Company's net sales.
The Company's vitamin products are sold in all 50 states through more than
50,000 retail outlets. The Company's vitamin product customers are primarily
mass market retailers and include the country's 20 largest drug store chains
(including Walgreen, American Stores, Eckerd, CVS, Rite-Aid and Revco), 18 of
the 20 largest supermarket chains (including Safeway, Winn-Dixie, Albertson's,
A&P and Lucky Stores), the 10 largest mass merchandising chains (including
Wal-Mart, Target, Kmart and Venture) and the two largest warehouse club chains
(Sam's and PriceCostco) (such retailer categories are referred to herein,
collectively, as "mass market"). The Company's vitamin products are sold under
its customers' store names ("private label products"), as well as under its own
brand, Your Life-Registered Trademark-, one of the nation's leading broadline
vitamin brands. The Company estimates that private label vitamin products
account for approximately 38% of total vitamin product sales by mass market
retailers and account for approximately 59% of Leiner's total net sales.
By leveraging its strengths and resources in vitamin product manufacturing
and distribution, Leiner has also become one of the nation's largest
manufacturers and marketers of private label non-prescription
("over-the-counter") pharmaceuticals, such as analgesics, cough and cold
remedies and digestive aids ("OTC pharmaceuticals"). Leiner markets over 100 OTC
pharmaceutical products in approximately 1,600 SKUs. OTC pharmaceutical sales
represent approximately 17% of the Company's net sales. The Company's OTC
pharmaceuticals are sold as private label products as well as under the
Company's Pharmacist Formula-Registered Trademark- brand.
The Company's net sales have increased from $230.8 million in fiscal 1993 to
$338.4 million in fiscal 1996. During the same period, the Company's operating
income, excluding certain charges not expected to continue, has increased from
$9.7 million in fiscal 1993 to $20.9 million in fiscal 1996. Excluded charges in
fiscal 1993 include management fees of $321,000 paid to AEA Investors Inc.
("AEA") that are expected to be discontinued and costs of $3.7 million related
to the LHP Acquisition. Excluded charges in fiscal 1996 include management fees
of $350,000 paid to AEA and a charge of $4.7 million for impairment of
long-lived assets. See "Selected Consolidated Financial Data." While
experiencing this growth, the Company has invested approximately $20.2 million
in a facilities consolidation, capacity expansion and equipment modernization
program with respect to its facilities in the western United States (the
"Manufacturing Program"). The Company has also invested $3.7 million in modern
equipment for its midwestern U.S. facilities.
INDUSTRY OVERVIEW
VITAMIN PRODUCTS
According to industry sources and management estimates, total retail sales
of vitamin products in the United States were approximately $3.7 billion in
calendar year 1995 and have grown at a compound annual rate of approximately 11%
since 1993. The vitamin product business is composed of several different types
of products: multivitamins, single-entity vitamins (such as vitamins C and E),
minerals (such as calcium), and nutritional supplements (such as
Pycnogenol-Registered Trademark-, coenzyme Q10 and evening primrose oil and
including herbal products (such as ginseng, garlic and ginkgo biloba)). Leiner
believes that growth in the vitamin product business has been driven by (i)
national media attention regarding scientific research suggesting potential
health benefits from regular consumption of vitamin products, (ii) the aging of
the U.S. population (because a larger portion of older age groups use vitamin
products), (iii) the growing practice of self-care and preventive medicine and
(iv) the favorable effects of and opportunities presented by the enactment and
implementation of the Dietary Supplement Health and Education Act of 1994.
SCIENTIFIC RESEARCH. Various studies published since 1992 by researchers at
major universities have suggested an association between regular consumption of
vitamin products such as E, C and beta carotene
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<PAGE>
(collectively, "antioxidants") and a reduced risk of certain diseases. In
addition, certain other studies have reported that consumption of folic acid (a
B vitamin) can aid prevention of heart disease and neural tube birth defects.
Such research has been described in major medical journals, magazines,
newspapers and television programs. However, certain recent studies relating to
certain antioxidants have produced results contrary to certain of the favorable
indications of other prior and subsequent studies. While there have been other
recent studies suggesting that vitamin product consumption may have a positive
health effect, the scientific research to date is not conclusive, and there can
be no assurance of future favorable scientific results and media attention, or
the absence of unfavorable or inconsistent findings. See "Risk Factors -- Effect
of Research and Publicity on Vitamin Product Business."
DEMOGRAPHICS. U.S. demographic trends are also acting as a catalyst for
increasing growth of the vitamin product market. According to the Gallup
Organization, people in the age group 50 and above exhibit the highest use of
vitamin products of all age groups (measured by percentage of the age group
using vitamin products). In the United States, approximately 41% of persons age
50 to 64 and approximately 39% of persons age 65 and above use vitamin products
(compared to 32% for persons age 35 to 49 and 26% for persons age 18 to 34).
According to the United States Bureau of the Census, between 1996 and 2005, the
age group of persons age 50 and above is projected to grow 23.3%, compared to
1.6% for the age group of persons age 18 to 49. The Company believes that these
demographic trends will continue to support increased demand for vitamin
products.
GROWTH OF SELF-CARE AND PREVENTIVE MEDICINE. Vitamin product consumption
has been favorably affected by the growing practice of self-care and preventive
medicine by lay people in the United States, which practices in turn are driven
by (i) increased information available to the consumer on the health benefits of
certain foods, including vitamin products; (ii) a desire to avoid rising health
costs and (iii) convenience. In response to the trend toward self-care, the
Company has created a nutrition information program for consumers and
pharmacists, which includes informational inserts, point of purchase nutritional
information brochures and a toll free telephone information line to answer
customer inquiries regarding nutrition. The nutrition information program has
enabled retailers to capitalize on trends towards self-care by allowing them to
position themselves as self-care centers, supplying consumers with vitamin
products and information describing the benefits of vitamin product consumption.
DSHEA. The Dietary Supplement Health and Education Act of 1994 ("DSHEA"),
enacted in October 1994, removed or scaled back many restrictions previously
imposed on vitamin product manufacturers. DSHEA expanded the ability of vitamin
product manufacturers to make, on labels and in literature, "structure/function"
claims that explain how a nutrient or dietary substance affects the structure or
function of the body. The Company believes that this change will aid the sale of
vitamin products by enabling manufacturers to better communicate the health
benefits of vitamins and to promote sales through labels, packages and
literature discussing the benefits of vitamin products generally. This ability
is especially important in light of the growing trend toward self-care and the
increased sales of vitamin products in the mass market channel, where customers
are less able to rely on sales personnel for explanations of product benefits.
DSHEA also affirms the ability of vitamin product manufacturers to introduce
and sell new "manufacturer-substantiated-as-safe" vitamin products without FDA
preclearances. While this aspect of DSHEA has led to a broader range of vitamin
products being marketed, it has also made retailers more reliant on internal
reviews by manufacturers to evaluate the utility and safety of new products. The
Company believes that due to its reputation for high quality and responsible new
product introductions it will benefit from the increased reliance of retailers
on manufacturers. See "Risk Factors -- Potential For Increased Government
Regulation."
The primary channels of retail distribution in the vitamin product business
are mass market retailers (drug stores, supermarkets, mass merchandising chains
and warehouse club stores, such as Walgreen, Safeway, Wal-Mart and Sam's,
respectively), health food stores, direct sales and mail order. According to
industry sources and management estimates, retail sales of vitamin products in
the U.S. mass market channel (the channel in which the Company participates)
were approximately $1.9 billion in calendar year 1995 and
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have grown at a compound annual rate of 11.3% since 1993. Management estimates
that this channel's share of total vitamin product sales was approximately 52%
in calender year 1995. Leiner distributes substantially all of its products
through mass market retailers and was the leading supplier of vitamin products
to this channel, with approximately 20% of the total sales for this channel in
1995. Management estimates that the health food store, mail order and direct
sales channels' shares of total vitamin product sales were approximately 28%, 5%
and 13%, respectively, in calendar year 1995. Leiner does not currently supply
health food stores or sell by mail order or direct sales.
While total vitamin product sales in the U.S. mass market channel grew at an
annual compound growth rate of 11.3% from 1993 through 1995, the vitamin product
business is composed of several different types of products with varying growth
rates. The growth rates of certain of these products are set forth below.
<TABLE>
<CAPTION>
SALES
----------------------------------
CY 1993 CY 1995 CAGR
---------- ---------- ----------
<S> <C> <C> <C>
(IN MILLIONS)
Vitamin C.......................................................... $ 189.1 $ 218.8 7.6%
Vitamin E.......................................................... 161.0 184.1 6.9%
Multivitamins...................................................... 514.0 535.7 2.1%
B Vitamins......................................................... 151.0 157.1 2.0%
Minerals........................................................... 229.5 301.9 14.7%
Nutritional Supplements............................................ 160.9 307.8 38.3%
</TABLE>
The fastest growing vitamin products over the past two years have been
nutritional supplements (which include herbal products). According to management
estimates and industry sources, nutritional supplement sales in the mass market
channel have grown at a compound annual rate of 38.3% from 1993 to 1995, while
overall vitamin product sales excluding nutritional supplements have grown at a
compound annual rate of 7.8%. Since 1993, Leiner has introduced 46 nutritional
supplement products and Leiner's share of nutritional supplement sales in the
mass market channel has grown from 7.7% in calendar year 1993 (or estimated
retail sales of $12.3 million) to 10.1% in calendar year 1995 (or estimated
retail sales of $31.2 million).
Within the mass market channel, there are three primary vitamin product
categories: national brands, broadline brands and private label products,
accounting for approximately 41%, 21% and 38%, respectively, of the total
vitamin product sales of mass market retailers in 1995, according to management
estimates. The national brand category primarily consists of multivitamin (as
opposed to single-entity vitamin) and mineral products marketed under heavily
advertised brand names such as Centrum-Registered Trademark-,
One-A-Day-Registered Trademark- and Theragran-Registered Trademark-
multivitamins and Oscal-Registered Trademark- mineral supplements. Broadline
brands, such as the Company's Your Life-Registered Trademark- brand, offer a
complete range of products under one brand name, including multivitamins,
single-entity vitamins (such as E, C and B-complex vitamins), minerals (such as
calcium and chromium picolinate) and nutritional supplements (such as
Pycnogenol-Registered Trademark-, coenzyme Q10 and evening primrose oil and
including herbal products (such as garlic, ginseng and ginkgo biloba)). Private
label products marketed under the retailer's name offer a wide product
assortment, similar to but somewhat narrower in scope than broadline brands,
including national brand equivalent formulas positioned as lower-priced "compare
and save" products. The Company estimates that it has an approximately 50% share
of sales of private label vitamin products in the mass market channel.
OTC PHARMACEUTICALS
Retail sales in the United States for OTC pharmaceutical products, such as
analgesics, cough and cold remedies (including allergy medications) and
digestive aids (including antacids, laxatives and antidiarrheals) were $10.7
billion in 1995, and are estimated to have grown at an annual rate of
approximately 4% during 1995 according to Information Resources, Inc. OTC
pharmaceuticals are sold primarily through mass market retailers in two product
categories -- national brand products and private label products, representing
1995 retail sales of $9.0 billion and $1.8 billion, respectively. According to
management estimates, sales of national brand OTC pharmaceuticals grew at an
annual rate of 3.4% during 1995, while sales of private
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<PAGE>
label OTC pharmaceuticals are estimated to have grown at an annual rate of
approximately 8.4% during the same period. The Company's OTC pharmaceutical
sales are primarily in the private label product category. The Company believes
that it is one of the nation's largest suppliers of private label OTC
pharmaceuticals.
The Company believes that OTC pharmaceutical sales will benefit from three
significant factors: (i) the aging of the U.S. population resulting in an
increasing need for medication, (ii) consumer preference for the lower cost and
greater convenience of self-medication and (iii) the increasing number of OTC
pharmaceutical products available as a result of the approval by the FDA of
over-the-counter sale of previously "prescription only" pharmaceuticals ("RxOTC
switch products"). Over the past ten years, medications equivalent to those
marketed under the national brand names Advil-Registered Trademark-,
Dimetapp-Registered Trademark-, Immodium-Registered Trademark- and
Drixoral-Registered Trademark-, among others, have switched from prescription to
OTC status and are currently marketed by the Company under its customers'
private labels and under its Pharmacist Formula-Registered Trademark- broadline
brand.
PRIVATE LABEL
The growth in the demand for private label vitamin products and OTC
pharmaceuticals has been driven by increasing acceptance of private label
products by both consumers and retailers. Consumers find private label products
attractive because they sell at substantially lower prices than national brands,
yet are comparable in quality and utility to and use the same active ingredients
and formulas as national brands. Private label products appeal to retailers
because such products generally provide for a higher gross profit margin and
higher dollar profit per unit than national brands. In the mass market, private
label products represent approximately 38% of the vitamin product business and
approximately 16% of the OTC pharmaceutical business.
MARKET LEADERSHIP
Leiner is the largest manufacturer and marketer of vitamins to the mass
market channel in the United States. This channel accounts for approximately 52%
of overall vitamin product sales in the United States, according to industry
sources. The leading role Leiner enjoys in the mass market channel allows the
Company to realize economies of scale while developing strong relationships with
the nation's leading mass market retailers. The Company attributes its
leadership in the overall vitamin product business to several competitive
advantages:
PRODUCT QUALITY. Leiner believes its reputation for quality is a critical
factor in customer purchase decisions, particularly for private label products,
which are marketed under the names of Leiner's mass market retailer customers.
The Company believes that in 1991 it became the first major vitamin product
supplier to manufacture its vitamin products to meet standards for dissolution
and disintegration in substantially the form later adopted by the United States
Pharmacopoeial Convention, Inc. (the "USP"). Leiner promotes its innovation in
this area under the Proven Release-Registered Trademark- and Release
Assured-Registered Trademark- trademarks. In 1994, the Company became the first
vitamin product manufacturer to sell vitamin products exhibiting the USP symbol.
In 1995, the Company became the first vitamin product manufacturer certified as
being in compliance with USP vitamin product manufacturing standards. The
Company's facilities were audited by an independent quality assurance laboratory
and received the laboratory's highest rating category. See "-- Government
Regulation."
PRODUCT INNOVATION. Leiner has consistently introduced product innovations
based on scientific research and in response to consumer needs. It was the first
major vitamin product supplier to introduce such industry-wide innovations as
Proven Release-Registered Trademark- (standards for dissolution and
disintegration in substantially the form later adopted by the USP), Daily
Paks-Registered Trademark- (pre-sorted, prepackaged vitamin combinations), the
Naturalized-Registered Trademark- line (vitamin products free of preservatives
and artificial colors and flavors), Family Size packages (larger quantity
packages initially developed for warehouse clubs) and Phytograph-TM- herbal
testing (a process of testing herbal products to ensure that active constituents
contained in the products are in conformity to the natural source). The Company
also believes that its reputation for introducing new products only after
careful review of their safety, utility and commercial acceptance is a key
element of Leiner's strong relationships with mass market retailers and, in
turn, enhances Leiner's ability to introduce new products into the channels it
serves. Leiner has created a scientific advisory board (the "Scientific
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<PAGE>
Advisory Board") composed of scientific and regulatory authorities on nutrition
and related health fields to assist the Company in the evaluation of research
and new products. The Company believes that its Scientific Advisory Board is
viewed by Leiner's customers as a valuable resource.
CUSTOMER SERVICE, SALES AND MARKETING SUPPORT. The Company's long-standing
customer relationships are built upon its commitment to a high level of customer
service and have been recognized by "vendor of the year" awards from several of
the nation's leading retailers, including Albertson's, Revco, Rite-Aid, Safeway
and Target. The Company believes it has an excellent reputation for customer
service, which has been enhanced by consistently shipping complex orders
complete and on time and by providing electronic data interchange and vendor
managed inventory services to its customers. The Company, through its direct
sales force and account marketing managers, also provides retailers with
category management services, including integrated schedules of merchandising
programs, advertising and promotions, designed to maximize retailers' sales and
profits. See "-- Customers, Sales and Marketing."
GRAPHICS AND PACKAGING EXPERTISE. Leiner designs and manages over 6,600
labels for approximately 265 customers. The Company believes that its resources
and expertise in label design and managment are significant competitive
advantages in servicing the complex needs of its private label customers.
Leiner's in-house graphics capability enables the Company to deliver quick
turnaround times for private label design projects and allows its customers to
participate in the development and production of labeling and packaging.
Leiner's customers benefit from Leiner's significant investment in computer
design equipment, as well as in-house expertise in marketing strategies and
regulatory matters applicable to labels and packaging. The Company operates four
packaging facilities equipped with 32 packaging lines in order to satisfy the
complex demands and rapid response time required by its customers.
MODERN, EFFICIENT MANUFACTURING. The Company has the largest manufacturing
capacity in the vitamin product industry with two tableting facilities operating
to USP standards capable of producing over 13 billion tablets per year and four
packaging facilities containing 32 packaging lines, of which 25 are modern, high
speed lines. In fiscal 1994, Leiner began the Manufacturing Program, a
facilities consolidation, capacity expansion and equipment modernization program
designed to consolidate its western U.S. facilities into a smaller number of
larger, more efficient units, outfitted with modern tableting and packaging
equipment. The Manufacturing Program has allowed the Company to increase
capacity by adding modern, high speed equipment and to reduce variable
manufacturing costs by producing larger batch sizes and conducting longer
uninterrupted tableting and packaging runs. Through the consolidation of
packaging and distribution facilities, the Manufacturing Program has also
allowed the Company to reduce distribution costs in its western facilities.
Leiner's investment in the Manufacturing Program totaled approximately $20.2
million. Leiner expects to realize further improvements in efficiency as the
elements of the Manufacturing Program are further integrated into the Company's
operations. See "-- Manufacturing and Distribution".
COMPLEMENTARY NATURE OF VITAMIN PRODUCT AND OTC PHARMACEUTICAL
BUSINESSES. The Company's OTC pharmaceutical products are sold through the same
distribution channels and, for most products, manufactured by the same processes
as the Company's vitamin products. In addition, vitamin product and OTC
pharmaceutical purchase decisions are generally made by the same buyer at the
Company's customers. This overlap of channels and processes allows the Company
to enhance its strong position with mass market retailers and its manufacturing
and distribution expertise by (i) strengthening the relationship between the
Company and its customers by allowing the Company to offer "one-stop"
vitamin/OTC pharmaceutical shopping, (ii) allowing the Company to allocate its
fixed costs across a broader revenue base and (iii) offering a more diversified
source of revenue to fund future growth of the Company.
BUSINESS STRATEGY
The Company's business strategy is to use its competitive advantages to
increase its share of the growing overall vitamin product business and to
leverage its distribution, marketing and manufacturing strengths in vitamin
products to maximize profitability. In order to implement this strategy, the
Company intends to:
DEVELOP AND MARKET NEW PRODUCTS. The Company believes it is a leader in the
vitamin product industry in the responsible development of new products. The
Company intends to continue to develop new products
35
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and programs based on scientific research and consumer needs. During fiscal 1997
the Company plans to introduce a number of new nutritional supplements
(including herbal products) as line extensions that build on successful
nutritional supplements previously introduced. The Company believes that new
nutritional supplement products offer an important avenue of growth because (i)
industry sales of nutritional supplements have increased in the mass market
channel at a compound annual rate of approximately 38% from 1993 through 1995
and (ii) the Company's share of nutritional supplement sales in the mass market
channel is substantially lower than the Company's share for vitamin and mineral
sales and thus presents a growth opportunity.
EXPAND VITAMIN PRODUCT SALES THROUGH NEW CHANNELS. The Company intends to
expand vitamin product sales through new channels such as warehouse club stores
(a new component of the mass market channel for vitamin products) and military
commissaries. In addition to continuing its efforts to increase its sales to
warehouse club stores and to the military through the development of specialized
sales and marketing programs designed to meet the unique needs of these
channels, the Company intends to focus on expanding its international sales
(primarily in Asia, South America and Canada) through increased investment of
resources in international sales development and by joining with its U.S. mass
market customers in their international expansion. To date, Leiner has obtained,
or has pending applications to obtain, trademark registrations or authorization
for importation and sale of its products in 44 countries outside of the United
States. In addition, Leiner has entered into a strategic alliance with Takeda
Chemical Industries, Ltd., one of Japan's largest pharmaceutical companies,
regarding the introduction, marketing and distribution of Your
Life-Registered Trademark- brand vitamin products in Japan.
EXPAND SALES AND DISTRIBUTION OF BRANDED PRODUCTS. Leiner's Your
Life-Registered Trademark- brand is one of the largest broadline brands of
vitamin products in the United States and accounted for approximately $66.5
million, or 20%, of the Company's net sales in fiscal 1996. Sales of Your
Life-Registered Trademark- brand vitamin products yield higher margins for the
Company than sales of comparable private label products. Nearly all of the
Company's product innovations (including Proven Release-Registered Trademark-,
Daily Paks-Registered Trademark-, Naturalized-Registered Trademark- vitamin
products, Family Size packages and Phytograph-TM- herbal testing) are initially
introduced under the Your Life-Registered Trademark- label. In 1993, Your
Life-Registered Trademark- was appointed the exclusive mass market vitamin
licensee of the United States Olympic Committee (through the 1996 Olympic games)
and has developed a marketing program based on this appointment. In order to
strengthen the Your Life-Registered Trademark- brand and expand the distribution
and sales of Your Life-Registered Trademark- vitamin products, Leiner is
increasing marketing and advertising expenditures in support of Your
Life-Registered Trademark- from approximately $8 million in fiscal 1996 to
approximately $10 million in fiscal 1997. An integral part of this expanded
marketing program will be a national radio campaign featuring endorsements by
well known personalities George Brett and Chuck Yeager.
SELECTIVE ACQUISITIONS. In addition to internally generated growth, Leiner
intends to expand sales and profitability through acquisitions of closely
related businesses and product lines. Leiner will focus on acquiring companies
that will add new distribution channels or additional brands to complement its
existing business. Although the Company is not currently considering any
acquisitions, it intends to review acquisitions in the future as opportunities
arise.
INCREASE OPERATING MARGINS. The Company's operating margin, excluding
certain charges not expected to continue, has increased from 4.2% in fiscal 1993
to 6.2% in fiscal 1996. Excluded charges in fiscal 1993 include management fees
of $321,000 paid to AEA that are expected to be discontinued and costs of $3.7
million related to the LHP Acquisition. Excluded charges in fiscal 1996 include
management fees of $350,000 paid to AEA and a charge of $4.7 million for
impairment of long-lived assets. In addition to continuing to control operating
costs, the Company intends to increase margins by shifting its product mix and
further reducing manufacturing costs.
Leiner intends to shift its product mix to increase the relative share of
higher margin products by (i) introducing new products, including herbal
products, in the nutritional supplement subcategory, which typically earn higher
margins, (ii) developing new channels, such as international sales and warehouse
club stores, which sell a greater proportion of higher margin branded products
than the mass market generally and (iii) promoting the sales of Your
Life-Registered Trademark- branded products through increased marketing support.
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<PAGE>
As a result of the Manufacturing Program, Leiner has experienced significant
reductions in costs in its new and expanded facilities. The Company believes
similar opportunities to realize cost reductions exist with respect to its
midwestern U.S. facilities. The Company has decreased its operating expenses
(i.e., marketing, selling, distribution, general and administrative expenses) as
a percentage of net sales from 20.8% in fiscal 1993 to 18.5% in fiscal 1996,
illustrating the continuing focus of Leiner's management on controlling
operating costs. Although the Company expects operating expenses as a percentage
of net sales to increase slightly in fiscal 1997 due to the Company's decision
to increase marketing support of the Your Life-Registered Trademark- brand,
management intends to continue its focus on controlling costs.
PRODUCTS
The Company currently manufactures and markets more than 420 vitamin and OTC
pharmaceutical products marketed in more than 6,200 SKUs. The Company includes
as separate products different dosage forms, potencies and flavors. Leiner's
products are sold under its retail customers' store names as well as under the
Company's own brands, which include Your Life-Registered Trademark- vitamin
products and Pharmacist Formula-Registered Trademark- OTC pharmaceuticals.
Leiner also markets a line of specialty hair, skin and bath care products under
its Bodycology-Registered Trademark- brand name.
The following table sets forth the net sales of the Company's principal
product lines from fiscal 1993 through fiscal 1996:
NET SALES BY PRODUCT LINE
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(IN MILLIONS)
Vitamin products................................................. $ 159.5 $ 217.3 $ 239.7 $ 267.7
OTC pharmaceuticals.............................................. 53.0 67.4 63.1 58.8
Other products................................................... 18.3 18.9 11.9 11.9
--------- --------- --------- ---------
$ 230.8 $ 303.6 $ 314.7 $ 338.4
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
VITAMIN PRODUCTS
The Company sells a full line of vitamin products, including approximately
320 products in more than 4,600 SKUs. The Company's products are sold in tablet
and capsule forms, and in varying sizes with different potencies, flavors and
coatings. Leiner is the nation's largest manufacturer and marketer of vitamin
products and estimates that it has an approximately 50% share of private label
and an approximately 20% share of overall vitamin product sales through the mass
market channel in the United States. In addition, Leiner's Your
Life-Registered Trademark- brand is one of the nation's largest broadline
vitamin product brands.
The following are examples of product innovations and marketing programs
that have been introduced by the Company over the past years:
-USP: Leiner was the first vitamin product manufacturer to be certified by
an independent quality assurance laboratory as complying with USP
manufacturing standards, initially adopted in January 1995. Moreover,
Leiner has been producing its vitamin products (excluding certain of its
vitamin products for which no USP standards have been adopted) to
disintegration and dissolution standards in substantially the form later
adopted by the USP since 1991 and was the first vitamin product
manufacturer to market vitamin products with the USP trademark on the
packaging. Leiner promotes its innovation in this area under the Proven
Release-Registered Trademark- and Release Assured-Registered Trademark-
trademarks.
-NUTRITION INFORMATION FOR THE CONSUMER: The Company has created a
nutrition information program for consumers and pharmacists, which includes
informational inserts, point of purchase nutritional information brochures
and a toll free telephone information line to answer customer inquiries
regarding nutrition. The nutrition information program has enabled
retailers to capitalize on trends towards self-care by allowing them to
position themselves as self-care centers, supplying consumers with vitamin
products and information describing the benefits of vitamin product
consumption.
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<PAGE>
-PHYTOGRAPH-TM- HERBAL TESTING: Phytograph-TM- herbal testing is Leiner's
process of testing herbal products to ensure that the active constituents
contained in the products are in conformity to the natural source.
-DAILY PAKS-REGISTERED TRADEMARK-: With the introduction of its Daily
Pak-Registered Trademark- products, Leiner was the first major manufacturer
to introduce multiple vitamin and mineral pills that are pre-sorted and
packaged into daily pouches. Leiner has developed a line of Daily
Pak-Registered Trademark- products which include vitamin product
combinations that target specific consumer needs. Examples include the
Women's Daily Pak-Registered Trademark-, the Men's Daily
Pak-Registered Trademark-, the Antioxidant Pak-TM- and the Select Daily
Pak-Registered Trademark- (for seniors). In response to a changing
marketplace, a "new and improved" line of Daily Pak-Registered Trademark-
products was introduced in fiscal 1996, which incorporates certain of the
Company's new herbal products. Leiner is the leader in this segment with an
estimated 54% share, according to management estimates and industry
sources.
-NATURALIZED-REGISTERED TRADEMARK-: Recognizing the growing consumer
preference for products free of unnecessary additives, the Company
introduced its Naturalized-Registered Trademark- line of national brand
equivalent vitamin products. These products are formulated without
preservatives or artificial colors or flavors.
-FAMILY SIZE: To improve customer value, and to increase the average dollar
sales per unit for the retailer, the Company created "Family Size" vitamin
product packages. This innovation has allowed the Company to become a
leader in the emerging and rapidly growing warehouse club stores channel.
-OLYMPIC LICENSE: In 1993, the Company's Your Life-Registered Trademark-
brand obtained the exclusive mass market vitamin product license from the
United States Olympic Committee. The license covered the 1994 winter games
and extends through the 1996 summer games. The Company has developed a
marketing program and consumer advertising to take advantage of this
appointment.
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<PAGE>
REPRESENTATIVE PRODUCTS
The following table sets forth representative vitamin products marketed by
the Company, and where appropriate, the names of comparable nationally
advertised brands (which names are owned by others) with which the Company's
products compete. Virtually all of the Company's products listed below are
marketed under the Company's Your Life-Registered Trademark- brand and private
label.
<TABLE>
<CAPTION>
COMPARABLE NATIONALLY
COMPANY PRODUCTS ADVERTISED BRANDS
- ------------------------------------------ ------------------------
<S> <C>
NATIONAL BRAND EQUIVALENT VITAMIN PRODUCTS
Central-Vite-Registered Trademark- Centrum-Registered Trademark-
Central-Vite Centrum
Select-Registered Trademark- Silver-Registered Trademark-
Thera Plus-Registered Trademark- Theragran
M-Registered Trademark-
Animal Chewable Multi Flintstones-Registered Trademark-
My-A-Multi-Registered Trademark- Myadec-Registered Trademark-
Prenatal Tablets Stuart
Prenatal-Registered Trademark-
One Daily One-A-Day-Registered Trademark-
Stress Formula Stress
Tabs-Registered Trademark-
Ger-Tab-Registered Trademark- Geritol-Registered Trademark-
Vision Formula Ocuvite-Registered Trademark-
Antioxidant Vitamin & Mineral Formula Protegra-Registered Trademark-
Ginkgo Biloba Tablets Ginkoba-TM-
Ginseng Ginsana-Registered Trademark-
Hi-Cal 500 Oscal-Registered Trademark-
Calcium 600 Caltrate-Registered Trademark-
Fe-Tabs-TM- Feosol-Registered Trademark-
DAILY PAKS-REGISTERED TRADEMARK-
Men's Daily Pak-Registered Trademark-
Women's Daily Pak-Registered Trademark-
Select Daily Pak-Registered Trademark-
Antioxidant Pak-TM-
Maximum Pak-Registered Trademark-
Stress Pak-TM-
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRODUCTS
- ----------------------------------------------------------------------------------------
<S> <C>
NATURAL VITAMIN PRODUCTS REGULAR VITAMIN PRODUCTS
Vitamin A B-Complex Supplement
Beta Carotene Vitamin B-12
Cod Liver Oil Vitamin A&D Vitamin B-6
Time Release Balanced B-50, B-100 Niacin 100 mg
Time Release B-12 (1000 mcg, 2000 mcg) Folic Acid
Time Release B-6 Chewable Vitamin C with Acerola (100 mg,
Balanced B Complex +C 300 mg, 500 mg)
Balanced B-50, B-100, B-150 Complex Vitamin C (250 mg, 500 mg, 1000 mg)
B-1 with Rice Bran Time Release Vitamin C
B-6 with Yeast Chewable Vitamin C (orange)
B-12 with Liver Vitamin E (200 I.U., 400 I.U., 800 I.U.,
Time Release Vit. C w/Rose Hips (500 mg, 1000 I.U., 1200 I.U.)
1000 mg, 1500 mg) Vitamin E Water Dispersible
Vitamin C with Rose Hips (250 mg, Vitamin E Plus Added Antioxidants
500 mg, 1000 mg) Physically Active
Vitamin E Blended (200 I.U., 400 I.U., Multivitamin/Multimineral
1000 I.U.) Women's Multivitamin/Multimineral
Vitamin E d-Alpha (400 I.U., 1000 I.U.) New & Improved Antioxidant Tablet
Time Release Complete Multivitamin/ Space Kids-TM- Children's Chewable
Multimineral Vitamins
Time Release Maximum Choice All Purpose Multivitamin/Multimineral
Hi Potency Multivitamin/Mineral Chromium Picolinate
Dieter's Multivitamin/Mineral Chewable Calcium + D
Iron-Free MultiVitamin & Mineral Selenium Tablets
Magnesium Ferrous Sulfate
Zinc Gluconate
Potassium Gluconate
Oyster Shell Calcium with D (250 mg,
500 mg)
Oyster Shell Calcium 500 mg
Calcium, Magnesium & Zinc
Calcium & Magnesium
Hi Potency Iron
Zinc Lozenges with Vitamins C and B-6
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRODUCTS
- ----------------------------------------------------------------------------------------
<S> <C>
NUTRITIONAL SUPPLEMENTS
Herbal Products Other Nutritional Supplements
Saw Palmetto Soya Lecithin
Goldenseal Aloe Vera
Echinacea Citrimax-TM- Weight Loss System*
Valerian Bee Pollen
Ginkgo Biloba Evening Primrose Oil
Ginseng Pycnogenol-Registered Trademark-*
Milk Thistle Brewer's Yeast
Ginger Garlic Oil 1500 mg
Bilberry Garlic & Parsley
Dong Quai Fish Oil Concentrate 1000 mg
Echinacea & Papayazyme-TM-
Goldenseal CoEnzyme Q10
L-Formula Lysine (500 mg & 1000 mg)
Fast Release Lysine
Concentrated Garlic
Cranberry Capsules
Imperial Ginseng
Gelatin 5 gr
Phyto-Nutrients-Registered Trademark- --
Mixed Vegetable
Tablets
</TABLE>
- ------------------------------
* Trademark owned by third party. The Company sells product under license.
OTC PHARMACEUTICALS
With its acquisition of XCEL in May 1992, the Company obtained a full line
of OTC pharmaceuticals. The Company markets over 100 different OTC
pharmaceutical products in over 1,600 SKUs, including products comparable to
most major national brands in the analgesic, cough and cold remedy and digestive
aid categories. The Company sells its OTC pharmaceuticals under its customers'
private labels as well as its own broadline brand, Pharmacist
Formula-Registered Trademark-, first introduced in 1989. The Company believes
that it is one of the nation's largest suppliers of private label OTC
pharmaceuticals. The Company's products are manufactured using the same active
ingredients, formulas and processes as those of competing nationally advertised
brands.
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<PAGE>
REPRESENTATIVE PRODUCTS
The following table sets forth representative OTC pharmaceutical products
marketed by the Company and the names of comparable nationally advertised brands
(which names are owned by others) with which the Company's products compete.
Virtually all of the Company's products listed below are marketed under the
Company's Pharmacist Formula-Registered Trademark- brand and private label.
<TABLE>
<CAPTION>
COMPARABLE NATIONALLY
COMPANY PRODUCTS ADVERTISED BRANDS
- -------------------------------------- ------------------------
<S> <C>
ANALGESICS
Ibuprofen Tablets Advil-Registered Trademark-
Tablets
Pain Reliever Without Aspirin Tylenol-Registered Trademark-
(Acetaminophen) Tablets
Fruit Flavored Non-Aspirin Chewables Children's
Tylenol-Registered Trademark-
Non-Aspirin 160 mg Caplets Tylenol-Registered Trademark-
Junior Strength
Children's Non-Aspirin Elixir Children's
Tylenol-Registered Trademark-
Infant No-Aspirin Suspension Drops Tylenol-Registered Trademark-
Infant Drops
Micro-coated Aspirin Bayer-Registered Trademark-
Enteric Coated Aspirin Ecotrin-Registered Trademark-
Extra Strength Pain Reliever Excedrin-Registered Trademark-
Buffered Aspirin Bufferin-Registered Trademark-
COUGH AND COLD
12-hour Nasal Spray Afrin-Registered Trademark-
Nite Time Liquid Nyquil-Registered Trademark-
Hista-Tabs Actifed-Registered Trademark-
Tussin Expectorant Robitussin-Registered Trademark-
Tap DM Elixir Dimetapp-Registered Trademark-
Pseudoephedrine Tablets Sudafed-Registered Trademark-
Complete Allergy Medication Tablet Benadryl-Registered Trademark-
Flu & Cold Drink Thera-Flu-Registered Trademark-
Nasal Spray 1/2% Neo-Synephrine-Registered Trademark-
Nite Time Liquid Caps Nyquil-Registered Trademark-
Liqui-Caps
Daytime Liquid Caps Day
Quil-Registered Trademark-
Liqui-Caps
Multisymptom Cold Tablets Comtrex-Registered Trademark-
Advanced Formula Cold Tablets Dristan-Registered Trademark-
Minicol Triaminicol-Registered Trademark-
ANTACIDS
Pink Bismuth Liquid Pepto-Bismol-Registered Trademark-
Antacid Liquid Maalox-Registered Trademark-
Antacid Liquid with Simethicone Mylanta-Registered Trademark-
Antacid II Liquid with Simethicone Mylanta
II-Registered Trademark-
Assorted Antacids Tablets Tums-Registered Trademark-
LAXATIVES
Natural Fiber Laxative Metamucil-Registered Trademark-
Women's Laxative Tablets Correctol-Registered Trademark-
Fiber Laxative Caplets Fibercon-Registered Trademark-
ANTI-DIARRHEAL
Loperamide Hydrochloride Immodium
AD-Registered Trademark-
Caplets
</TABLE>
42
<PAGE>
SERVICES; OTHER PRODUCTS
The Company offers drug repackaging services to major prescription
pharmaceutical wholesalers and a major drug store chain. In addition, the
Company performs contract manufacturing services on a limited basis for selected
consumer products companies.
In order to leverage further its existing distribution system and marketing
expertise, the Company markets certain niche products. For example, the Company
developed and markets the Bodycology-Registered Trademark- line of hair, skin
and bath care products, which are made according to proprietary formulas with
botanical extracts, and are non-animal tested and biodegradable.
Bodycology-Registered Trademark- is sold at a discount to similar, nationally
advertised products, such as those offered by The Body
Shop-Registered Trademark-.
CUSTOMERS, SALES AND MARKETING
CUSTOMER RELATIONSHIPS
Leiner's vitamin and OTC pharmaceutical products are sold in all 50 states
through more than 50,000 retail outlets. The Company's customers are mass market
retailers and include the country's 20 largest drug store chains (including
Walgreen, American Stores, Eckerd, CVS, Rite-Aid and Revco), 18 of the 20
largest supermarket chains (including Safeway, Winn-Dixie, Albertson's, A&P and
Lucky Stores), the 10 largest mass merchandising chains (including Wal-Mart,
Target, Kmart and Venture) and the two largest warehouse clubs (Sam's and
PriceCostco).
The Company has approximately 265 active customers. In fiscal 1996, Wal-Mart
and Walgreen accounted for approximately 21% and 13%, respectively of the
Company's net sales; each of the Company's other major customers accounted for
less than 10% of the Company's net sales. The Company's top ten customers, in
aggregate, accounted for approximately 67% of the Company's net sales for fiscal
1996.
The Company's long-standing customer relationships are built upon its
commitment to a high level of customer service. The Company believes it has an
excellent reputation for customer service, which has been enhanced by
consistently shipping complex orders complete and on time, and has been
recognized by "vendor of the year" awards from several of the nation's leading
retailers, including Albertson's, Revco, Rite-Aid, Safeway and Target. The
Company, through its sales force and account marketing managers, also provides
retailers with comprehensive sales and marketing support, designed to maximize
retailers' sales and profits, including integrated schedules of merchandising
programs, advertising and promotions, and category management services for
retailers' vitamin product sections.
SALES FORCE
The Company has a sales force of 32 professionals who regularly call on the
Company's customers to develop an in-depth understanding of each customer's
competitive environment and opportunities. Leiner's sales force enables the
Company to establish close relationships with its customers. The Company's sales
department consists of account managers organized into regional divisions. Each
regional sales manager has broad authority in negotiating with and supporting
the retail customers in his territory. The sales executives utilize financial
costing models, which enable the Company to understand the profitability of
specific sales contracts. The Company has attracted and retained sales
executives who have been trained at many of the leading pharmaceutical and
consumer products companies. The Company believes its sales force constitutes a
competitive advantage over companies that have less extensive sales forces and
therefore rely more heavily on outside brokers.
MARKETING SUPPORT
The Company provides retailers with comprehensive marketing support designed
to maximize their sales and profits. Leiner's marketing activities are organized
into three operating groups: (i) account marketing, which provides category
management and marketing services to retailers, (ii) brand marketing, which
focuses on supporting the Company's branded products, and (iii) new product
development, which develops new products and new product differentiation
strategies.
The Company, through its account marketing managers, acts as the category
manager of the vitamin product sections for several of the nation's largest mass
market retailers. As a category manager, the Company is able to utilize industry
sales data obtained from consumer market research firms, together with
43
<PAGE>
customer sales data (often received through the Company's on-line electronic
data interchange system), to identify profit enhancement opportunities and to
develop and present to customers analyses and proposals regarding merchandising,
pricing and marketing strategies. Leiner's account marketing managers also
provide private label customers with creative services (such as artwork for
promotions, advertisement layouts and label and packaging design). The Company's
category management program and creative services constitute significant sales
and marketing tools which strengthen Leiner's relationships with its customers.
PRODUCT DEVELOPMENT
The brand management group focuses on building the sales of the Company's
branded products, primarily Your Life-Registered Trademark- and Daily
Paks-Registered Trademark-. The Company uses marketing programs for its branded
products similar to those used for the Company's private label customers. In
addition to utilizing retailer advertising vehicles, the Company supports its
brands with consumer advertising, in print and radio, and with regular coupon
support provided through free standing inserts in newspapers across the country.
The Your Life-Registered Trademark- brand, for example, is supported through a
newly implemented national radio campaign featuring endorsements by well known
personalities George Brett and Chuck Yeager. To implement this advertising
support, the brand marketing group conceives, designs and places print
advertisements and produces commercials and arranges for their airing.
The new product development group seeks to develop new products in response
to scientific research and consumer trends and often consults with the
Scientific Advisory Board in developing and introducing new products. In
addition to developing and introducing new products for the domestic market, the
new product group is also responsible for developing formulations and packaging
for the Company's international products, as well as obtaining trademark
registrations and authorizations for importation and sale of the Company's
products in countries outside of the United States.
GRAPHICS AND PACKAGING EXPERTISE
The Company's graphics design staff consists of 35 professionals who produce
design concepts, artwork, graphics and copy for over 5,800 private label
products for approximately 265 customers. The Company believes its graphics and
packaging capabilities are an important competitive advantage in servicing the
complex needs of the Company's private label customers. The graphics department
occupies approximately 8,000 square feet in the Company's Carson, California
headquarters facility and is equipped with modern, computer-aided design
equipment and software.
Leiner's in-house graphics capability facilitates quick turnaround times for
design projects and allows the Company's customers to participate in the
development and production of labeling and packaging. Leiner's customers benefit
from Leiner's significant investment in computer design equipment, as well as
its in-house expertise in marketing strategies and regulatory matters applicable
to labels and packaging. The Company believes that the competitive advantage
derived from its graphics facilities has been enhanced by the increased use of
"structure/function" claims and other nutritional claims on vitamin product
labels as result of DSHEA.
MANUFACTURING AND DISTRIBUTION
MODERN FACILITIES
Leiner's facilities consist of approximately 1.3 million square feet of
plant and office facilities in seven locations and six states. The Company has
the largest manufacturing capacity in the vitamin products industry and is
capable of packaging over 18 billion doses each year. In April 1995, Leiner was
the first vitamin product manufacturer certified as being in compliance with USP
standards for manufacturing vitamin products, which became effective in January
1995. The Company's facilities were audited by an independent quality assurance
laboratory and received the laboratory's highest rating category. All of the
Company's manufacturing facilities also have been audited by the FDA and have
been found to be in compliance with the FDA's "Current Good Manufacturing
Practices for Finished Pharmaceutials" ("cGMP").
Leiner has three manufacturing facilities located in Garden Grove,
California; Chicago, Illinois; and Kalamazoo, Michigan. The primary
manufacturing facility for the Company's vitamin products is its 138,500
44
<PAGE>
square foot Garden Grove plant. The primary manufacturing facility for the
Company's OTC pharmaceuticals is the Company's 51,250 square foot Kalamazoo
plant. In the event of a catastrophic casualty to one of the Company's primary
vitamin or OTC tableting facilities, the Company has the ability to shift
production to other facilities. The Company operates 38 tableting machines in
its Garden Grove, California facility and 23 tableting machines in its
Kalamazoo, Michigan facility. The Company operates four packaging and
distribution facilities located in Carson, California; West Unity, Ohio;
Madison, Wisconsin; and Sherburne, New York, occupying 471,500, 190,500, 95,500
and 10,300 square feet, respectively. These facilities are equipped with a total
of 32 packaging lines.
The Company's OTC pharmaceutical liquids manufacturing is performed at the
Company's 379,000 square foot plant in Chicago, Illinois. During fiscal 1996,
the Company decided to significantly reduce the size of its liquid OTC
manufacturing business. Accordingly, the Company determined that certain
long-lived assets with a carrying amount of $8,256,000 were impaired and wrote
them down by $4,730,000 to their estimated fair values.
The Company purchases approximately 760 different bulk raw materials which
it mixes into over 420 proprietary formulations and fabricates into a wide
variety of tablets, caplets and liquid products. Upon receipt by the Company,
the raw materials are sampled and tested in the Company's laboratories and
compared against rigid product specifications. After the bulk raw materials are
tested and released, they are available to the manufacturing department where
they are weighed, mixed and (in the case of tableting) compressed. Finished bulk
products are then packaged or filled into a wide variety of bottle counts and
labels producing over 6,200 SKUs. The Company performs comprehensive quality
control procedures from the receipt of raw materials to the release of the
packaged product, including extended stability and dissolution tests on the
finished products. All of the Company's vitamin and OTC pharmaceutical products
are manufactured according to cGMP and all of the Company's vitamin products are
manufactured according to USP standards (except for products for which no USP
standards have been adopted). In addition, the Company's manufacturing
activities include packaging bulk products purchased from certain suppliers.
CUSTOMER SERVICE
The Company believes that it has an excellent reputation for customer
service, which has been earned by consistently shipping complex orders complete
and on time. The Company has been recognized by "vendor of the year" awards from
several of the nation's leading retailers, including Albertson's, Revco,
Rite-Aid, Safeway and Target. In order to enhance its customers' ability to
place orders efficiently and accurately, Leiner has established an electronic
data interchange ("EDI") system which links Leiner electronically with many of
its customers. The most recent example of the Company's commitment to high
levels of customer service and superior order fulfillment is the Company's
implementation of a vendor managed inventory system ("VMI"). As part of the VMI
process, the Company electronically receives sales data generated by scanning
equipment at its customers' cashier stations or warehouses. Using this data, the
Company monitors and automatically restocks customer inventory as needed. The
EDI and VMI systems allow paperless order placement and increase the accuracy
and timeliness of order processing, while enabling the customer and the Company
to decrease inventory levels without losing sales due to products being
out-of-stock. In addition, by communicating customer sales data to the Company,
VMI allows the Company to better anticipate customer needs and enhances the
Company's ability to manage production scheduling. The Company believes that it
is a leader among vitamin product manufacturers and marketers in providing
advanced order processing services and expects to provide these services to an
increasing number of customers. The Company also believes that its new modern
manufacturing and distribution facilities provide the Company with an increased
capability to respond quickly to customers' sales orders while maintaining the
highest level of quality control.
MANUFACTURING PROGRAM/COST REDUCTION
Leiner is committed to being a low cost producer of vitamin products and OTC
pharmaceuticals. In support of this commitment, Leiner has invested
approximately $20.2 million since fiscal 1994 in the implementation of its
Manufacturing Program with respect to its western U.S. facilities and has
invested
45
<PAGE>
approximately $3.7 million in modern equipment for its midwestern U.S.
facilities. In addition, the Company intends to invest up to approximately $10
million in low cost manufacturing equipment and distribution enhancements for
its midwestern facilities.
The XCEL Acquisition, as well as other acquisitions made by the Company
prior to 1989, resulted in a number of separate facilities with overlapping
functions, creating opportunities to realize manufacturing cost reductions by
consolidating the acquired facilities into a smaller number of larger, more
efficient units equipped with modern tableting equipment. In response to these
opportunities in fiscal 1994, Leiner formulated the Manufacturing Program, which
called for the consolidation and expansion of its western tablet manufacturing,
packaging and distribution facilities. The Company consolidated two packaging
facilities and one distribution facility into one combined operation in Carson,
California, increasing the aggregate space dedicated to distribution and
packaging from 266,000 to 403,000 square feet. As a result of moving packaging
operations out of the Company's Garden Grove, California facility and dedicating
that facility primarily to tableting, the total tableting space at Garden Grove
has been expanded from 66,000 to 120,000 square feet.
The Company has benefited from its significant investments in modern
tableting and packaging equipment. The Company's newly purchased tableting
presses run significantly faster than its older equipment and have reduced raw
material yield loss. In addition, the new presses' advanced design and computer
controls allow quicker setups and longer runs between cleanups. The newly
purchased packaging equipment also runs significantly faster than the Company's
older equipment and allows the Company to reduce changeover time, which
increases packaging throughput and flexibility. The consolidation and consequent
simplification of the Company's manufacturing system have allowed the Company to
benefit from economies of scale (through increased average batch sizes) and to
reduce manufacturing costs (through reduced overhead and handling associated
with multiple subscale facilities). The Company has also reduced packaging
changeover downtime by increased dedication of lines by bottle size.
As a result of the Manufacturing Program, the Company's western U.S.
facilities have realized the following benefits: tableting costs per 1,000
tablets have decreased approximately 12% and distribution costs as a percentage
of sales have decreased 10.3%. In fiscal 1996, the Manufacturing Program in
fiscal 1996 reduced tableting costs by approximately $1.0 million and reduced
distribution costs by $1.5 million. The Company's western tableting capacity
increased by over 135% (or 5.2 billion tablets annually) and western bottling
capacity has increased by over 80% (or 45 million bottles annually). The Company
believes similar opportunities to realize manufacturing cost reductions exist
with respect to Leiner's midwestern facilities, and the Company plans to invest
in low cost manufacturing equipment and distribution enhancements for this
purpose.
PURCHASED MATERIALS
The Company believes it is the largest purchaser of vitamin product raw
materials in the United States and, as a result, receives volume discounts and
other benefits that the Company believes give it a competitive advantage.
The Company purchases certain important ingredients and products, which the
Company cannot manufacture, from third party suppliers. The Company currently
has supply arrangements with several suppliers of these products and believes
that these products are readily available from numerous sources. However, the
loss of its largest supplier would have a temporary adverse effect upon its
operations.
Although the Company's top two suppliers during fiscal 1996 provided
approximately 15% and 12%, respectively, of the Company's materials purchased,
the Company's raw materials are generally available from numerous sources. No
other single supplier accounts for more than 10% of the Company's raw material
purchases.
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes on the basis of customer service, product quality, pricing and
marketing support. In the vitamin product business, the
46
<PAGE>
Company believes that its major competitors are Pharmavite Corp., Rexall
Sundown, Inc. and NBTY, Inc. (manufacturer of Nature's Bounty vitamin products).
In the OTC pharmaceutical business, the Company believes its major competitor is
Perrigo Company.
The Company sells substantially all of its vitamin products in the mass
market. Although the Company does not currently participate in other channels
such as health food stores, direct mail and direct sales, the Company's products
may face competition from such alternative channels as more customers utilize
these channels of distribution to obtain vitamin products. The mass market
channel accounted for approximately 52% of all vitamin product sales in calendar
year 1995.
The Company competes with other major private label and broadline brand
manufacturers, certain of which are larger and have access to greater resources
than the Company. Among other factors, competition among private label
manufacturers is based upon price. If one or more private label or broadline
brand manufacturers significantly reduce their prices in an effort to gain
market share, the Company's results of operations or market position could be
adversely affected. However, the Company believes that it competes favorably
with other companies because of its (i) low manufacturing costs, (ii) sales and
marketing strategies, (iii) customer service (including complexity and speed of
delivery) and (iv) reputation of being a quality supplier of products.
The Company also competes with manufacturers of nationally advertised brand
name products such as American Home Products, Bayer Group and Bristol
Myers/Squibb, which are larger and have resources substantially greater than
those of the Company. In the future, one or more of these companies could seek
to compete more directly with the Company by manufacturing private label
products or by significantly lowering the prices of their national brand
products. The Company believes, however, that the mass-oriented manufacturing
and marketing methods used by national brand manufacturers are less suited to
the customized packaging and marketing requirements of private label customers,
which the Company satisfies by utilizing its packaging and graphics facilities.
See "-- Graphics and Packaging Expertise."
TRADEMARKS AND PATENTS
The Company owns trademarks registered with the United States Patent and
Trademark Office and/or certain countries for its 127 trademarks. In addition,
the Company has applications pending for 62 trademark registrations. The Company
regards its trademarks and other proprietary rights as valuable assets and
believes they are important in the marketing of the Company's products. Leiner's
most significant trademarks include Your Life-Registered Trademark-, Pharmacist
Formula-Registered Trademark-, Proven Release-Registered Trademark-, Daily
Pak-Registered Trademark-, Naturalized-Registered Trademark-,
Central-Vite-Registered Trademark-, Phytograph-TM- and
Bodycology-Registered Trademark-. The Company vigorously protects its trademarks
against infringement.
The Company does not have any patents on its proprietary processes. The
Company believes that it can better protect its trade secrets by maintaining the
confidentiality of the relevant information as opposed to generating the public
exposure inherent in the procedure of applying for patents.
ENVIRONMENTAL
The Company is subject to various federal, state and local environmental
laws and regulations. The costs of complying with such laws and regulations have
not been, and are not expected to be, material to the business of the Company.
GOVERNMENT REGULATION
The manufacturing, processing, formulation, packaging, labeling and
advertising of the Company's products are subject to regulation by one or more
federal agencies, including the FDA, the FTC and the CPSC. The activities are
also regulated by various agencies of the states and localities in which the
Company's products are sold. In addition, the Company manufactures and markets
certain of its products in compliance with the guidelines promulgated by
voluntary standard organizations, such as the USP.
FDA
The United States Food and Drug Administration ("FDA") exercises authority
over three aspects of the Company's business: (i) the labeling and marketing of
dietary supplements, (ii) the labeling and marketing of OTC pharmaceuticals and
(iii) the operation of its manufacturing and packaging facilities.
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<PAGE>
DIETARY SUPPLEMENTS. The Dietary Supplement Health and Education Act of
1994 (DSHEA) was enacted on October 25, 1994 and amends the Federal Food, Drug
and Cosmetic Act to (i) define supplements, (ii) improve the process for
introducing new dietary ingredients, (iii) permit "nutritional support" claims
for all vitamin products, including herbal products and other nutritional
supplements, and (iv) permit the use of published literature in the sale of
vitamin products. Dietary supplements are regulated as foods under DSHEA and the
FDA is prohibited from regulating the dietary ingredients in supplements as food
additives, or the supplements as drugs unless product claims trigger drug
status.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements. The FDA has proposed the form of these requirements, which are
proposed to become effective January 1, 1998. DSHEA permits substantiated,
truthful and non-misleading statements of nutritional support to be made in
labeling, including describing the positive effects on general well-being from
consumption of a dietary ingredient or the role of a nutrient or dietary
ingredient in affecting or maintaining structure or function of the body. In
addition, DSHEA also authorizes the FDA to promulgate current good manufacturing
practices specific to the manufacture of dietary supplements, to be modeled
after food current good manufacturing practices. The Company currently
manufactures its dietary supplement products pursuant to the more detailed OTC
pharmaceutical current good manufacturing practices.
The FDA has begun proposing regulations to implement DSHEA. The Company
cannot determine what effect such regulations, when promulgated, will have on
its business in the future. Regulations in the form currently proposed by the
FDA will likely require, among other things, expanded or different labeling. In
addition, regulations promulgated by the FDA in the future could significantly
limit certain provisions of DSHEA that are beneficial to the sales of vitamin
products. See "Risk Factors -- Potential For Increased Government Regulation."
The Nutrition Labeling and Education Act of 1990 (the "NLEA"), in part
modified by DSHEA, requires the FDA to establish regulations (i) governing
nutrition labeling of all foods, including dietary supplements, (ii) regulating
the use of nutrient content descriptors (e.g., "high" or "low") and (iii)
establishing permitted health claims. The FDA issued final regulations under the
NLEA in January 1993. A limited number of Company's vitamin products are foods
subject to all of the January 1993 NLEA regulations; most Company's vitamin
products are dietary supplements subject to the health claim regulations only.
Based on the changes to the NLEA effected by DSHEA, the FDA has proposed new
dietary supplement regulations (i) adopting standard formats for nutrition
information on dietary supplement labels and (ii) applying existing approved and
proposed new descriptors to dietary supplements. Under the current FDA proposal,
the nutrition information and descriptor regulations for dietary supplements
would apply to packages labeled on or after January 1, 1998. Previously labeled
packages could be sold through the distribution chain. The health claim
regulations took effect for packages labeled, or claims made, after July 1,
1994. While packages labeled before July 1, 1994 are protected from charges
under the NLEA for making unapproved health claims, the FDA is not prevented
from using these health claims to allege that the relevant product is a drug
and, therefore, is subject to applicable drug regulations. The Company has
established accounting reserves in connection with the anticipated cost of
complying with the new regulations, which the Company believes are adequate.
The Company cannot determine what effect the FDA's future regulations, when
and if promulgated, would have on its business in the future. Such regulations
could, however, among other things, require expanded documentation of the
properties of certain products, or scientific substantiation regarding
ingredients, product claims or safety. In addition, the Company cannot predict
whether new legislation regulating the Company's activities will be enacted, or
what the effect any such legislation would have on the Company's business.
OTC PHARMACEUTICALS. FDA regulation of OTC pharmaceuticals takes two forms.
Most of the Company's OTC pharmaceutical products are governed by FDA monographs
covering well-known ingredients and specifying, among other things, permitted
claims, required warnings and precautions, allowable combinations of ingredients
and dosage levels. Marketing a product governed by a monograph or pending
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<PAGE>
monograph requires no prior approval of the FDA, only compliance with the
applicable monograph. Monographs may be changed from time to time requiring
formulation, packaging or labeling changes for an affected product. While such
changes may cause the Company to incur costs to comply with such changes,
disruption of distribution or material obsolescence of inventory due to any such
changes is not likely.
In the future, the Company may desire to market as over-the-counter products
previously "prescription only" pharmaceutical ("RxOTC switch products"), which
require FDA approval before the products can be marketed. The marketing of such
products by the Company will require that the Company obtain FDA approvals or
arrange to obtain such products from manufacturers that have obtained FDA
approval. In addition, the Drug Price Competition & Patent Term Restoration Act
of 1984 (the Hatch-Waxman Amendments to the Federal Food, Drug, and Cosmetic
Act) gives a three-year period of marketing exclusivity to a company that
obtains FDA approval of a switch requiring clinical evidence of effectiveness of
the OTC pharmaceutical dose. Unless Leiner establishes relationships with such
companies having exclusive marketing rights, the Company's ability to market
RxOTC switch products and offer its customers products comparable to national
brand products would be delayed until the expiration of the exclusivity granted
to the company initiating such a switch. There can be no assurance that, in the
event that the Company applies for FDA approvals, the Company would obtain such
approvals to market RxOTC switch products or, alternatively, that the Company
would be able to obtain such products from other manufacturers.
MANUFACTURING AND PACKAGING. All facilities where foods (including dietary
supplements) and pharmaceuticals are manufactured, packed, warehoused, or sold
must comply with the FDA manufacturing standards applicable to that type of
product. All of the Company's products are manufactured according to cGMP. The
failure of a facility to be in compliance may lead to a breach of
representations made to private label customers or to regulatory action against
the products made in that facility, including seizure, injunction or recall. The
Company believes that its facilities are in compliance in all material respects
with cGMP and other applicable requirements for each facility.
CPSC
The United States Consumer Product Safety Commission ("CPSC") has authority,
under the Poison Prevention Packaging Act, to designate those products,
including vitamin products and OTC pharmaceuticals, that require child resistant
closures to help reduce the incidence of poisonings. The CPSC has adopted
regulations requiring numerous OTC pharmaceuticals and iron-containing dietary
supplements to have such closures, and has adopted rules on the testing of such
closures by both children and adults. The Company, working with its packaging
suppliers, believes that it is in compliance with all CPSC requirements.
FTC
The United States Federal Trade Commission ("FTC") exercises primary
jurisdiction over the advertising and other promotional practices of food and
OTC pharmaceutical marketers, and has concurrent jurisdiction with the FDA over
the advertising and promotional practices of marketers of dietary supplements.
The FTC has historically applied a different standard to health-related claims
than the FDA; the FTC has applied a "substantiation standard," which is less
restrictive than the standard under the NLEA. The FTC NLEA enforcement policy
uses FDA regulations as a baseline (and safe harbor) and permits (i) nutrient
content descriptions that are reasonable synonyms of FDA-permitted terms, and
(ii) qualified health claims not approved by FDA where adequate substantiation
exists for the qualified or limited claims.
STATE REGULATION
All states regulate foods and drugs under local laws that parallel federal
statutes. Because the NLEA gave the states the authority to enforce many
labeling prohibitions of the Federal Food, Drug, and Cosmetic Act, after
notification to the FDA, the Company and other dietary supplement manufacturers
may be subject to increasing state scrutiny for NLEA compliance, as well as
increasing FDA review.
The Company's operations and products are also subject to special state
laws, such as the California Safe Drinking Water and Toxic Enforcement Act
(commonly known as "Proposition 65"). Under Proposition 65, chemicals are
subject to being identified by the State of California as carcinogens or
reproductive toxicants.
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<PAGE>
For several years the California Attorney General's Office has been
investigating the Proposition 65 implications of the presence of minute amounts
of lead in the calcium supplement products sold by the Company and others in the
industry. Lead is a listed chemical under Proposition 65. Subject to certain
exceptions and defenses, some of which the Company believes are applicable to
it, a person who knowingly and intentionally exposes another to a listed
chemical is subject to enforcement proceedings, including substantial civil
penalties, unless an adequate warning is provided. Neither the Company nor other
members of the industry have been providing such warnings. The Company's calcium
products comply with all federal regulations governing lead content.
The Company has cooperated with the Attorney General's investigation, which
the Company understands is in its final stages. It is uncertain whether the
Attorney General will take any enforcement action under Proposition 65 or what
form any enforcement action would take. Under certain circumstances, private
plaintiffs are permitted to file enforcement actions against those who are
alleged to be violating Proposition 65, even if the Attorney General has
declined to act. The Company does not believe that the resolution of this matter
will have a material adverse effect on the Company.
USP
The United States Pharmacopoeial Convention, Inc. is a non-governmental,
voluntary standard-setting organization. Its drug standards are incorporated by
reference into the Federal Food, Drug, and Cosmetic Act as the standards that
must be met for the listed drugs, unless compliance with those standards is
specifically disclaimed. USP standards exist for most OTC pharmaceuticals. The
FDA requires USP compliance as part of cGMP.
The USP began adopting standards for vitamin and mineral dietary supplements
in 1994. These standards cover composition (both of nutrient ingredient
combinations, and "other ingredients," i.e., those used as binders, fillers,
colorants, or other incidental ingredients), disintegration and dissolution
requirements, and cGMP requirements. The USP promulgated disintegration and
dissolution standards that became requirements of USP compliance in 1995. While
USP standards in this area are voluntary, and not incorporated into federal law,
customers of the Company may demand that products they are supplied meet these
standards. 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 of its vitamin products for which
no USP standards have been adopted) comply with existing USP standards.
LEGAL PROCEEDINGS AND PRODUCT LIABILITY
Due to a strong epidemiological link between the ingestion of L-Tryptophan
and a blood disorder known as eosinophilia myalgia syndrome ("EMS") discovered
in 1989, numerous manufacturers, distributors, suppliers, importers, and
retailers of L-Tryptophan or products containing L-Tryptophan are or were
defendants in an estimated 2,000 actions brought in federal or state courts
seeking compensatory and, in some cases, punitive damages for alleged personal
injuries resulting from the ingestion of certain products containing
L-Tryptophan. As of May 13, 1996, the Company and/or certain of its customers,
many of whom have tendered their defense to the Company, had been named in
approximately 650 lawsuits of which approximately 640 have been settled. There
has been no indication that EMS was caused by any formulation or manufacturing
fault of the Company and extensive evidence now indicates that some shipments
from a single raw material supplier may have caused the illness. As a result of
the Defense and Indemnification Agreement described below, to date the Company
has not been required to make any payments towards the cost of defense or
settlement for any of these lawsuits.
The Company and certain other companies in the industry, including
distributors, wholesalers and retailers (the "Indemnified Group"), have entered
into an agreement (the "Defense and Indemnification Agreement") with the
Company's supplier of bulk L-Tryptophan, Showa Denko America, Inc. (the
"Supplier"), under which the Supplier, a U.S. subsidiary of a major Japanese
corporation, Showa Denko K.K., has assumed the defense of all claims against the
Indemnified Group arising out of the ingestion of L-Tryptophan products and has
agreed to pay the legal fees and expenses in that defense. The Supplier has
agreed to indemnify the Indemnified Group against any judgments and to fund
settlements arising out of those actions and claims if it is determined that a
cause of the injuries sustained by the plaintiffs was a
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constituent in the bulk material sold by the Supplier to the Indemnified Group,
except for certain claims relating to punitive damages. To date, the Supplier
has funded all settlements and paid all legal fees and expenses incurred by the
Indemnified Group.
Of the remaining ten cases, management of the Company does not expect that
the Company will be required to make any material payments in connection with
their resolution by virtue of the Defense and Indemnification Agreement.
Accordingly, no provision has been made in the Company's Consolidated Financial
Statements for any loss that may result from the remaining actions. In the event
that the Supplier ceases to honor the Defense and Indemnification Agreement, the
Company has product liability insurance which it believes will provide adequate
coverage for any remaining liability for compensatory damages, legal defense
costs and, in certain states, punitive damages, in each case, arising from its
sales of the L-Tryptophan, subject to deductibles not to exceed $900,000 in the
aggregate. Although it is possible that the Company or its customers could be
named as defendants in new lawsuits, the Company has been advised by its legal
advisors that, in addition to the indemnification provided under the Defense and
Indemnification Agreement, the Company would likely be able to defend against
such lawsuits on the basis of an expired statute of limitations.
The Company is currently engaged in various other legal actions and
governmental proceedings, and, although ultimate liability cannot be determined
at the present time, the Company is currently of the opinion that the amount of
any such liability from these other actions and proceedings when taking into
consideration the Company's product liability coverage, will not have a material
adverse impact on its financial position.
The Company, like other retailers, distributors and manufacturers of
products that are ingested, faces an inherent risk of exposure to product
liability claims in the event that, among other things, the use of its products
results in injury. With respect to product liability coverage, the Company
currently has an aggregate of $47.0 million of insurance coverage, including
primary products liability and umbrella liability coverage with deductibles of
(i) in the case of OTC pharmaceuticals, $100,000 per claim subject to an annual,
aggregate deductible limit of $1.0 million and (ii) in the case of vitamin and
all other products, $100,000 per claim, subject to an annual, aggregate
deductible limit of $1.0 million.
PROPERTIES
The following table sets forth the location, square footage and ownership
interest in each of the Company's principal facilities. See " -- Manufacturing
and Distribution" for a description of the Company's ongoing consolidation
program.
<TABLE>
<CAPTION>
APPROX. LEASED OR
LOCATION TYPE OF FACILITY SQUARE FEET OWNED
- --------------------- ------------------------------------------------- ----------- ---------
<S> <C> <C> <C>
Carson, CA Packaging, distribution and corporate offices 471,500 Leased
Garden Grove, CA Manufacturing 138,500 Leased
Chicago, IL Manufacturing 379,000 Owned
Kalamazoo, MI Manufacturing 51,250 Owned
West Unity, OH Packaging and distribution 190,500 Leased
Sherburne, NY Packaging and distribution 10,300 Owned
Madison, WI Packaging and distribution 95,500 Owned
</TABLE>
The Company believes that its facilities and equipment generally are well
maintained and in good operating condition.
EMPLOYEES
As of March 31, 1996, the Company had approximately 1,185 full-time
employees. Approximately 215 employees were engaged in executive or
administrative capacities and approximately 970 employees were engaged in
manufacturing, packaging or distribution. In addition, the Company employs
approximately 660 temporary employees. The large number of temporary employees
gives the Company significant flexibility to adjust staffing levels in response
to seasonal fluctuations in demand. None of the Company's employees is
represented by a collective bargaining unit. The management of the Company
considers its relations with its employees to be good.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the name, age at March 31, 1996, and
positions of each person who is a director or executive officer of the Company.
Effective as of March 31, 1994, each executive officer of LHP was appointed to
serve as an executive officer of Leiner Health Products Group Inc. Unless
otherwise indicated, each executive officer of Leiner Health Products Group Inc.
holds identical executive officer positions with LHP, Leiner Health Products
Group Inc.'s sole operating subsidiary, as he or she does with Leiner Health
Products Group Inc. Officers serve at the discretion of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Francis C. Rooney, Jr. (a)(b) 74 Director; Chairman of the Board*
Robert M. Kaminski (a) 45 Director; Chief Executive Officer
Gale K. Bensussen 49 Director; President
David F. Brubaker 51 Director; Chairman and Founder of LHP
Kevin J. Lanigan 49 Executive Vice President and Chief Operations
Officer
Diane J. Beardsley 41 Senior Vice President, Chief Financial Officer and
Treasurer
Stanley J. Kahn 43 Senior Vice President - Sales
Howard L. Clark (c) 80 Director
Hamish Maxwell (c) 69 Director
Carl M. Mueller (b) 75 Director
</TABLE>
- -------------------
* Holds position with Leiner Health Products Group Inc. only.
(a) Member of the Executive Committee.
(b) Member of the Compensation Committee.
(c) Member of the Audit Committee.
The principal occupations and positions for at least the past five years of
each of the directors and executive officers of the Company are as follows:
Francis C. Rooney, Jr., has been a Director and Chairman of the Board of
Directors of the Company since June 1992. Since November 1990, Mr. Rooney has
been Chairman and Chief Executive Officer of H.H. Brown Shoe Co. From 1975 to
1987, Mr. Rooney was Chairman and Chief Executive Officer of Melville
Corporation. From 1964 to 1975, Mr. Rooney was President and Chief Executive
Officer of Melville Corporation.
Robert M. Kaminski has been a Director of the Company since June 1992 and
Chief Executive Officer of the Company since March 1994. He has been Chief
Executive Officer of LHP since May 1992. From 1988 to 1992, Mr. Kaminski was
Chief Operating Officer of the Predecessor Company and from 1982 to 1988, he was
Vice President - Sales of the Predecessor Company. Mr. Kaminski joined the
Predecessor Company in 1978.
Gale K. Bensussen has been a Director of the Company since June 1992 and
President of the Company since March 1994. He has been a Director of LHP since
June 1992 and President of LHP since May 1992. Mr. Bensussen was Senior Vice
President Marketing and Corporate Development of the Predecessor Company from
May 1991 to May 1992. From July 1988 to May 1991, Mr. Bensussen was Senior Vice
President - Sales and Marketing of the Predecessor Company. Mr. Bensussen joined
the Predecessor Company in 1974.
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David F. Brubaker became a Director of the Company in June 1992. He became
Chairman and Founder of LHP in May 1992. From 1984 to 1992, Mr. Brubaker was
President of the Predecessor Company. In 1973, Mr. Brubaker founded the vitamin
division of P. Leiner & Sons America, which ultimately became LHP.
Kevin J. Lanigan became Executive Vice President and Chief Operations
Officer of the Company in March 1994 and of LHP in May 1992. From 1986 to 1992,
Mr. Lanigan was Senior Vice President - Operations Planning of the Predecessor
Company and, from 1979 to 1986, was Vice President - Operations. Before joining
the Predecessor Company in 1973, he held various engineering positions in the
aerospace industry.
Diane J. Beardsley became Senior Vice President and Chief Financial Officer
of the Company in March 1994 and of LHP in May 1992. From November 1988 to 1992,
Ms. Beardsley was Vice President - Chief Financial Officer of the Predecessor
Company and, from April 1988 to November 1988, was Corporate Controller of the
Predecessor Company. Ms. Beardsley joined a subsidiary of the Predecessor
Company as Controller in 1986.
Stanley J. Kahn became Senior Vice President - Sales of the Company in March
1994 and of LHP in May 1992. From September 1989 to 1992, Mr. Kahn was Vice
President - Sales of the Predecessor Company and, from July 1988 to September
1989, was Vice President - Business Development. Mr. Kahn was National Key
Account Manager from 1985 to 1988. Mr. Kahn joined the Predecessor Company in
1980 as Regional Sales Manager.
Howard L. Clark has been a Director of the Company since June 1992. Mr.
Clark was Chief Executive Officer of American Express Company from 1960 to 1977,
first as President and then as Chairman of the Board. Mr. Clark is also a
director of Fund American Enterprises, Inc.
Hamish Maxwell has been a Director of the Company since June 1992. Mr.
Maxwell was Chairman of the Executive Committee of the Board of Directors of
Philip Morris Companies Inc. ("Philip Morris") from September 1991 to April
1995. He was Chairman and Chief Executive Officer of Philip Morris from 1984
until his retirement in 1991. Mr. Maxwell is also a director of Bankers Trust
New York Corporation, The News Corporation Limited and Sola International Inc.
Carl M. Mueller became a Director of the Company in June 1992. Mr. Mueller
was Vice Chairman of Bankers Trust Company from 1977 to June 1985. Mr. Mueller
is also a director of Teltrend Inc.
The Company's directors hold office until the next annual meeting of
stockholders or until their respective successors are duly elected and
qualified. The Company will pay each director who is not an employee of the
Company or AEA a fee of $5,000 per year for services as a director, except for
the Chairman of the Board of Directors, who receives an annual fee of $25,000,
plus $500 for each meeting of the board of directors attended, plus reasonable
travel expenses.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation of each of the Company's
chief executive officer and the four most highly paid executive officers (other
than the chief executive officer) (collectively, the "named executive officers")
for fiscal 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION (1) -------------
------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS
NAME AND PRINCIPAL POSITION ($) ($)[*] ($) (#)
- ---------------------------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Robert M. Kaminski .................................
Chief Executive Officer $ 384,500 --
Gale K. Bensussen ..................................
President 237,500 --
David F. Brubaker ..................................
Chairman and Founder of LHP 376,000 --
Kevin J. Lanigan ...................................
Executive Vice President 198,000 --
Stanley J. Kahn ....................................
Senior Vice President 237,500 --
</TABLE>
- -------------------
(1) The compensation described in this table does not include medical and group
life insurance received by the named executive officers which are available
generally to all salaried employees of the Company and certain perquisites
and other personal benefits received by the named executive officers, the
value of which does not exceed the lesser of $50,000 or 10% of any such
officer's total salary and bonus disclosed in this table.
[ * Fiscal 1996 bonuses were not determined as of the date of this Prospectus.]
54
<PAGE>
The following table sets forth the stock option grants to each of the named
executive officers for fiscal 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM*
OPTIONS IN FISCAL PRICE EXPIRATION --------------------
NAME GRANTED (#) YEAR ($/SH) DATE 5%($) 10%($)
- -------------------------------------- -------------- ------------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Kaminski....................
Gale K. Bensussen.....................
David F. Brubaker.....................
Kevin J. Lanigan......................
Stanley J. Kahn.......................
</TABLE>
- -------------------
* Sets forth potential option gains based on assumed annualized rates of stock
price appreciation from the exercise price at the date of grant of 5% and
10% (compounded annually) over the full term of the grant with appreciation
determined as of the expiration date. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission, and do not represent the Company's estimate or projection of
future Common Stock prices.
The following table sets forth the stock option exercises for the fiscal
year ended March 31, 1996 and the stock option values as of March 31, 1996, in
each case, for each of the named executive officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND OPTION VALUES AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNSECURED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL
SHARES YEAR-END YEAR-END
ACQUIRED VALUE (#) ($)*
ON EXERICSE REALIZED -------------------------- --------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Robert M. Kaminski................
Gale K. Bensussen.................
David F. Brubaker.................
Kevin J. Lanigan..................
Stanley J. Kahn...................
</TABLE>
- -------------------
* Sets forth values for "in the money" options that represent the positive
spread between the respective exercise prices of outstanding stock options
and the value of the Company's Common Stock as of March 31, 1996 based on an
assumed public offering price of $15.00 per share.
SEVERANCE ARRANGEMENTS
In November 1991, the Predecessor Company entered into certain severance
arrangements with members of the Company's senior management, pursuant to which
the Company will pay severance benefits if the individual's employment is
terminated by the Company other than for cause or if the individual resigns his
or her employment with the Company for good reason.
55
<PAGE>
The severance benefits provided to each of Robert M. Kaminski, Gale K.
Bensussen, David F. Brubaker and Stanley J. Kahn include (a) a lump-sum
severance payment equal to the sum of (i) one year's base salary, plus (ii) any
annual individual performance bonus or targeted commission, both as in effect at
the time of the termination or resignation; (b) outplacement assistance at the
Company's expense, up to a maximum cost to the Company of $20,000; and (c) any
rights under applicable Company plans or programs, including but not limited to
stock option and incentive plans, as may be determined pursuant to the terms of
such plans or programs. The severance benefits provided to Kevin J. Lanigan
include a lump-sum severance payment equal to three times the sum of one year's
base salary plus any annual individual performance bonus or targeted commission,
both as in effect at the time of termination or resignation, as well as the
benefits described in clauses (b) and (c) above; subject to certain limitations
to the extent that the Company determines that the foregoing benefits would not
be deductible by the Company because such payments constitute an "excess
parachute payment" (as defined in section 280G of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code")).
STOCK OPTION PLAN
GENERAL. The board of directors adopted the Leiner Health Products Group
Inc. Stock Option Plan (the "Stock Option Plan") on , 1996, effective as
of . The Stock Option Plan is an amendment and restatement of the
Company's original stock option plan. The Stock Option Plan is designed to help
the Company and its subsidiaries attract and retain skilled individuals for key
positions within the Company and its subsidiaries by permitting the Company to
offer such individuals the opportunity to acquire an equity interest in the
Company. To date, the Committee has not determined to grant any options under
the Stock Option Plan; however, it may do so in the future.
SUMMARY OF STOCK OPTION PLAN. The following summary description of the
principal terms of the Stock Option Plan does not purport to be complete and is
qualified in its entirety by the full text of the Stock Option Plan, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Pursuant to the Stock Option Plan, key employees of the Company will be
eligible to receive awards of stock options in consideration for services
performed for the Company. Currently, there are approximately 25 persons
eligible to receive awards under the Stock Option Plan. Options granted under
the Stock Option Plan may be either nonqualified stock options or "incentive
stock options," within the meaning of section 422 of the Internal Revenue Code.
The Company has authorized shares of Common Stock for issuance of awards
under the Stock Option Plan (subject to antidilution and similar adjustments).
As of March 31, 1996, options for the purchase of shares of Common Stock were
outstanding, including options to purchase shares granted to employees in
fiscal 1996. Information concerning option grants to certain executive officers
under the Stock Option Plan during the year ended March 31, 1996 is set forth in
the table entitled "Option Grants in Last Fiscal Year."
The Stock Option Plan will be administered by a committee consisting of at
least two members of the Board (the "Committee"). Initially, the Compensation
Committee shall act as the Committee. Subject to the provisions of the Stock
Option Plan, the Committee will determine when and to whom options will be
granted, the number of shares covered by each option award and the terms and
provisions applicable to each option; provided, however, that the Committee may
not award options to any employee with respect to more than shares of
Common Stock in any fiscal year during the term of the Stock Option Plan. Awards
may be made under the Stock Option Plan to such key employees of the Company as
the Committee in its sole discretion shall decide. The Committee may interpret
the Stock Option Plan and may at any time adopt such rules and regulations for
the Stock Option Plan as it deems advisable.
An option may be granted on such terms and conditions as the Committee may
approve, provided that all options must be granted with an exercise price equal
to the fair market value of the underlying shares as of the date of grant (110%
in the case of incentive stock options granted to a "ten percent shareholder"
(as defined in section 422 of the Internal Revenue Code)). Payment of the option
exercise price may be made by
56
<PAGE>
a certified or official bank check or, subject to Committee consent, by the
surrender of shares of Common Stock that had been owned by the optionee for at
least six months prior to the date of exercise. Unless the Committee otherwise
provides in the agreement evidencing the grant of an option, an option becomes
exercisable with respect to 25% of the underlying shares on the date of grant,
and with respect to an additional 25% on each of the first three anniversaries
of the date of grant. Each option shall be for such term as the Committee shall
determine, provided that no incentive stock option shall have a term of greater
than ten years (five years in the case of an incentive stock option granted to a
"ten percent shareholder"). Unless otherwise determined by the Compensation
Committee, in the event of certain change of control transactions with respect
to the Company, all outstanding options shall vest and, upon exercise, entitle
the holder thereof to receive the same amount and kind of stock, securities,
cash, property or other consideration that each holder of a share of Common
Stock was entitled to receive in such transaction. Prior to the Offering there
has been no public market for the Common Stock.
The board of directors may at any time and from time to time suspend, amend,
modify or terminate the Stock Option Plan; provided, however, that, to the
extent required by Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended, or any other law, regulation or stock exchange rule, no such
change shall be effective without the requisite approval of the Company's
stockholders. In addition, no such change may adversely affect any award
previously granted, except with the written consent of the grantee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion is a
brief summary of the principal United States federal income tax consequences
under current federal income tax laws relating to options awarded under the
Stock Option Plan. This summary is not intended to be exhaustive and, among
other things, does not describe state, local or foreign income and other tax
consequences.
An optionee will not recognize any taxable income upon the grant of a
nonqualified option and the Company will not be entitled to a tax deduction with
respect to such grant. Upon exercise of a nonqualified option, the excess of the
fair market value of the Common Stock on the exercise date over the exercise
price will be taxable as compensation income to the optionee. Subject to the
optionee including such excess amount in income or the Company satisfying
applicable reporting requirements, the Company should be entitled to a tax
deduction in the amount of such compensation income. The optionee's tax basis
for the Common Stock received pursuant to such exercise will equal the sum of
the compensation income recognized and the exercise price.
In the event of a sale of Common Stock received upon the exercise of a
nonqualified option, any appreciation or depreciation after the exercise date
generally will be taxed as capital gain or loss and will be long-term gain or
loss if the holding period for such Common Stock was more than one year.
Generally, an optionee should not recognize taxable income at the time of
grant or exercise of an incentive stock option and the Company should not be
entitled to a tax deduction with respect to such grant or exercise. The exercise
of an incentive stock option generally will give rise to an item of tax
preference that may result in alternative minimum tax liability for the
optionee.
A sale or other disposition by an optionee of shares acquired upon the
exercise of an incentive stock option more than one year after the transfer of
the shares to such optionee and more than two years after the date of grant of
the incentive stock option should result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain or loss
to the optionee with no deduction being allowed to the Company. Upon a sale or
other disposition of shares acquired upon the exercise of an incentive stock
option within one year after the transfer of the shares to the optionee or
within two years after the date of grant of the incentive stock option
(including the delivery of such shares in payment of the exercise price of
another incentive stock option within such period), any excess of (a) the lesser
of (i) the fair market value of the shares at the time of exercise of the option
and (ii) the amount realized on such disqualifying sale or other disposition of
the shares over (b) the exercise price of such shares, should constitute
ordinary income to the optionee and the Company should be entitled to a
deduction in the amount of such income. The excess, if any, of the amount
realized on a disqualifying sale over the fair market
57
<PAGE>
value of the shares at the time of the exercise of the option generally will
constitute short-term or long-term capital gain and will not be deductible by
the Company. Special rules may apply to optionees who are subject to section 16
of the Securities Exchange Act of 1934.
Under certain circumstances the accelerated vesting or exercise of options
in connection with a change of control of the Company might be deemed an "excess
parachute payment" for purposes of the golden parachute tax provisions of
section 280G of the Internal Revenue Code. To the extent it is so considered,
the optionee may be subject to a 20% excise tax and the Company may be denied a
tax deduction.
Section 162(m) of the Internal Revenue Code generally disallows a federal
income tax deduction to any publicly held corporation for compensation paid in
excess of $1 million in any taxable year to the chief executive officer or any
of the four other most highly compensated executive officers who are employed by
the Company on the last day of the taxable year. Compensation attributable to
options granted under the Company's Stock Option Plan should not be subject to
such deduction limitations.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
Francis C. Rooney, Jr., Charles F. Baird, Jr. and Carl M. Mueller served on
the Company's Compensation Committee during fiscal 1996. Mr. Baird also served
as an officer of the Company during fiscal 1996. Mr. Baird no longer serves as
an officer or director of the Company.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock (i) immediately prior to the Offering,
giving effect to the Recapitalization and (ii) as adjusted to reflect the sale
of shares of Common Stock pursuant to the Offering (a) by each person or entity
who is known to the Company to be the beneficial owner of more than 5% of the
Common Stock after the Offering, (b) by each named executive officer and
director of the Company and (c) by all directors and executive officers as a
group. Except as otherwise indicated, the person or entities listed below have
sole voting and investment power with respect to all shares of Common Stock
owned by them, except to the extent such power may be shared with a spouse.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING COMMON STOCK
BENEFICIALLY BEFORE OUTSTANDING AFTER
NAME OWNED (1) OFFERING (1) OFFERING (1)
- ---------------------------------------------------- -------------------- ----------------- -----------------
<S> <C> <C> <C>
5% STOCKHOLDERS
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Robert M. Kaminski (2)..............................
Gale K. Bensussen (3)...............................
David F. Brubaker (4)...............................
Kevin J. Lanigan (5)................................
Stanley J. Kahn (6).................................
Francis C. Rooney, Jr...............................
Howard L. Clark.....................................
Hamish Maxwell......................................
Carl M. Mueller.....................................
All directors and executive officers
(10 persons) (7)..................................
</TABLE>
- -------------------
* The percentage of shares of Common Stock beneficially owned does not exceed
one percent of the outstanding shares of Common Stock.
(1) For purposes of this table, information as to the shares of Common Stock (a)
assumes that the Underwriters' over-allotment option is not exercised and
(b) does not give effect to purchases, if any, by such persons or entities
in the Offering. For purposes of this table, a person or group of persons is
deemed to have "beneficial ownership" of any shares of Common Stock which
such person has the right to acquire within 60 days after April 30, 1996.
For purposes of computing the percentage of outstanding shares of Common
Stock held by each person or group of persons named above, any shares that
such person or persons has the right to acquire within 60 days after the
date of this Prospectus is deemed to be outstanding but is not deemed to be
outstanding for the purpose of computing the percentage ownership of any
other person.
(2) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
(3) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
(4) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
(5) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
59
<PAGE>
(6) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
(7) Includes shares issuable upon the exercise of options that are exercisable
within 60 days after April 30, 1996.
60
<PAGE>
CERTAIN TRANSACTIONS
OWNERSHIP OF REDEEMABLE PREFERRED STOCK AND COMMON STOCK
On December 10, 1993 and in connection with the closing of the Credit
Agreement, AEA purchased 10,000 shares of Redeemable Preferred Stock for an
aggregate purchase price of $9 million. The Redeemable Preferred Stock will be
redeemed for approximately $11.9 million, including accrued dividends, with a
portion of the net proceeds of the Offering. See "Use of Proceeds."
The following table sets forth the amounts paid by (a) the named executive
officers and (b) all directors and executive officers as a group for the Common
Stock they held immediately prior to the Offering and the value of such persons'
continuing investment in the Company's Common Stock.
<TABLE>
<CAPTION>
INVESTMENT IN COMMON COMMON STOCK HELD
STOCK AFTER OFFERING (A)
-------------------- --------------------
INVESTOR #(B) $(C) #(B) $(C)
- ------------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Robert M. Kaminski..........................................
Gale K. Bensussen...........................................
David F. Brubaker...........................................
Kevin J. Lanigan............................................
Stanley J. Kahn.............................................
All directors and executive officers (10 persons)...........
</TABLE>
- -------------------
(a) Assumes an initial public offering price of $15.00 per share.
(b) With respect to executive officers of the Company, includes the number of
shares purchased in connection with the LHP Acquisition and shares
purchasable pursuant to stock options exercisable within 60 days of April
30, 1996.
(c) Includes the exercise price of stock options exercisable within 60 days of
April 30, 1996.
OTHER TRANSACTIONS
On May 4, 1992, upon consummation of the LHP Acquisition, the Company paid a
fee of $1.5 million plus expenses to AEA for negotiating the LHP Acquisition
with the Predecessor Company and arranging the financing for the LHP
Acquisition.
On May 4, 1992, the Company and AEA entered into a management agreement,
pursuant to which AEA has provided management, consulting and financial services
to the Company for an annual professional service fee of $350,000 plus expenses.
The Company believes that the fees paid to AEA for these services are comparable
to fees that would be paid to unaffiliated third parties for similar services.
Upon consummation of the Offering, the Company and AEA expect to terminate the
management agreement. In connection with the termination of the management
agreement, the Company will pay AEA a termination fee of $1.5 million.
The Company receives the benefit of volume discounts for certain office
services and supplies made available to various companies associated with AEA
pursuant to arrangements managed by a subsidiary of AEA.
The Company has entered into agreements to provide indemnification for its
directors and executive officers in addition to the indemnification provided for
in the Company's Certificate of Incorporation and By-Laws.
DESCRIPTION OF CERTAIN INDEBTEDNESS
The summaries contained herein of certain provisions of the material
indebtedness of LHP do not purport to be complete and are qualified in their
entirety by reference to the various agreements which are filed as exhibits to
the Registration Statement of which this Prospectus is a part. Capitalized terms
used in this section and not otherwise defined have the meanings ascribed
thereto in the various agreements.
61
<PAGE>
THE CREDIT AGREEMENT
LHP is a party to a credit agreement, dated as of December 10, 1993 and
amended as of September 30, 1994, February 26, 1996 and June , 1996 (as
amended, the "Credit Agreement"), with various financial institutions party
thereto (the "Lenders") and The Bank of Nova Scotia ("Scotiabank"), as agent for
the Lenders.
The Credit Agreement, which expires on June 30, 1998, consists of revolving
loan commitments and letters of credit commitments issued by the respective
Lenders, and a swing line loan commitment provided by Scotiabank. The maximum
amount which, at any one time, may be outstanding under revolving loans and
under swing line loans and which may be undrawn and available under all issued
and outstanding letters of credit (the "Total Commitment Amount") may not exceed
the lesser of (i) the revolving loan commitment amount then in effect (currently
$55 million) or (ii) 80% of specified accounts receivable plus 50% of specified
inventory (at March 31, 1996, $83.8 million). Neither the amount which may be
undrawn and available under all issued and outstanding letters of credit at any
one time nor the amount which may be borrowed under swing line loans may exceed
$5 million. As of March 31, 1996, the amount of outstanding revolving loans and
outstanding swing line loans was $42.8 million and $0 million, respectively, and
no letters of credit were outstanding.
LHP may elect that revolving loans made under the Credit Agreement bear
interest at a rate equal to either (i) a fluctuating rate ("Base Rate Loans")
determined by reference to the Scotiabank Alternate Base Rate plus a margin of
between 0% and 1.25% (based on LHP's ratio of Consolidated Debt to Total
Capital) or (ii) a rate fixed for the applicable interest period selected by LHP
of one, two, three or six months, determined by reference to the LIBO Rate
(Reserve Adjusted) plus a margin of between 1.50% and 2.25% (based on LHP's
ratio of Consolidated Debt to Total Capital). Swing line loans may be made as
Base Rate Loans only. At March 31, 1996, the $42.8 million outstanding under the
Credit Agreement bore interest at the weighted average of 8.2% per annum.
The Credit Agreement requires that LHP prepay the outstanding principal
amount of the Loans in an aggregate amount equal to (i) a portion (allocated
between the Lenders under the Credit Agreement and the holders of the Senior
Notes) of net proceeds received by LHP or its Subsidiaries from certain asset
sales and (ii) the principal amount of any voluntary prepayment of the Senior
Notes. LHP's obligations under the Credit Agreement are guaranteed by PLI
Holdings Inc. ("Holdings") and will be guaranteed by any subsequently formed or
acquired United States subsidiaries of LHP. In addition, the obligations of LHP
under the Credit Agreement are secured by (i) a security interest in all the
issued and outstanding shares of capital stock of LHP, (ii) intercompany notes
and (iii) all or a portion of the capital stock of certain subsidiaries.
AFFIRMATIVE AND NEGATIVE COVENANTS. The Credit Agreement contains a number
of covenants including, among others, covenants restricting the ability of LHP
(and, in some cases, its Subsidiaries, if any) to incur indebtedness or make
guarantees, enter into transactions with affiliates, engage in businesses
unrelated to the manufacture, marketing or distribution of vitamins, minerals,
nutritional supplements and over-the-counter drugs, create liens, make certain
investments or loans or effect certain transactions such as consolidations or
sales of assets other than in the ordinary course of business and other
transactions. The Credit Agreement also restricts the ability of LHP to declare
or pay any dividend or distribution on capital stock of LHP or on warrants,
options or other rights with respect to capital stock of LHP or redeem, retire,
apply its funds to a sinking fund, or purchase any capital stock of LHP,
Holdings, Leiner Health Products Group Inc., or warrants, options or other
rights with respect to capital stock of LHP, Holdings or Leiner Health Products
Group Inc. except that LHP may declare or pay such dividends or payments when
the outstanding principal amount of the Senior Notes and/or the commitments
under the Credit Agreement have been permanently reduced in an aggregate amount
at least equal to $17 million, if (A) the aggregate amount of such payments does
not exceed 50% of LHP's cumulative net income from May 4, 1992, less 100% of
LHP's cumulative net loss from May 4, 1992, and less certain permitted
investments, (B) after giving effect thereto, the ratio of Consolidated Debt to
Total Capital does not exceed 40% and (C) there is no default under the Credit
Agreement and the Senior Note Agreement. In addition, the Credit Agreement
contains affirmative
62
<PAGE>
covenants by LHP and its Subsidiaries, including, among other things, compliance
with laws, preservation of corporate existence, maintenance of insurance,
payment of taxes, maintenance of properties, environmental compliance and
delivery of financial and other information to the Lenders.
LHP and its Subsidiaries are also required to comply with certain financial
tests and maintain certain financial ratios. Certain of the financial covenants
contained in the Credit Agreement are set forth below:
NET WORTH. LHP may not permit the shareholders' equity on LHP's
consolidated balance sheet ("Net Worth") at any time to fall below the sum of
$55.8 million plus 45% of cumulative Net Income since December 10, 1993;
provided that, if cumulative net income since December 10, 1993 is less than
zero, for purposes of this covenant, cumulative Net Income shall equal zero.
CASH FLOW COVERAGE RATIO. LHP may not permit the Cash Flow Coverage Ratio
(computed on a four quarter basis) as of the end of any fiscal quarter occurring
during any period to be less than 110% (from the first quarter of fiscal 1996
and thereafter).
MAXIMUM LEVERAGE RATIO. LHP may not permit the Maximum Leverage Ratio as of
the end of any fiscal quarter occurring during any period to be greater than an
amount equal to 60% (as of and for the first quarter of fiscal 1997) and
declining to 45% (for fiscal 1999 and thereafter).
INTEREST COVERAGE RATIO. LHP may not permit the Interest Coverage Ratio
(computed on a four quarter basis) as of the end of any fiscal quarter to be
less than a percentage equal to 250% (as of and for the first quarter of fiscal
1997) and increasing to 350% (for the fourth quarter of fiscal 1998 and
thereafter).
CURRENT RATIO. LHP may not permit the current Ratio to be less than 180% at
any time. The "Current Ratio" is calculated by dividing current assets by
current liabilities (excluding current maturities of indebtedness).
CONSOLIDATED SUBSIDIARY DEBT. LHP may not permit the outstanding principal
amount of all indebtedness of LHP's Subsidiaries (other than certain
indebtedness, including in respect of the Credit Agreement and the Senior Notes)
to exceed 10% of Total Capital.
CAPITAL EXPENDITURES. The Capital Expenditures of LHP and its Subsidiaries
may not exceed the greater of (i) and (ii) below, provided, however, that, in
certain circumstances, to the extent the amount of Capital Expenditures made in
any Fiscal Year is less than the maximum amount permitted for such Fiscal Year
as provided below, the amount of Capital Expenditures that LHP and its
Subsidiaries may make in a subsequent Fiscal Year shall be increased:
<TABLE>
<CAPTION>
REGULAR CAPITAL
(i) FISCAL YEAR EXPENDITURES
-----------------
<S> <C>
1994................................................................. $ 9,000,000
1995................................................................. 10,000,000
1996................................................................. 10,650,000
1997................................................................. 12,750,000
1998................................................................. 13,740,000
1999................................................................. 14,810,000; or
(ii) 3.5% of Net Sales for such Fiscal Year.
</TABLE>
EVENTS OF DEFAULT. In addition to customary events of default, the Credit
Agreement contains the following Events of Default: (i) the occurrence of a
"Change of Control," as defined in the Senior Note Agreement, requiring the
prepayment of all or any part of the Senior Notes; (ii) (A)(1) any term of the
Defense and Indemnification Agreement is modified in any respect or LHP forbears
from exercising any of its material rights with respect thereto, except, in each
case, if it would not likely detrimentally and materially affect LHP or any of
its Subsidiaries, (2) the Defense and Indemnification Agreement ceases to be
effective or enforceable, (3) the Supplier, Showa Denko K.K. or any Affiliate
thereof shall contest the effectiveness, validity or enforceability of the
Defense and Indemnification Agreement or fail to comply with all of its terms,
or (4) certain events of bankruptcy or insolvency occur with respect to the
Supplier or Showa Denko K.K. and the Defense and Indemnification Agreement has
not terminated in full in accordance with its
63
<PAGE>
terms, and, at such time (B) the aggregate amount payable in respect of
judgments, settlements or otherwise in connection with the L-Tryptophan
litigation, after giving effect to insurance, contribution or indemnification
payments, exceeds 15% of the Net Worth; (iii) any judgment or order (including
with respect to the L-Tryptophan litigation) for a payment in excess of $500,000
(exclusive of amounts covered by insurance less any deductible) entered against
LHP or any of its Subsidiaries remains in effect and unsatisfied 45 days after
entry thereof; and (iv) failure of the Company to own 100% of the capital stock
of Holdings, free and clear of liens and failure of Holdings to own 100% of the
capital stock of LHP, free and clear of liens (except liens in favor of the
Lenders under the Credit Agreement).
SENIOR NOTE AGREEMENT
LHP is a party to a note agreement, dated as of May 4, 1992 and amended as
of May 15, 1993, December 10, 1993, October 15, 1994 and April 1, 1995 (as
amended, the "Senior Note Agreement"), with the purchasers signatory thereto.
Pursuant to the Senior Note Agreement, LHP issued $35 million aggregate
principal amount of its senior notes, series A, which bear interest at a rate of
9.44% per annum (the "Series A Notes") and $10 million aggregate principal
amount of its senior notes, series B, which bear interest at a rate of 9.60% per
annum (the "Series B Notes," and collectively with the Series A Notes, the
"Senior Notes"), both series maturing on April 30, 2002. If no default or event
of default exists and the unsecured funded debt of LHP receives a rating equal
to or greater than BBB- from Standard & Poor's Corporation (or a comparable
rating from any other nationally recognized rating agency) then for so long as
such rating is maintained the interest rate on the Series A Notes will be
reduced to 9.14% and the interest rate on the Series B Notes will be reduced to
9.30%. Alternatively, the Company may, at its option, obtain the same interest
rate reductions by electing to amend certain financial covenants contained in
the Credit Agreement to certain specified levels. Interest on the Senior Notes
is payable semiannually. The Senior Notes rank PARI PASSU with the debt under
the Credit Agreement.
On each of April 30, 1999, 2000 and 2001, LHP is required to make principal
payments on the Series A Notes equal to the lesser of $8,750,000 or the
principal amount of the Series A Notes then outstanding and principal payments
on the Series B Notes equal to the lesser of $2.5 million or the principal
amount of Series B Notes then outstanding. In addition, LHP may, upon notice,
prepay the outstanding Senior Notes on a pro rata basis in whole or in part (in
a minimum principal amount of $1.0 million, together with accrued interest
thereon and a make-whole premium).
In the event of a Change of Control (as defined below), LHP must redeem the
Senior Notes by payment of the principal amount thereof together with accrued
interest thereon and a premium to each holder of the Senior Notes that does not
consent to the Change of Control. "Change of Control" means, among other things,
any event in which (1) any entity or group of related entities, other than the
AEA Persons (i) gains, or enters into any agreement with Leiner Health Products
Group Inc., Holdings, LHP or any of their direct or indirect shareholders
pursuant to which such entity or group of related entities will gain, beneficial
ownership of 30% or more of the outstanding voting stock of either Leiner Health
Products Group Inc., Holdings or LHP after an initial public offering of the
common stock of either Leiner Health Products Group Inc., Holdings or LHP as a
result of which the AEA Persons beneficially own less than a majority in
interest of the outstanding voting stock of Leiner Health Products Group Inc.,
Holdings or LHP; or (ii) constitutes a majority of the board of directors of
Leiner Health Products Group Inc., Holdings or LHP at a time when the AEA
Persons beneficially own less than a majority in interest of the outstanding
Voting Stock of either Leiner Health Products Group Inc., Holdings or LHP; (2)
an entity, other than an entity controlled by the AEA Persons, acquires or
enters into any agreement to acquire all or substantially all of the assets of
Leiner Health Products Group Inc., Holdings or LHP; or (3) prior to the
termination of the Credit Agreement, any "Change of Control" as defined in the
Credit Agreement occurs.
In the event of certain sales, transfers or other dispositions of assets,
LHP is obligated to offer to prepay, to the extent of the net proceeds of such
sale, transfer or other disposition, the Senior Notes on a pro rata basis
together with accrued interest. The offer to prepay the Senior Notes will be
made simultaneously on a pro rata basis with an offer to prepay obligations
under the Credit Agreement.
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<PAGE>
LHP's obligations under the Senior Note Agreement are guaranteed and secured
in substantially the same manner as LHP's obligations under the Credit
Agreement. See " -- The Credit Agreement."
The covenants under the Senior Note Agreement are substantially equivalent
to those under the Credit Agreement. See " -- The Credit Agreement."
In addition, LHP is required to maintain compliance with a maximum leverage
ratio, a maximum consolidated subsidiary debt amount, a minimum ratio of current
assets to current liabilities, a minimum interest coverage ratio, a minimum cash
flow ratio and a minimum consolidated net worth. These covenants are
substantially the same as the financial covenants contained in the Credit
Agreement except that the maximum leverage ratio after the first quarter of
fiscal year 2000 may not exceed 42%.
EVENT OF DEFAULT. In addition to customary events of default, the Senior
Note Agreement provides that an Event of Default shall occur if an Obligor under
the Senior Note Agreements shall pay, or is obligated to pay, amounts
(aggregating amounts paid or payable by LHP or certain of its Subsidiaries)
exceeding 15% of Consolidated Net Worth (after giving effect to insurance
proceeds and contributions) pursuant to or as a result of the L-Tryptophan
litigation.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Immediately prior to consummation of the Offering made hereby, the Company
will effect the Recapitalization and the Company's certificate of incorporation
will be amended to reclassify its three classes of common stock into one class
of Common Stock. See "Recapitalization." The following brief description of the
Company's capital stock reflects the effects of the Recapitalization. Such
description does not purport to be complete and is subject in all respects to
applicable Delaware law and to the provisions of the Company's certificate of
incorporation, as amended (the "Certificate of Incorporation"), and amended and
restated bylaws (the "By-Laws"), copies of which have been filed with the
Securities and Exchange Commission.
The authorized capital stock of the Company consists of shares of
Common Stock, par value $.01 per share and shares of preferred stock,
par value $.01 per share (the "Preferred Stock"). Giving effect to the
Recapitalization, but prior to the Offering, there will be record holders
of Common Stock. Immediately following the consummation of the Offering, there
will be shares of Common Stock outstanding, shares of Common Stock
will be issuable upon exercise of outstanding options and no shares of Preferred
Stock will be outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders, including the election of directors. Holders
of Common Stock do not have cumulative voting rights, and therefore holders of a
majority of the shares voting for the election of directors can elect all of the
directors. In such event, the holders of the remaining shares will not be able
to elect any directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available therefor, after payment of dividends required to be paid on
outstanding Preferred Stock, if any, and subject to the terms of the agreements
governing the Credit Agreement and Senior Note Agreement. See "Dividend Policy",
"Risk Factors -- Leverage and Restrictions on Dividends" and "Description of
Certain Indebtedness." In the event of the liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of Preferred Stock then outstanding, if any.
The Common Stock has no preemptive, conversion or redemption rights and is
not subject to further calls or assessments by the Company. Immediately upon
consummation of the Offering, all of the then outstanding shares of Common Stock
will be validly issued, fully paid and nonassessable.
At present, there is no public market for the Common Stock. The Company
intends to apply for listing of the Common Stock on the New York Stock Exchange
("NYSE"). In order to meet the requirements for
65
<PAGE>
listing of the Common Stock on the NYSE, it is anticipated that the
representatives of the Underwriters will assure the NYSE that the distribution
of the shares of Common Stock offered hereby will meet or exceed the listing
requirements of the NYSE.
The transfer agent for the Common Stock will be .
PREFERRED STOCK
The board of directors of the Company is authorized without further
stockholder action to provide for the issuance from time to time of up to
shares of Preferred Stock, in one or more classes or series, with such
powers, designations, preferences and relative, participating, optional or other
specific rights, qualifications, limitations or restrictions as will be set
forth in the resolutions providing for the issue of such classes or series of
Preferred Stock adopted by the board of directors of the Company. The holders of
Preferred Stock will have no preemptive rights (unless otherwise provided in the
applicable certificate of designation) and will not be subject to future
assessments by the Company. Such Preferred Stock may have voting or other rights
which could adversely affect the rights of holders of the Common Stock.
CERTAIN BY-LAW PROVISIONS
The By-Laws contain certain provisions that could make more difficult the
acquisition of the Company by means of a tender offer, proxy contest or
otherwise.
The By-Laws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors, or bring other business
before an annual meeting of stockholders of the Company (the "Stockholder Notice
Procedure").
The Stockholder Notice Procedure provides that only persons who are
nominated by, or at the direction of, the Company's Board, or by a stockholder
who has given timely written notice to the Secretary of the Company prior to the
meeting at which directors are to be elected, will be eligible for election as
directors of the Company. The Stockholder Notice Procedure provides that at an
annual meeting only such business may be conducted as has been brought before
the meeting by, or at the direction of, the Chairman of the Company's Board or
by a stockholder who has given timely written notice to the Secretary of the
Company of such stockholder's intention to bring such business before such
meeting.
Under the Stockholder Notice Procedure, for notice of stockholder
nominations or business to be made at an annual meeting to be timely, such
notice must be received by the Company not less than 60 days nor more than 90
days prior to the first anniversary of the previous year's annual meeting.
Under the Stockholder Notice Procedure, for notice of a stockholder
nomination to be made at a special meeting at which directors are to be elected
to be timely, such notice must be received by the Company not later than the
close of business on the 10th day following the day on which (i) notice of the
date of the special meeting was mailed, or (ii) public disclosure of the date of
such meeting is first made, whichever first occurs.
In addition, under the Stockholder Notice Procedure, a stockholder's notice
to the Company proposing to nominate a person for election as a director must
contain certain specified information. If the Chairman of the Board of Directors
or other officer presiding at a meeting determines that a person was not
nominated or other business was not brought before the meeting in accordance
with the Stockholder Notice Procedure, such person will not be eligible for
election as a director or such business will not be conducted at such meeting,
as the case may be.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation provides that, to the fullest extent
permitted by the Delaware General Corporation Law (the "DGCL") as it currently
exists, a director of the Company will not be personally liable to the Company
or its stockholders for monetary damages for any breach of fiduciary duty as a
director. Under the DGCL, liability of a director may not be limited (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (ii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases and (iv) for any
transaction from which the director derives an improper
66
<PAGE>
personal benefit. The effect of this provision of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care as
a director (including breaches resulting from negligent or grossly negligent
behavior) except in situations described in clauses (i) through (iv) above. This
provision does not limit or eliminate the rights of the Company or any
stockholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. In addition, the Company's
Certificate of Incorporation provides that the Company shall indemnify its
directors, officers, employees and agents to the fullest extent permitted by the
DGCL. The Company's By-Laws provide additional indemnification for the directors
and officers of the Company.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
The Company is a Delaware corporation and has not elected out of section 203
of the DGCL. Therefore, upon the closing of the Offering, the restrictions of
section 203 will apply to the Company.
Generally, section 203 of the DGCL prevents an "interested stockholder"
(defined in section 203, generally, as a person owning 15% or more of a
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined in section 203) with a publicly held Delaware
corporation for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder, the
board of directors of the corporation approved the transaction in which the
interested stockholder became an interested stockholder or approved the business
combination, or (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owns
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by persons that are both directors
and officers of the corporation and stock held by employee stock plans that do
not provide employees with the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer), or
(iii) at or subsequent to the time of the transaction in which such person
became an interested stockholder, the business combination is approved by the
board of directors of the corporation and authorized at a meeting of
stockholders by the affirmative vote of the holders of 66 2/3% of the
outstanding voting stock of the corporation not owned by the interested
stockholder. A "business combination" generally includes mergers, stock or asset
sales, and other transactions resulting in a financial benefit to interested
stockholders.
The provisions of the Certificate of Incorporation authorizing the board of
directors to issue preferred stock without stockholder approval, the provisions
of the By-Laws establishing the Stockholder Notice Procedure, and the provisions
of section 203 of the DGCL, could have the effect of delaying, deferring or
preventing a change in control of the Company or the removal of existing
management, or discouraging bids for the Common Stock at a premium, or otherwise
adversely affecting the market price of the Common Stock. The Credit Agreement
and the Senior Note Agreement each contain provisions with respect to a change
of control of the Company. See "Description of Certain Indebtedness" and
"Management."
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Prior to the Offering, there has been no public market for securities of the
Company. No prediction can be made as to the effect, if any, that market sale of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market after the lapse of the
restrictions described below, or the perception that such shares could occur,
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future at a time and price which it deems
appropriate.
Upon completion of the Offering, the Company will have approximately
shares of Common Stock outstanding. Of these shares, the shares
of Common Stock sold in the Offering ( shares, if the Underwriters'
over-allotment option is exercised in full), will be freely tradable by persons
other than "affiliates" of the Company, without restriction under the Securities
Act of 1933, as amended (the
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<PAGE>
"Securities Act") and the remaining shares of Common Stock outstanding
will be "restricted securities" within the meaning of Rule 144 and may not be
sold in the absence of registration under the Securities Act unless an exemption
from registration is available, including the exemptions contained in Rule 144
and 144A. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such issuer.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
"restricted securities" for two years beginning from the later of the date of
acquisition of restricted shares from the Company or from an affiliate of the
Company, will be entitled to sell within any three-month period up to that
number of shares that does not exceed the greater of (i) 1% of the then
outstanding shares of Common Stock (approximately shares immediately after
the Offering) or (ii) the average weekly trading volume in the Common Stock on
all national securities exchanges and/or reported through the automated
quotation system of registered securities associations during the four calendar
weeks immediately preceding the date on which such notice of the sale is filed
with the Securities and Exchange Commission (the "Commission"). Sales pursuant
to Rule 144 are also subject to certain other requirements regarding the manner
of sale, notice and availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the three months
immediately preceding the sale is entitled to sell restricted securities
pursuant to Rule 144(k) without regard to the limitations described above,
provided that three years have expired since the later of the date on which such
restricted securities were acquired from the Company or the date they were
acquired from an affiliate of the Company. Affiliates continue to be subject to
such volume limitations after the three-year holding period. The Commission has
proposed reducing the periods of beneficial ownership of "restricted securities"
required by Rule 144. Under the proposal, persons who have beneficially owned
restricted securities for at least one year, instead of two years as currently
required, would be able to resell such securities by complying with the volume
limitations described above. In the case of a person who is not deemed to be an
affiliate of the Company during the preceding three months, the proposal would
permit sales without regard to the limitations described above as long as such
person had held the securities for at least two years, instead of three years as
currently required. There can be no assurance that the proposed revisions to
Rule 144 will be adopted by the Commission.
Substantially all of the shares outstanding immediately prior to the
Offering have been beneficially owned for the three year period specified in
Rule 144(k), discussed above, and substantially all of the holders of such
shares would not be deemed affiliates of the Company during the three months
immediately preceding the Offering. Therefore, substantially all of the
shares of such Common Stock may be available for sale in the public market after
the Offering has been consummated, subject to the matters discussed two
paragraphs below relating to the 180-day resale restriction.
In connection with the Offering, the Company and its existing stockholders
will agree that they will not, during a period of 180 days from the date of this
Prospectus, without the prior written consent of Merrill Lynch, on behalf of the
Representatives, (i) directly or indirectly, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, with respect to a stockholder,
whenever acquired or whenever the power of disposition is acquired, or file any
registration statement under the Securities Act with respect to any other
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. With respect to
the Company, the restrictions described in the foregoing sentence shall not
apply to (A) the shares of Common Stock to be sold in the Offering, (B) any
shares of Common Stock issued by the Company upon the exercise of the XCEL
Earn-Out Options or (C) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to the Stock Option Plan.
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<PAGE>
REGISTRATION RIGHTS
The current stockholders of the Company acquired their shares of common
stock (the "Restricted Shares") pursuant to subscription agreements that contain
registration rights. Following the Offering, upon the request of the persons
owning Restricted Shares aggregating at least 25% of the sum of all outstanding
Restricted Shares and having an estimated value of not less than $5 million, the
Company will be required to register the sale of such Restricted Shares, subject
to certain limitations and requirements. In addition, under certain
circumstances, should the Company file a registration statement with the
Securities and Exchange Commission registering shares of the Common Stock, the
owners of Restricted Shares would be entitled to include their Restricted Shares
in such registration. Such registration rights have been waived as to the
Registration Statement of which this Prospectus is a part.
69
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the purchase agreement (the
"Purchase Agreement") among the Company and each of the Underwriters named below
(the "Underwriters"), the Company, for its own account, has agreed to sell to
each of the Underwriters, and each of the Underwriters has severally agreed to
purchase from the Company, the aggregate number of shares of Common Stock set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................................................
Lehman Brothers Inc.....................................................................
Salomon Brothers Inc....................................................................
------------
Total......................................................................... 5,000,000
------------
------------
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Lehman
Brothers Inc. and Salomon Brothers Inc are acting as representatives (the
"Representatives") of the several Underwriters.
In the Purchase Agreement, the several Underwriters have agreed, subject to
the terms and conditions set forth therein, to purchase all of the shares of
Common Stock being sold pursuant to the Purchase Agreement if any of the shares
of Common Stock being sold pursuant to the Purchase Agreement are purchased.
Under certain circumstances, the commitments of nondefaulting Underwriters may
be increased.
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share of
Common Stock. The Underwriters may allow, and such dealers may reallow, a
discount not in excess of $ per share of Common Stock to certain other
dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 750,000 additional shares of Common Stock, exercisable for 30 days
after the date of this Prospectus, to cover over-allotments, if any, at the
initial public offering price set forth on the cover page of this Prospectus,
less the underwriting discount. To the extent that the Underwriters exercise
this option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage of such shares
that the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the total number of shares initially offered by the
Underwriters.
Prior to the Offering, there has been no public market for the shares of
Common Stock. The initial public offering price will be determined through
negotiation among the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are price-earnings ratios of publicly traded
companies that the Representatives believe to be comparable to the Company,
certain financial information of the Company, the history of, and the prospects
for, the Company and the industry in which it competes, an assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company.
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There can be no assurance that an active trading market will develop for the
shares of Common Stock or that the shares of Common Stock will trade in the
public market subsequent to the Offering at or above the initial public offering
price.
The Representatives have informed the Company that the Underwriters do not
intend to sell shares of Common Stock to discretionary accounts.
In connection with the Offering, the Company and its existing stockholders
will agree that they will not, during a period of 180 days from the date of this
Prospectus, without the prior written consent of Merrill Lynch, on behalf of the
Representatives, (i) directly or indirectly, offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, with respect to a stockholder,
whenever acquired or whenever the power of disposition is acquired, or file any
registration statement under the Securities Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. With respect to
the Company, the restrictions described in the foregoing sentence shall not
apply to (A) the shares of Common Stock to be sold in the Offering, (B) any
shares of Common Stock issued by the Company upon the exercise of the XCEL
Earn-Out Options or (C) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to the Stock Option Plan. See "Shares Eligible for
Future Sale."
At the request of the Company, the Underwriters have reserved up to
approximately shares of Common Stock, representing % of the shares of
Common Stock to be sold in the Offering, for offer at the initial public
offering price, to employees of the Company, certain customers of the Company
and certain other individuals who have expressed an interest in purchasing
shares of Common Stock in the Offering. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as the
other shares offered by this Prospectus. Certain individuals that purchase
reserved shares may be required to agree not to sell or otherwise dispose of any
shares of Common Stock, or securities convertible into or exchangeable or
exercisable for Common Stock for a period of three months following the date of
this Prospectus.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1993. Application
will be made to list the shares of Common Stock on the New York Stock Exchange
under the symbol "LNR."
The Representatives have provided investment banking services in the past to
the Company and/or AEA and have received customary fees therefor.
VALIDITY OF SHARES
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), New York, New York and for the
Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The Consolidated Financial Statements as of March 31, 1995 and March 31,
1996, and for each of the years in the three-year period ended March 31, 1996,
appearing in this Prospectus and the Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere in this Prospectus and in the Registration Statement, and
are included in reliance upon the reports of Ernst & Young LLP given upon the
authority of such firm as experts in accounting and auditing.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission in
Washington, D.C. a registration statement (of which this Prospectus is a part
and which term shall encompass any amendments thereto) on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto, to which reference is hereby made.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file reports and other information with the
Securities and Exchange Commission. Such reports and other information, as well
as the Registration Statement and the financial statements, schedules and
exhibits thereto, may be inspected and copied at the public reference facilities
of the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and will also be available for
inspection and copying at the following regional offices of the Securities and
Exchange Commission: Suite 1300, Seven World Trade Center, New York, New York
10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material or any part thereof may also be
obtained by mail from the public reference section of the Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Copies of such material will also be available for inspection
at the offices of the New York Stock Exchange, 20 Broad Street, New York, New
York 10005.
The Company intends to furnish its stockholders with annual reports
containing audited consolidated financial statements and a report thereon by its
independent certified public accountants and will distribute quarterly reports
for the first three quarters of each year containing unaudited summary financial
information.
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INDEX TO FINANCIAL STATEMENTS
LEINER HEALTH PRODUCTS GROUP INC.
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at March 31, 1995 and March 31, 1996...................... F-3
Consolidated Statements of Income for the years ended March 31, 1994, March 31, 1995
and March 31, 1996................................................................... F-4
Consolidated Statements of Common Shareholders' Equity for the years ended March 31,
1994, March 31, 1995 and March 31, 1996.............................................. F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1994, March 31,
1995 and March 31, 1996.............................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Leiner Health Products Group Inc.
We have audited the accompanying consolidated balance sheets of Leiner
Health Products Group Inc. as of March 31, 1995 and 1996, and the related
consolidated statements of income, common shareholders' equity and cash flows
for each of the three years in the period ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Leiner Health
Products Group Inc. at March 31, 1995 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Orange County, California
May 20, 1996
F-2
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Current assets:
Cash and cash equivalents............................................................ $ -- $ 1,411
Accounts receivable, net of allowances of $3,316 and $2,539 at March 31, 1995 and
1996, respectively.................................................................. 72,201 67,459
Inventories.......................................................................... 63,926 71,744
Deferred income taxes................................................................ 5,932 3,826
Other current assets................................................................. 1,123 862
---------- ----------
Total current assets............................................................... 143,182 145,302
Property, plant and equipment, less accumulated depreciation and amortization.......... 43,011 41,864
Goodwill, less accumulated amortization of $4,527 and $5,608 at March 31, 1995 and
1996, respectively.................................................................... 58,698 52,386
Other noncurrent assets................................................................ 12,470 11,762
---------- ----------
Total assets....................................................................... $ 257,361 $ 251,314
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank checks outstanding, less cash on deposit........................................ $ 12,191 $ 2,291
Current portion of long-term debt.................................................... 4,090 2,023
Accounts payable..................................................................... 48,972 53,728
Customer allowances payable.......................................................... 5,388 5,471
Accrued compensation and benefits.................................................... 5,363 4,749
Income taxes payable................................................................. 344 461
Other accrued expenses............................................................... 5,144 4,326
---------- ----------
Total current liabilities.......................................................... 81,492 73,049
Long-term debt......................................................................... 102,572 102,151
Other noncurrent liabilities........................................................... 852 1,115
Deferred income taxes.................................................................. 944 2,202
Commitments and contingent liabilities (Notes 12 and 13)
Redeemable preferred stock, $.01 par value:
Authorized shares -- 30,000
Issued and outstanding shares -- 11,264 and 12,728 at March 31, 1995 and 1996,
respectively........................................................................ 10,490 11,875
Common shareholders' equity:
Common stock, $.01 par value:
Authorized shares -- 821,769 and 837,696 at March 31, 1995 and 1996,
respectively......................................................................
Issued and outstanding shares 714,496 at March 31, 1995 and 1996................... 7 7
Capital in excess of par value....................................................... 54,215 54,347
Retained earnings.................................................................... 6,789 6,568
---------- ----------
Total common shareholders' equity.................................................. 61,011 60,922
---------- ----------
Total liabilities and shareholders' equity......................................... $ 257,361 $ 251,314
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ----------
Net sales.................................................................... $ 303,629 $ 314,730 $ 338,417
Cost of sales................................................................ 226,045 236,613 253,272
---------- ---------- ----------
Gross profit................................................................. 77,584 78,117 85,145
Marketing, selling and distribution expenses................................. 43,056 42,400 44,228
General and administrative expenses.......................................... 16,476 17,302 18,344
Charge for long-lived asset impairment....................................... -- -- 4,730
Amortization of goodwill..................................................... 1,551 1,586 1,585
Other charges................................................................ 2,367 1,044 482
---------- ---------- ----------
Operating income............................................................. 14,134 15,785 15,776
Interest expense, net........................................................ 6,974 9,010 9,924
---------- ---------- ----------
Income before income taxes................................................... 7,160 6,775 5,852
Provision for income taxes................................................... 3,631 3,333 4,686
---------- ---------- ----------
Net income................................................................... $ 3,529 $ 3,442 $ 1,166
---------- ---------- ----------
---------- ---------- ----------
Supplemental pro forma net income per share (Note 15 -- unaudited)........... $
----------
----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1994, 1995 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TOTAL COMMON
------------------------ EXCESS OF RETAINED SHAREHOLDERS'
SHARES AMOUNT PAR VALUE EARNINGS EQUITY
--------- ------------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993............................. 709,568 $ 7 $ 53,425 $ 1,408 $ 54,840
Issuance of Class A common shares pursuant to Stock
Purchase Plan........................................ 4,928 -- 493 -- 493
Stock option compensation............................. -- -- 165 -- 165
Accretion of redeemable preferred stock dividends..... -- -- -- (390) (390)
Redeemable preferred stock accretion.................. -- -- -- (3) (3)
Net income............................................ -- -- -- 3,529 3,529
--
--------- ----------- --------- ------------
Balance at March 31, 1994............................. 714,496 7 54,083 4,544 58,634
Stock option compensation............................. -- -- 132 -- 132
Accretion of redeemable preferred stock dividends..... -- -- -- (1,187) (1,187)
Redeemable preferred stock accretion.................. -- -- -- (10) (10)
Net income............................................ -- -- -- 3,442 3,442
--
--------- ----------- --------- ------------
Balance at March 31, 1995............................. 714,496 7 54,215 6,789 61,011
Stock option compensation............................. -- -- 132 -- 132
Accretion of redeemable preferred stock dividends..... -- -- -- (1,377) (1,377)
Redeemable preferred stock accretion.................. -- -- -- (10) (10)
Net income............................................ -- -- -- 1,166 1,166
--
--------- ----------- --------- ------------
Balance at March 31, 1996............................. 714,496 $ 7 $ 54,347 $ 6,568 $ 60,922
--
--
--------- ----------- --------- ------------
--------- ----------- --------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ---------
OPERATING ACTIVITIES
Net income..................................................................... $ 3,529 $ 3,442 $ 1,166
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization................................................ 7,407 10,698 12,496
Stock and stock option compensation expense.................................. 264 132 132
Deferred income taxes........................................................ 2,684 2,779 3,364
Write-off of deferred financing charges...................................... 1,753 -- --
Charge for long-lived asset impairment....................................... -- -- 4,730
---------- ---------- ---------
15,637 17,051 21,888
Changes in operating assets and liabilities:
Accounts receivable........................................................ (22,469) (4,600) 4,742
Inventories................................................................ (7,404) (99) (7,818)
Bank checks outstanding, less cash on deposit.............................. -- 12,191 (9,900)
Accounts payable........................................................... 6,269 1,123 4,756
Customer allowances payable................................................ 934 (7,330) 260
Accrued compensation and benefits.......................................... (1,839) (1,339) (925)
Other accrued expenses..................................................... (6,085) (4,423) (1,252)
Income taxes payable....................................................... (88) (1) 691
Other...................................................................... (956) 321 261
---------- ---------- ---------
Net cash provided by (used in) operating activities............................ (16,001) 12,894 12,703
---------- ---------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment, net................................ (15,042) (16,722) (3,468)
Increase in other noncurrent assets............................................ (3,427) (4,935) (5,335)
---------- ---------- ---------
Net cash used in investing activities.......................................... (18,469) (21,657) (8,803)
---------- ---------- ---------
FINANCING ACTIVITIES
Net borrowings under bank line of credit....................................... 21,800 5,225 78
Increase in other long-term debt............................................... 3,800 5,662 1,305
Payments on other long-term debt............................................... (2,915) (3,566) (3,872)
Proceeds from sale of stock.................................................... 9,394 -- --
---------- ---------- ---------
Net cash provided by (used in) financing activities............................ 32,079 7,321 (2,489)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents........................... (2,391) (1,442) 1,411
Cash and cash equivalents at beginning of period............................... 3,833 1,442 --
---------- ---------- ---------
Cash and cash equivalents at end of period..................................... $ 1,442 $ -- $ 1,411
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
CONTEMPORANEOUSLY WITH AND SUBJECT TO THE COMPLETION OF AN INITIAL PUBLIC
OFFERING, THE COMPANY INTENDS TO CONVERT ALL OUTSTANDING CLASSES OF ITS COMMON
STOCK TO A SINGLE CLASS ON A SHARE-FOR-SHARE BASIS AND EFFECT A FOR-1 STOCK
SPLIT (COLLECTIVELY, THE RECAPITALIZATION). THE COMPANY WILL APPLY A PORTION OF
THE NET PROCEEDS OF THE INITIAL PUBLIC OFFERING TO REPAY CERTAIN INDEBTEDNESS
AND TO REDEEM ALL OF THE COMPANY'S OUTSTANDING REDEEMABLE PREFERRED STOCK.
EXCEPT FOR NOTE 15 (UNAUDITED), THESE NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS DO NOT REFLECT THE RECAPITALIZATION OR THE REDEMPTION OF THE
REDEEMABLE PREFERRED STOCK.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Leiner Health
Products Group Inc. and its direct and indirect subsidiaries, including its
principal operating subsidiary, Leiner Health Products Inc. on a consolidated
basis (the Company). All significant intercompany accounts and transactions have
been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
BUSINESS
The Company is primarily involved in a single business segment, the
manufacture and distribution of vitamins, over-the-counter drugs and other
health and beauty aid products.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt, which have been determined
based on borrowing rates currently available to the Company for loans with
similar terms or maturity, approximate the carrying amounts in the consolidated
financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost being
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method, at rates designed to distribute the cost of assets
over their estimated service lives or, for leasehold improvements, the shorter
of their estimated service lives or their remaining lease terms. Depreciable
lives range from 3 to 32 years.
OTHER ASSETS
Goodwill, representing the excess of the purchase price over the fair values
of the net assets of acquired entities, is being amortized over the period of
expected benefit of 40 years. Deferred financing charges are being amortized
based on the principal balance outstanding using the effective interest method.
Other intangible assets are being amortized over the period of expected benefit
of 15 years. Costs associated with acquiring long-term sales agreements with
certain customers are being amortized over the terms of the agreements.
F-7
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from product sales at the time of shipment.
Provisions are made currently for estimated returns.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation plans in accordance with
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees" and related interpretations. Under the provisions of APB
25, compensation expense is measured at the grant date for the difference
between the fair value of the stock, less the exercise price.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for the
years ended March 31, 1994, 1995 and 1996 was $9,272,000, $8,293,000 and
$8,731,000, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Under these rules, goodwill
associated with assets acquired in purchase business combinations is included in
impairment evaluations when events or circumstances exist that indicate the
carrying amount of those assets may not be recoverable. The Company has elected
to adopt the provisions of Statement 121 in fiscal 1996.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which establishes financial accounting and reporting
standards for stock-based employee compensation plans. The Company will comply
with this standard in fiscal 1997. It is currently determining which
alternatives available within the standard will be adopted.
2. FORMATION
On April 29, 1992, Leiner Health Products Group Inc., an inactive holding
corporation, was recapitalized in connection with the acquisition from Booker
plc and others of the outstanding shares of P. Leiner Nutritional Products Corp.
(Leiner), effective May 4, 1992, in a business combination accounted for as a
purchase. This transaction had a total value, including transaction costs, of
approximately $77 million. As part of this transaction, Leiner issued $45
million of senior notes and obtained a $25 million credit agreement which was
later increased to $55 million (Note 6). On May 22, 1992, the Company acquired
the assets and paid certain liabilities of XCEL Laboratories, Inc. (XCEL) in a
transaction accounted for as a purchase. The assets and liabilities of the
acquired entities were recorded at their estimated fair values as of the date of
the transactions. The excess of the purchase price over the fair value of the
net assets acquired in these transactions, aggregating $63,184,000, was
classified as goodwill.
3. LONG-LIVED ASSET IMPAIRMENT
During fiscal 1996, the Company decided to significantly reduce the size of
its over-the-counter liquids manufacturing business. Accordingly, the Company
evaluated the ongoing value of the plant, equipment and related goodwill that
arose as part of the XCEL acquisition in May 1992. Goodwill was allocated based
on the relative estimated fair value of the long-lived assets at the date of
acquisition. Based on its evaluation, the Company determined that assets with a
carrying amount of $8,256,000 were impaired and wrote them down by $4,730,000 to
their fair value. Fair value was based on independent appraisals of the plant
and equipment. This asset impairment charge is reflected in the consolidated
balance sheet as a reduction in the carrying amount of goodwill.
F-8
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMPOSITION OF CERTAIN BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
MARCH 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Inventories:
Raw materials, bulk vitamins and packaging materials..................................... $ 41,064 $ 40,950
Work-in-process.......................................................................... 2,883 3,573
Finished products........................................................................ 19,979 27,221
--------- ----------
$ 63,926 $ 71,744
--------- ----------
--------- ----------
Property, plant and equipment:
Land..................................................................................... $ 537 $ 537
Buildings and improvements............................................................... 3,012 3,012
Leasehold improvements................................................................... 9,257 9,761
Machinery and equipment.................................................................. 34,924 37,781
Furniture and fixtures................................................................... 2,699 2,790
--------- ----------
50,429 53,881
Less accumulated depreciation and amortization........................................... (7,418) (12,017)
--------- ----------
$ 43,011 $ 41,864
--------- ----------
--------- ----------
</TABLE>
5. SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash paid during the period for:
Interest........................................................................... $ 6,853 $ 8,759 $ 9,532
Income taxes, net of refunds received.............................................. 1,136 555 616
</TABLE>
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Long-term debt consists of:
Senior note agreements (Series A and B)................................................. $ 45,000 $ 45,000
Credit agreement, banks................................................................. 42,725 42,803
Revolving loan agreement, vendor........................................................ 7,999 8,271
Term loan, bank......................................................................... 2,595 1,898
Note payable to Walgreen Company........................................................ 1,000 --
Industrial revenue bonds................................................................ 250 125
Capital lease obligations............................................................... 7,093 6,077
---------- ----------
106,662 104,174
Less current portion.................................................................... (4,090) (2,023)
---------- ----------
Total long-term debt.................................................................. $ 102,572 $ 102,151
---------- ----------
---------- ----------
</TABLE>
SENIOR NOTE AGREEMENTS (SERIES A AND B)
Series A notes aggregate $35,000,000 and bear interest at 9.44% and Series B
notes aggregate $10,000,000 and bear interest at 9.60%. The senior notes are due
in equal annual installments aggregating
F-9
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
$11,250,000 commencing April 30, 1999 through April 30, 2002. These notes are
subject to certain mandatory prepayments in the event of the sale, disposition
or loss of equipment or in the event of the sale, transfer or other disposition
of all or a significant portion, as defined, of the Company's assets. Borrowings
under these agreements, together with the Credit Agreement, Banks, are secured
by a pledge of all of the stock of the Company's principal operating subsidiary.
CREDIT AGREEMENT, BANKS
On December 10, 1993, the Company entered into a Credit Agreement that
expires on June 30, 1998 and permits the Company to borrow up to $55,000,000,
subject to borrowing base limitations, as defined. Borrowings under this
agreement bear interest at either the bank's base rate plus up to 1.25% (9.50%
at March 31, 1996) or LIBOR plus up to 2.25% (7.69% at March 31, 1996) at the
option of the Company. In addition to certain agent and up-front fees, as
defined, this agreement requires a commitment fee of 1/2% of the average daily
unused portion of the revolving loan commitment amount, as defined. Borrowings
under this agreement, together with the Senior Note Agreements, are secured by a
pledge of all of the stock of the Company's principal operating subsidiary. In
connection with refinancing the credit agreement in December 1993, unamortized
debt issue costs of $1,753,000 were included in other charges in the year ended
March 31, 1994.
REVOLVING LOAN AGREEMENT, VENDOR
The revolving loan agreement expires on May 31, 1997, and permits the
Company to borrow up to a maximum of $9,500,000 subject to certain borrowing
base limitations, as defined. Borrowings under this facility bear interest at
either the prime rate less .50% or the LIBOR rate plus .25% (5.69% at March 31,
1996). The principal amount outstanding under the facility is adjusted
semi-annually based upon purchases from the vendor during the preceding twelve
months.
TERM LOAN, BANK
The Company entered into a $3,797,000 term loan on September 9, 1993 which
is payable in monthly installments of $63,283 through August 31, 1998. The
outstanding principal balance bears interest at the prime rate plus .50% (8.75%
at March 31, 1996). At any time during the term of the loan, the Company may
convert the loan from a variable rate loan to a fixed rate loan at the bank's
base rate plus .50%. The term loan is secured by certain equipment with a net
book value of approximately $4,254,000 at March 31, 1996.
INDUSTRIAL REVENUE BONDS
The Company is obligated under industrial revenue bonds issued through the
City of Kalamazoo, Michigan, requiring annual principal payments of $125,000
through July 1996 and bearing interest at 7.7% per annum on the unpaid balance
payable on January 1 and July 1 of each year. The bonds are secured by land and
building with a net book value of approximately $645,000 at March 31, 1996.
CAPITAL LEASE OBLIGATIONS
The capital lease obligations are payable in variable monthly installments
through April 2000, bear interest at effective rates ranging from 6.8% to 14.5%
and are secured by equipment with a net book value of approximately $6,143,000
at March 31, 1996.
COVENANTS AND MINIMUM PAYMENTS
Provisions of certain of the Company's debt agreements include terms, among
others, that require the Company to maintain certain financial ratios.
Furthermore, the agreements restrict indebtedness and expenditures for capital
improvements, dividend distributions and investments. A change of control, as
defined, will constitute a default under the Credit Agreement and the Company
may be required to redeem the Senior Notes, including allowed interest thereon
and a premium. In addition, should the Defense and Indemnification Agreement
discussed in Note 13 expire or cease to be effective, or if the Supplier or
Showa
F-10
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT (CONTINUED)
Denko K.K. fail to comply with its terms, and the aggregate amount payable in
connection with the L-Tryptophan litigation exceeds specified amounts, such
occurrence will constitute an event of default under the Credit Agreement and,
in certain cases, the Senior Note Agreements. As of March 31, 1996, the Company
was in compliance with the covenants and conditions of the original agreements
as amended and restated. Due to restrictions in the Credit Agreement and the
Senior Note Agreement, none of the retained earnings are available for
dividends.
Principal payments on long-term debt through fiscal 2001 and thereafter are:
<TABLE>
<CAPTION>
(IN
FISCAL YEAR THOUSANDS)
- -----------------------------------------------------------------------------------------
<S> <C>
1997..................................................................................... $ 2,023
1998..................................................................................... 10,144
1999..................................................................................... 44,001
2000..................................................................................... 12,797
2001..................................................................................... 12,709
Thereafter............................................................................... 22,500
-------------
Total.................................................................................. $ 104,174
-------------
-------------
</TABLE>
7. INCOME TAXES
Deferred income taxes are computed using the liability method and reflect
the effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Valuation allowances are established, when necessary, to reduce
deferred tax assets to estimated realizable amounts. The provision for income
taxes reflects the taxes to be paid for the period and the change during the
period in the deferred tax assets and liabilities.
Significant components of the Company's deferred tax assets and liabilities
are:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Acquisition related accruals............................................................... $ 1,621 $ 485
Inventory capitalization................................................................... 1,116 759
Compensation accruals...................................................................... 332 442
Inventory obsolescence reserves............................................................ 1,149 1,033
Allowances for doubtful accounts and sales returns......................................... 1,278 1,031
Federal net operating loss carryforward.................................................... 247 --
Other...................................................................................... 690 135
--------- ---------
Total deferred tax assets.................................................................. 6,433 3,885
Valuation allowances....................................................................... (59) (59)
--------- ---------
Net deferred tax assets...................................................................... 6,374 3,826
--------- ---------
Deferred tax liabilities:
Fixed assets book versus tax basis difference.............................................. (1,386) (2,202)
--------- ---------
Deferred tax assets, net of deferred tax liabilities......................................... $ 4,988 $ 1,624
--------- ---------
--------- ---------
</TABLE>
F-11
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective income tax rate:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
<S> <C> <C> <C>
1994 1995 1996
----- ----- -----
Tax at U.S. statutory rates........................................................ 35% 35% 35%
Charge for long-lived asset impairment............................................. -- -- 28
Goodwill amortization.............................................................. 7 8 9
State income taxes, net of federal tax benefit..................................... 9 6 8
-- -- --
51% 49% 80%
-- -- --
-- -- --
</TABLE>
Significant components of the provision for income taxes are:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
Current:
Federal.................................................................. $ 556 $ 348 $ 1,176
State.................................................................... 391 206 146
--------- --------- ---------
Total current.............................................................. 947 554 1,322
--------- --------- ---------
Deferred:
Federal.................................................................. 2,200 2,251 2,846
State.................................................................... 484 528 518
--------- --------- ---------
Total deferred............................................................. 2,684 2,779 3,364
--------- --------- ---------
$ 3,631 $ 3,333 $ 4,686
--------- --------- ---------
--------- --------- ---------
</TABLE>
8. REDEEMABLE PREFERRED STOCK
On December 1, 1993, the Company's Class B common shareholders authorized
the issuance of up to 30,000 shares of Payment-In-Kind, Exchangeable, Redeemable
Series A Preferred Stock (Redeemable Preferred Stock). In connection with the
refinancing of its Credit Agreement on December 10, 1993 (Note 6), the Company
issued 10,000 shares of the Redeemable Preferred Stock to AEA Investors Inc. in
exchange for $9,000,000 cash. The redeemable preferred stock has been presented
net of issuance costs of $100,000 and the amount is being increased through
periodic accretions over the 10 year period ending December 1, 2003.
Except as expressly required by statute or the exchange provisions discussed
below, holders of the Redeemable Preferred Stock have no voting rights.
Cumulative dividends are payable on the outstanding shares of Redeemable
Preferred Stock at the rate of 13% per annum on the liquidation preference of
each share per year payable annually commencing December 1, 1994. At the option
of the Company, such dividends are payable in cash or in additional shares of
the Redeemable Preferred Stock. In the event of any liquidation, dissolution or
winding up of the Company, the holders of the outstanding shares of Redeemable
Preferred Stock are to be paid, before any payments or declarations are made in
respect of the outstanding shares of common stock, an amount equal to $900 per
share of Redeemable Preferred Stock then outstanding, plus all accrued but
unpaid dividends thereon. During fiscal 1994, 1995 and 1996, dividends of
$390,000, $1,187,000 and $1,377,000, respectively, have been accreted to the
Redeemable Preferred Stock. During fiscal 1995 and fiscal 1996, 1,264 and 1,464
shares, respectively, of the Redeemable Preferred Stock have been issued as
dividends.
F-12
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. REDEEMABLE PREFERRED STOCK (CONTINUED)
The Company, at the option of its Board of Directors, may redeem for cash
the outstanding shares of Redeemable Preferred Stock in whole or in part at a
redemption price equal to $900 per share plus any accrued and unpaid dividends
through the redemption date.
The Company must redeem the Redeemable Preferred Stock on the earlier of (i)
December 1, 2003, or (ii) the failure of AEA Investors Inc. together with its
employees, shareholders, directors and officers (a) to own beneficially at least
51% of the issued and outstanding shares of the common stock of the Company and
(b) to have and exercise voting power for the election of at least a majority of
the Company's Board of Directors.
The Company, with the consent of the majority holders of the Redeemable
Preferred Stock, as defined, may require the holders of the Redeemable Preferred
Stock to exchange all of such shares of Redeemable Preferred Stock for
debentures in a principal amount equal to $900 for each outstanding share of
Redeemable Preferred Stock, together with all accrued but unpaid dividends.
9. COMMON SHAREHOLDERS' EQUITY
COMMON STOCK
Common shares issued and outstanding at March 31, 1995 and 1996 consist of:
<TABLE>
<CAPTION>
VOTING
CLASS RIGHTS COMMON SHARES
- ----------- ------------ ---------------
<C> <S> <C>
A Nonvoting 551,392
B Voting 10,000
C Nonvoting 153,104
-------
714,496
-------
-------
</TABLE>
Except as expressly required by statute, the entire voting power and all
voting rights are vested exclusively in the Class B common stock. Each holder of
shares of the Class B common stock is entitled to one vote for each share of
Class B common stock held. Except as required for the Redeemable Preferred
Stock, dividends or distributions in connection with the liquidation,
dissolution or winding up of the affairs of the Company, or not paid out of
current or accumulated earnings, as defined, are to be paid first to the holders
of Class A common stock on a ratable basis up to $100 per share of Class A
common stock held. Such dividends or distributions are then to be paid
exclusively to the holders of Class B and Class C common stock on a ratable
basis up to $100 per share of Class B or Class C common stock held. Any
remaining liquidation and all other dividends or distributions are to be paid on
a ratable basis to all common shareholders.
MIDDLE MANAGEMENT STOCK PURCHASE PLAN
The Company's Middle Management Stock Purchase Plan (Stock Purchase Plan)
provides for the issuance of up to 13,238 shares of the Company's Class A common
stock to key employees of the Company. Shares are issued pursuant to the Stock
Purchase Plan at purchase prices established by the Company's Board of
Directors. Class A common stock totaling 13,040 shares have been issued pursuant
to the Stock Purchase Plan at a price of $80 per share. The difference between
the fair market value of the Class A common stock and the purchase price,
aggregating $261,000, was recognized as compensation expense in fiscal 1993 and
1994.
XCEL EARN-OUT OPTION AGREEMENTS
In connection with the May 22, 1992 acquisition of XCEL (Note 2), the
Company issued options to the former shareholders of XCEL to purchase shares of
Class A common stock of the Company. These options are exercisable solely in
exchange for the additional consideration, not to exceed $2,517,000, that may be
payable by the Company (to the extent earned), to the former shareholders of
XCEL. The number of shares that may be acquired pursuant to the option
agreements will be computed by dividing the amount of the
F-13
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMON SHAREHOLDERS' EQUITY (CONTINUED)
additional consideration due at March 31, 1997, by the per share price of $305.
The options granted may be exercised during the 30-day period commencing 90 days
after the end of the fiscal year. Through March 31, 1996, no additional
consideration was earned by the former shareholders of XCEL.
STOCK OPTION PLAN
The Company's Stock Option Plan, as amended in 1995, provides for the
issuance of nonqualified stock options to certain key employees and directors to
purchase up to 100,000 shares of Class A common stock. Options granted are at
exercise prices as determined by the Board of Directors, but not less than $100
per share. Options generally vest on a pro rata basis at a rate of 25% per year,
with 25% immediate vesting on the date of grant, and expire no later than ten
years from the date of grant.
As of March 31, 1996, the Company has granted options to purchase 100,000
shares of Class A common stock at exercise prices ranging from $100 to $145 per
share. The aggregate difference between the estimated fair market value of the
Class A common stock and the exercise price of the options granted is being
recognized as compensation expense over the vesting period of the options. At
March 31, 1996, 83,147 options were exercisable and no options were available
for future grant.
The Company has reserved a total of 123,398 shares of Class A common stock
for issuance under the Stock Option Plan, XCEL Earn-Out Option agreements and
Middle Management Stock Purchase Plan as of March 31, 1996.
10. EMPLOYEE BENEFITS
The Company has contributory retirement plans that cover substantially all
of the Company's employees who meet minimum service requirements and are not
covered by a collective bargaining agreement. The Company's contribution to the
plans is discretionary and is determined annually by the Board of Directors. The
Company's contribution to the plans is funded annually. The Company's
contributions totaled $923,000, $969,000 and $1,011,000 for the plan years ended
March 31, 1994, 1995 and 1996, respectively.
11. RELATED PARTY TRANSACTIONS
The Company leased certain facilities under an operating lease with a
partnership which includes two officers of the Company's operating subsidiary.
The lease was terminated as of March 31, 1995. Rents paid to the partnership
totaled $477,000 during each of the years ended March 31, 1994 and 1995.
In connection with the transaction discussed in Note 2, the Company paid one
of its shareholders, AEA Investors Inc., an investment banking fee of $1,500,000
and reimbursed certain transaction related expenses aggregating $574,000. The
Company also paid to AEA Investors Inc. management fees of $350,000 during each
of the three years ended March 31, 1996, which are included in other charges in
the accompanying consolidated statements of income.
12. COMMITMENTS
OPERATING LEASES
The Company leases certain real estate for its manufacturing facilities,
warehouses, corporate and sales offices, as well as certain equipment under
operating leases (noncancelable) that expire at various dates through March
2004. Total rents charged to operations were $4,448,000, $5,558,000 and
$4,679,000 for the years ended March 31, 1994, 1995 and 1996, respectively.
F-14
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS (CONTINUED)
Minimum future obligations on noncancelable operating leases in effect at
March 31, 1996 are:
<TABLE>
<CAPTION>
(IN
FISCAL YEAR THOUSANDS)
- -------------------------------------------------------------------------------
<S> <C>
1997........................................................................... $ 3,834
1998........................................................................... 2,567
1999........................................................................... 2,441
2000........................................................................... 2,010
2001........................................................................... 1,840
Thereafter..................................................................... 3,262
-------------
Total minimum lease payments................................................... $ 15,954
-------------
-------------
</TABLE>
13. CONTINGENT LIABILITIES
L-TRYPTOPHAN
Due to a strong epidemiological link between the ingestion of L-Tryptophan
and a blood disorder known as eosinophilia myalgia syndrome (EMS) discovered in
1989, numerous manufacturers, distributors, suppliers, importers, and retailers
of L-Tryptophan or products containing L-Tryptophan are or were defendants in an
estimated 2,000 actions brought in federal or state courts seeking compensatory
and, in some cases, punitive damages for alleged personal injuries resulting
from the ingestion of certain products containing L-Tryptophan. As of May 13,
1996, the Company and/or certain of its customers, many of whom have tendered
their defense to the Company, had been named in approximately 650 lawsuits of
which approximately 640 have been settled. There has been no indication that EMS
was caused by any formulation or manufacturing fault of the Company and
extensive evidence now indicates that some shipments from a single raw material
supplier may have caused the illness. As a result of the Defense and
Indemnification Agreement described below, to date the Company has not been
required to make any payments towards the cost of defense or settlement for any
of these lawsuits.
The Company and certain other companies in the industry, including
distributors, wholesalers and retailers (the Indemnified Group), have entered
into an agreement (the Defense and Indemnification Agreement) with the Company's
supplier of bulk L-Tryptophan, Showa Denko America, Inc. (the Supplier), under
which the Supplier, a U.S. subsidiary of a major Japanese corporation, Showa
Denko K.K., has assumed the defense of all claims against the Indemnified Group
arising out of the ingestion of
L-Tryptophan products and has agreed to pay the legal fees and expenses in that
defense. The Supplier has agreed to indemnify the Indemnified Group against any
judgments and to fund settlements arising out of those actions and claims if it
is determined that a cause of the injuries sustained by the plaintiffs was a
constituent in the bulk material sold by the Supplier to the Indemnified Group,
except for certain claims relating to punitive damages. To date, the Supplier
has funded all settlements and paid all legal fees and expenses incurred by the
Indemnified Group.
Of the remaining ten cases, management of the Company does not expect that
the Company will be required to make any material payments in connection with
their resolution by virtue of the Defense and Indemnification Agreement.
Accordingly, no provision has been made in the Company's Consolidated Financial
Statements for any loss that may result from these remaining actions. In the
event that the Supplier ceases to honor the Defense and Indemnification
Agreement, the Company has product liability insurance which it believes will
provide adequate coverage for any remaining liability for compensatory damages,
legal defense costs and, in certain states, punitive damages, in each case,
arising from its sales of the L-Tryptophan, subject to deductibles not to exceed
$900,000 in the aggregate.
OTHER
The Company is subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings and claims
cannot be predicted with certainty, management does not believe the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position or results of operations.
F-15
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables. The
Company sells its products to a geographically diverse customer base in the
drugstore, supermarket and discount chain industries. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
losses. For the years ended March 31, 1994, 1995 and 1996, two customers
represented approximately 16% and 13%, 19% and 14%, and 21% and 13%,
respectively, of net sales.
15. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED)
RECAPITALIZATION
Contemporaneously with and subject to the completion of an initial public
offering, the Company intends to convert all outstanding classes of its common
stock to a single class on a share-for-share basis and effect a -for-1
stock split (collectively, the Recapitalization). All voting rights will vest in
the single class of common stock remaining after the common stock conversion and
split, and all common shares will have the same dividend rights. The Company
will apply a portion of the net proceeds of the initial public offering to
redeem all of the Company's outstanding Redeemable Preferred Stock and all
accrued but unpaid dividends.
The Company's common shareholders' equity at March 31, 1996, as adjusted on
a pro forma basis for the Recapitalization follows:
<TABLE>
<CAPTION>
MARCH 31,
1996 AS ADJUSTED
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PAR VALUE DATA)
<S> <C> <C>
Common stock, $.01 par value:
Class A, nonvoting, 551,392 shares issued and outstanding at March 31, 1996............ $ 5 $ --
Class B, voting, 10,000 shares issued and outstanding at March 31, 1996................ -- --
Class C, nonvoting, 153,104 shares issued and outstanding at March 31, 1996............ 2 --
Common stock, as adjusted, shares outstanding at March 31, 1996................ -- --
Capital in excess of par value........................................................... 54,347
Retained earnings........................................................................ 6,568
----------- -----------
Total common shareholders' equity........................................................ $ 60,922 $ 60,922
----------- -----------
----------- -----------
</TABLE>
The Company's common shares reserved for issuance pursuant to the Company's
Stock Option Plan, the XCEL Earn-Out Option Agreements, and the Middle
Management Stock Purchase Plan at March 31, 1996, as adjusted on a pro forma
basis for the Recapitalization follows:
<TABLE>
<CAPTION>
MARCH 31,
1996 AS ADJUSTED
----------- -----------
<S> <C> <C>
Stock Option Plan........................................................................ 100,000
XCEL Earn-Out Option Agreements.......................................................... 23,200
Middle Management Stock Purchase Plan.................................................... 198
----------- -----------
Total number of common shares reserved for issuance...................................... 123,398
----------- -----------
----------- -----------
</TABLE>
As a result of the Recapitalization, the average exercise price of the
options outstanding under the Stock Option Plan will be adjusted to $ per
share and the XCEL Earn-Out Options will be adjusted to an exercise price of
$ per share in fiscal 1997.
MANAGEMENT AGREEMENT TERMINATION
It is anticipated that the Company will pay $1.5 million to AEA in
connection with the termination of a management agreement between the Company
and AEA.
F-16
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED) (CONTINUED)
SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Supplemental pro forma net income per share for the year ended March 31,
1996 is computed based on shares of common and common equivalent shares.
This computation gives effect to the Recapitalization and uses the weighted
average number of shares and common share equivalents outstanding during the
year increased by the assumed issuance of shares of common stock as of the
beginning of the year. Further, it is assumed that the net proceeds from the
issuance of these shares of common stock were used as of the beginning of the
year to redeem all of the Company's Redeemable Preferred Stock and repay amounts
outstanding under the Credit Agreement and vendor revolving loan agreement,
thereby eliminating from the calculation related preferred stock accretion of
$1,387,000 and interest expense, net of related income tax benefit, of
$2,761,000 incurred in fiscal 1996. Pursuant to the requirements of the
Securities and Exchange Commission, common shares issued during the twelve
months immediately preceding the proposed initial public offering, plus the
number of shares of common stock equivalents from stock options granted during
this period (determined using the treasury stock method and the estimated public
offering price) have been included in the calculation as if they were
outstanding for the entire year. This supplemental pro forma net income per
share computation does not give effect to any additional common shares expected
to be issued in the contemplated initial public offering nor does it give effect
to any other potential cost savings to be derived.
F-17
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
The Company.................................... 15
Use of Proceeds................................ 17
Dividend Policy................................ 17
Dilution....................................... 18
Capitalization................................. 19
Pro Forma Financial Information................ 20
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 25
Business....................................... 31
Management..................................... 52
Principal Stockholders......................... 59
Certain Transactions........................... 61
Description of Certain Indebtedness............ 61
Description of Capital Stock................... 65
Shares Eligible for Future Sale................ 67
Underwriting................................... 70
Validity of Shares............................. 71
Experts........................................ 71
Available Information.......................... 72
Index to Financial Statements.................. F-1
</TABLE>
-------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
5,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MERRILL LYNCH & CO.
LEHMAN BROTHERS
SALOMON BROTHERS INC
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities being registered
hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC registration fee (actual).............................................. $ 29,741
NYSE filing fee............................................................ *
NASD fees (actual)......................................................... 9,125
Transfer agent and registrar fees and expenses............................. *
Accounting fees and expenses............................................... *
Legal fees and expenses.................................................... *
Blue Sky expenses and counsel fees......................................... 26,000
Printing and engraving expenses............................................ *
Miscellaneous.............................................................. *
---------
Total.................................................................. $ *
---------
---------
</TABLE>
- ------------------------
*To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant, as a Delaware corporation, is empowered by section 145 of
the General Corporation Law of the State of Delaware (the "DGCL"), subject to
the procedures and limitations stated therein, to indemnify any person against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with any
threatened, pending or completed action, suit or proceeding in which such person
is made or threatened to be made a party by reason of his being or having been a
director, officer, employee or agent of the Registrant. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors, or otherwise. The Registrant's
certificate of incorporation provides for indemnification by the Registrant of
its directors and officers to the full extent permitted by the DGCL. Pursuant to
section 145 of the DGCL, the Registrant has purchased insurance on behalf of its
present and former directors and officers against any liability asserted against
or incurred by them in such capacity or arising out of their status as such.
Pursuant to specific authority granted by section 102 of the DGCL, the
Registrant's certificate of incorporation contains the following provision
regarding limitation of liability of directors and officers.
"To the fullest extent permitted by the Delaware General Corporation Law as
the same exists or may hereafter be amended, a Director of the Corporation
shall not be liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a Director."
In addition, the Company's bylaws provide for indemnification of directors
and officers, including indemnification of directors and officers that are a
party to a proceeding in whole or in part attributable to (a) the fact that he
is or was a director or officer of the Registrant or was serving at the request
of the Registrant or (b) anything done or not done by such person in any such
capacity against losses if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Registrant, and,
with respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful.
The Registrant has entered into agreements to provide indemnification for
its directors and executive officers in addition to the indemnification provided
for in the Registrant's certificate of incorporation and bylaws. These
agreements, among other things, indemnify the directors, to the fullest extent
provided by Delaware law, for certain expenses (including attorneys' fees),
losses, claims, liabilities, judgments, fines and settlements amounts incurred
by such indemnitee in any action or proceeding, including any action by or in
II-1
<PAGE>
the right of the Registrant, on account of services as a director or officer of
any affiliate of the Registrant, or as a director or officer of any other
company or enterprise that the indemnitee provides services to at the request of
the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On December 10, 1993, the Company sold to AEA 10,000 shares of the Company's
Redeemable Preferred Stock for $9,000,000 in cash. The Company believes that the
sale of the Redeemable Preferred Stock to AEA was exempt from registration
requirements of the Securities Act of 1933 pursuant to the exemption provided by
section 4(2) of the Securities Act of 1933 and regulation D promulgated
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. Exhibits:
<TABLE>
<C> <S>
1.1. Proposed form of Purchase Agreement.*
2.1. Agreement and Plan of Merger, dated as of December 24, 1991, by and between PLI
Investors Inc., PLI Merger Corp. and P. Leiner Health Products Corp.*
2.2. Stock Purchase and Sale Agreement, dated as of May 22, 1992, by and among PLI
Investors Inc., XCEL Laboratories, Inc. and certain stockholders of XCEL
Laboratories, Inc.*
3.1. Restated Certificate of Incorporation of the Company and amendments thereto.**
3.2. Amended and Restated By-Laws of the Company.**
4.1. Specimen Form of Company's Common Stock Certificate.*
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson as to the validity of the
securities being registered.*
10.1. Form of Subscription Agreement between the Company and stockholders of the Company.*
10.2. Restated Standard Indemnity Agreement, dated September 1, 1992, between Showa Denko
America, Inc. and LHP Holdings Corp.*
10.3. Guaranty Agreement, dated September 1, 1992, between Showa Denko K.K. and LHP
Holdings Corp.*
10.4. Subscription Agreement, dated December 10, 1993, between the Company and AEA
Investors Inc.**
10.5. Form of Leiner Health Products Group Inc. Stock Option Plan, 1996 Amendment and
Restatement.*
10.6. Note Agreement, dated as of May 4, 1992, between Leiner Health Products Inc. and the
Purchasers signatory thereto regarding the Series A Notes and the Series B Notes.*
10.7. First Amendment Agreement, dated as of May 15, 1993, among Leiner Health Products
Inc. and each of the holders of Notes listed in Schedule I thereto regarding the
Series A Notes and the Series B Notes.*
10.8. Second Amendment Agreement, dated as of December 10, 1993, among Leiner Health
Products Inc. and each of the holders of Notes listed in Schedule I thereto
regarding the Series A Notes and the Series B Notes.*
10.9. Waiver and Third Amendment Agreement, dated as of October 15, 1994, among Leiner
Health Products Inc. and each of the holders of Notes listed in Schedule I thereto
regarding the Series A Notes and the Series B Notes.*
10.10. Fourth Amendment Agreement, dated as of April 1, 1995, among Leiner Health Products
Inc. and each of the holders of Notes listed in Schedule I thereto regarding the
Series A Notes and the Series B Notes.*
10.11. Credit Agreement, dated as of December 10, 1993, among Leiner Health Products Inc.,
the various lending institutions parties thereto and The Bank of Nova Scotia.*
10.12. Waiver and Amendment No. 1 to Credit Agreement, dated as of September 30, 1994,
among Leiner Health Products Inc., the financial institutions parties thereto and
The Bank of Nova Scotia.*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.13. Amendment No. 2 and Waiver to Credit Agreement, dated as of February 26, 1996, among
Leiner Health Products Inc., the financial institutions parties hereto and The Bank
of Nova Scotia.*
10.14. Amendment No. 3 to Credit Agreement, dated as of June 1996, among Leiner Health
Products Inc., the financial institutions parties thereto and The Bank of Nova
Scotia.*
10.15. Lease Agreement, dated October 4, 1993, between Watson Land Company and Leiner
Health Products Inc., relating to a premise located at 810 East 233rd Street,
Carson, California.*
10.16. Lease Agreement, dated October 4, 1993, between Watson Land Company and Leiner
Health Products Inc., relating to a premise located at 901 East 233rd Street,
Carson, California.*
10.17. Sublease Agreement, dated October 8, 1993, between Teledyne and Leiner Health
Products Inc., relating to a premise located at 901 East 233rd Street, Carson,
California.*
10.18. Lease Agreement, dated March 12, 1984, between R&R Properties and Trupak, Inc.,
relating to a premise located in West Unity, Ohio.*
10.19. First Amendment to Lease, dated August 1, 1986, between R&R Properties and Trupak,
Inc., relating to a premise located in West Unity, Ohio.*
10.20. Second Amendment to Lease, dated June 19, 1989, between R&R Properties and Trupak,
Inc., relating to a premise located in West Unity, Ohio.*
10.21. Third Amendment to Lease, dated August 3, 1992, between R&R Properties and P. Leiner
Nutritional Products, Inc., successor by merger to Trupak Inc., relating to a
premise in West Unity, Ohio.*
10.22. Fourth Amendment to Lease, dated August 2, 1994, between R&R Properties and Leiner
Health Products Inc., relating to a premise in West Unity, Ohio.*
10.23. Fifth Amendment dated May 20, 1996, between R&R Properties and Leiner Health
Products Inc., relating to a premise in West Unity, Ohio.*
10.24. Lease Agreement, dated August 2, 1994, between Square Feet Unlimited and Leiner
Health Products Inc., relating to a premise in West Unity, Ohio.*
10.25. First Amendment to Lease, dated May 20, 1996, by and between Square Feet Unlimited
and Leiner Health Products Inc., relating to a premise in West Unity, Ohio.*
10.26. Form of Indemnification Agreement between Leiner Health Products Group Inc. and its
directors and/or officers.**
11.1. Computation of Supplemental Pro Forma Net Income Per Share.
21.1. Subsidiaries of the Company.**
23.1. Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).*
23.2. Consent of Ernst & Young LLP, Independent Auditors.
24.1. Power of Attorney for Francis C. Rooney, Jr. (included on signature page)
24.2. Power of Attorney for Robert M. Kaminski (included on signature page)
24.3. Power of Attorney for Gale K. Bensussen (included on signature page)
24.4. Power of Attorney for Diane J. Beardsley (included on signature page)
24.5. Power of Attorney for David F. Brubaker (included on signature page)
24.6. Power of Attorney for Howard L. Clark (included on signature page)
24.7. Power of Attorney for Hamish Maxwell (included on signature page)
24.8. Power of Attorney for Carl M. Mueller (included on signature page)
</TABLE>
- ------------------------
*To be filed by amendment.
**Previously filed.
II-3
<PAGE>
B. Schedules.
<TABLE>
<S> <C> <C>
Report of Independent Auditors on Financial Statement Schedules....... S-1
Schedule I Condensed Financial Information of Registrant.......... S-2
Schedule II Valuation and Qualifying Accounts (Company)............ S-4
</TABLE>
All supporting schedules other than the above have been omitted because they
are not required or the information required to be set forth therein is included
in the financial statements or in the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters,
at the closings specified in the purchase agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) promulgated under the Securities Act of 1933 shall be
deemed to be part of this Registration Statement as of the time it was
declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification of liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Leiner Health Products Group Inc. has duly caused this Amendment No. 1 to the
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Carson and the State of California on the 7th
day of June, 1996.
LEINER HEALTH PRODUCTS GROUP INC.
By: /s/ DIANE J. BEARDSLEY
-----------------------------------
Diane J. Beardsley
CHIEF FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Gale K. Bensussen and Diane J. Beardsley his true
and lawful attorneys-in-fact and agents, each acting alone, with full powers of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments to the Registration
Statement (No. 33-78636), including post-effective amendments, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, and hereby ratifies and confirms all his said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes may lawfully do or
cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ FRANCIS C. ROONEY, JR.
------------------------------------------- Chairman of the Board June 7, 1996
Francis C. Rooney, Jr. of Directors
/s/ ROBERT M. KAMINSKI Chief Executive Officer and
------------------------------------------- Director (Principal Executive June 7, 1996
Robert M. Kaminski Officer)
/s/ GALE K. BENSUSSEN
------------------------------------------- President and Director June 7, 1996
Gale K. Bensussen
Senior Vice President and Chief
/s/ DIANE J. BEARDSLEY Financial Officer (Principal
------------------------------------------- Financial and Accounting June 7, 1996
Diane J. Beardsley Officer)
/s/ DAVID F. BRUBAKER
------------------------------------------- Director June 7, 1996
David F. Brubaker
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ --------------------------------- ----------------------
<C> <S> <C>
/s/ HOWARD L. CLARK
------------------------------------------- Director June 7, 1996
Howard L. Clark
------------------------------------------- Director June , 1996
Hamish Maxwell
/s/ CARL M. MUELLER
------------------------------------------- Director June 7, 1996
Carl M. Mueller
By:
ATTORNEY-IN-FACT , 1996
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------- -----
<C> <S> <C>
1.1. Proposed form of Purchase Agreement.*
2.1. Agreement and Plan of Merger, dated as of December 24, 1991, by and between PLI Investors Inc.,
PLI Merger Corp. and P. Leiner Health Products Corp.*
2.2. Stock Purchase and Sale Agreement, dated as of May 22, 1992, by and among PLI Investors Inc.,
XCEL Laboratories, Inc. and certain stockholders of XCEL Laboratories, Inc.*
3.1. Restated Certificate of Incorporation of the Company and amendments thereto.**
3.2. Amended and Restated By-Laws of the Company.**
4.1. Specimen Form of Company's Common Stock Certificate.*
5.1. Opinion of Fried, Frank, Harris, Shriver & Jacobson as to the validity of the securities being
registered.*
10.1. Form of Subscription Agreement between the Company and stockholders of the Company.*
10.2. Restated Standard Indemnity Agreement, dated September 1, 1992, between Showa Denko America, Inc.
and LHP Holdings Corp.*
10.3. Guaranty Agreement, dated September 1, 1992, between Showa Denko K.K. and LHP Holdings Corp.*
10.4. Subscription Agreement, dated December 10, 1993, between the Company and AEA Investors Inc.**
10.5. Form of Leiner Health Products Group Inc. Stock Option Plan, 1996 Amendment and Restatement.*
10.6. Note Agreement, dated as of May 4, 1992, between Leiner Health Products Inc. and the Purchasers
signatory thereto regarding the Series A Notes and the Series B Notes.*
10.7. First Amendment Agreement, dated as of May 15, 1993, among Leiner Health Products Inc. and each
of the holders of Notes listed in Schedule I thereto regarding the Series A Notes and the Series
B Notes.*
10.8. Second Amendment Agreement, dated as of December 10, 1993, among Leiner Health Products Inc. and
each of the holders of Notes listed in Schedule I thereto regarding the Series A Notes and the
Series B Notes.*
10.9. Waiver and Third Amendment Agreement, dated as of October 15, 1994, among Leiner Health Products
Inc. and each of the holders of Notes listed in Schedule I thereto regarding the Series A Notes
and the Series B Notes.*
10.10. Fourth Amendment Agreement, dated as of April 1, 1995, among Leiner Health Products Inc. and each
of the holders of Notes listed in Schedule I thereto regarding the Series A Notes and the Series
B Notes.*
10.11. Credit Agreement, dated as of December 10, 1993, among Leiner Health Products Inc., the various
lending institutions parties thereto and The Bank of Nova Scotia.*
10.12. Waiver and Amendment No. 1 to Credit Agreement, dated as of September 30, 1994, among Leiner
Health Products Inc., the financial institutions parties thereto and The Bank of Nova Scotia.*
10.13. Amendment No. 2 and Waiver to Credit Agreement, dated as of February 26, 1996, among Leiner
Health Products Inc., the financial institutions parties hereto and The Bank of Nova Scotia.*
10.14. Amendment No. 3 to Credit Agreement, dated as of June 1996, among Leiner Health Products Inc.,
the financial institutions parties thereto and The Bank of Nova Scotia.*
10.15. Lease Agreement, dated October 4, 1993, between Watson Land Company and Leiner Health Products
Inc., relating to a premise located at 810 East 233rd Street, Carson, California.*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------------- -----
10.16. Lease Agreement, dated October 4, 1993, between Watson Land Company and Leiner Health Products
Inc., relating to a premise located at 901 East 233rd Street, Carson, California.*
<C> <S> <C>
10.17. Sublease Agreement, dated October 8, 1993, between Teledyne and Leiner Health Products Inc.,
relating to a premise located at 901 East 233rd Street, Carson, California.*
10.18. Lease Agreement, dated March 12, 1984, between R&R Properties and Trupak, Inc., relating to a
premise located in West Unity, Ohio.*
10.19. First Amendment to Lease, dated August 1, 1986, between R&R Properties and Trupak, Inc., relating
to a premise located in West Unity, Ohio.*
10.20. Second Amendment to Lease, dated June 19, 1989, between R&R Properties and Trupak, Inc., relating
to a premise located in West Unity, Ohio.*
10.21. Third Amendment to Lease, dated August 3, 1992, between R&R Properties and P. Leiner Nutritional
Products, Inc., successor by merger to Trupak Inc., relating to a premise in West Unity, Ohio.*
10.22. Fourth Amendment to Lease, dated August 2, 1994, between R&R Properties and Leiner Health
Products Inc., relating to a premise in West Unity, Ohio.*
10.23. Fifth Amendment dated May 20, 1996, between R&R Properties and Leiner Health Products Inc.,
relating to a premise in West Unity, Ohio.*
10.24. Lease Agreement, dated August 2, 1994, between Square Feet Unlimited and Leiner Health Products
Inc., relating to a premise in West Unity, Ohio.*
10.25. First Amendment to Lease, dated May 20, 1996, by and between Square Feet Unlimited and Leiner
Health Products Inc., relating to a premise in West Unity, Ohio.*
10.26. Form of Indemnification Agreement between Leiner Health Products Group Inc. and its directors
and/or officers.**
11.1. Computation of Supplemental Pro Forma Net Income Per Share.
21.1. Subsidiaries of the Company.**
23.1. Consent of Fried, Frank, Harris, Shriver & Jacobson (included in Exhibit 5.1).*
23.2. Consent of Ernst & Young LLP, Independent Auditors.
24.1. Power of Attorney for Francis C. Rooney, Jr. (included on signature page)
24.2. Power of Attorney for Robert M. Kaminski (included on signature page)
24.3. Power of Attorney for Gale K. Bensussen (included on signature page)
24.4. Power of Attorney for Diane J. Beardsley (included on signature page)
24.5. Power of Attorney for David F. Brubaker (included on signature page)
24.6. Power of Attorney for Howard L. Clark (included on signature page)
24.7. Power of Attorney for Hamish Maxwell (included on signature page)
24.8. Power of Attorney for Carl M. Mueller (included on signature page)
</TABLE>
- ------------------------
*To be filed by amendment.
**Previously filed.
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors
Leiner Health Products Group Inc.
We have audited the consolidated financial statements of Leiner Health
Products Group Inc. as of March 31, 1995 and 1996, and for each of the three
years in the period ended March 31, 1996 and have issued our report thereon
dated May 20, 1996 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedules of Leiner Health Products
Group Inc. listed in Item 16(b) of this Registration Statement. These schedules
are the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
May 20, 1996
S-1
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investment in Leiner Health Products Inc................................ $ 71,501 $ 72,667
Receivable from Leiner Health Products Inc.............................. -- 130
--------- ---------
Total assets............................................................ $ 71,501 $ 72,797
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Redeemable preferred stock.............................................. $ 10,490 $ 11,875
Shareholders' equity.................................................... 61,011 60,922
--------- ---------
Total liabilities and shareholders' equity.............................. $ 71,501 $ 72,797
--------- ---------
--------- ---------
</TABLE>
S-2
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Statement of Income
Equity in income of Leiner Health Products Inc................. $ 3,529 $ 3,442 $ 1,166
--------- --------- ---------
Net income..................................................... $ 3,529 $ 3,442 $ 1,166
--------- --------- ---------
--------- --------- ---------
Statement of Cash Flows
Cash flows from operating activities:
Net income................................................... $ 3,529 $ 3,442 $ 1,166
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in income of Leiner Health Products Inc............. (3,529) (3,442) (1,166)
--------- --------- ---------
Net cash provided by operating activities...................... -- -- --
--------- --------- ---------
Net change in cash............................................. -- -- --
Cash at beginning of year.................................... -- -- --
--------- --------- ---------
Cash at end of year.......................................... $ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
Notes to Condensed Financial Information
The Registrant is a holding company with no operations and no assets other
than a receivable from and an investment in all of the stock of Leiner Health
Products Inc.
See Note 1 to the Consolidated Financial Statements appearing elsewhere in
this Registration Statement for significant accounting policies.
The Registrant, at its option, may redeem for cash the shares of Redeemable
Preferred Stock at a redemption price of $900 per share plus accrued but unpaid
dividends or it may require the holders of the stock to exchange the shares for
debentures in a principal amount of $900 per share. The Company must redeem the
stock on the earlier of December 1, 2003, or upon the failure of AEA Investors
Inc. to maintain a majority ownership.
S-3
<PAGE>
LEINER HEALTH PRODUCTS GROUP INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS
BEGINNING CHARGED TO
OF COSTS BALANCE AT
PERIOD AND EXPENSES DEDUCTIONS END OF PERIOD
----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended March 31, 1994:
Accounts receivable allowances........................ $ 1,212 $ 4,294 $ 3,359 $ 2,147
Inventory valuation reserve........................... 3,434 3,427 1,555 5,306
Year ended March 31, 1995:
Accounts receivable allowances........................ $ 2,147 $ 4,903 $ 3,734 $ 3,316
Inventory valuation reserve........................... 5,306 2,640 3,537 4,409
Year ended March 31, 1996:
Accounts receivable allowances........................ $ 3,316 $ 4,443 $ 5,220 $ 2,539
Inventory valuation reserve........................... 4,409 2,320 2,828 3,901
</TABLE>
S-4
<PAGE>
EXHIBIT 11.1
LEINER HEALTH PRODUCTS GROUP INC.
COMPUTATION OF SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
MARCH 31, 1996
----------------
<S> <C>
Net income...................................................................................... $ 1,166,000
Adjustment to eliminate certain interest expense, net of related income tax benefit............. 2,761,000
----------------
Adjusted net income............................................................................. $ 3,927,000
----------------
----------------
Calculation of shares outstanding for computing net income per share:
Weighted average common and common equivalent shares outstanding in accordance with generally
accepted accounting principles.................................................................
Adjustment to reflect the requirements of the SEC in accordance with SAB 83.....................
Adjustment to reflect assumed issuance of shares to redeem all of the Company's Redeemable
Preferred Stock and repay amounts outstanding under the Credit Agreement and vendor revolving
loan agreement.................................................................................
----------------
Shares used in computing supplemental pro forma net income per share............................
Supplemental pro forma net income per share..................................................... $
----------------
----------------
</TABLE>
Share amounts reflect a for-1 stock split and a conversion of all shares
of Class A, Class B and Class C common stock into a single class of common stock
pursuant to the contemplated recapitalization discussed elsewhere in this
Registration Statement.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated May 20, 1996 in Amendment No. 1 to the Registration
Statement (Form S-1 No. 33-78636) and related Prospectus of Leiner Health
Products Group Inc. for the registration of 5,000,000 shares of its Common
Stock.
/s/ ERNST & YOUNG LLP
ORANGE COUNTY, CALIFORNIA
JUNE 5, 1996
